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Jeremy Smith
Jeremy Smith

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Mortgage Debt Repayment

I have always had an interest in personal finance and used to work directly with some of the best financial advisors in the uk. What i suggest here should not be considered financial advice and may mean taking on a higher level of risk than most people are comfortable with. So it is not for many, but it is one way I believe would help repayment of mortgage debt (without consideration of risk tolerance).

What

Reduce income tax liability, and maximise potential investment growth by making payment to a SIPP instead of paying off your mortgage debt. Then use your tax free cash allowance from that SIPP to pay off your mortgage when you retire / drawdown.

Why

Income tax reduction

You can reduce your taxable income by paying into a salary sacrifice SIPP, this will reduce your income tax and national insurance liability. This means a basic rate taxpayer will get approximately 32% (20% basic rate tax and 12% national insurance) immediate benefit of paying into a SIPP over taking a higher salary and paying down your mortgage.

Earn more from investment growth

Investments in the stock market go up and down, but as long it goes up more than inflation (and the costs of the investment, such as fund fee and management charge of the platform you hold the investment on) an investment provides a positive return. If that return is greater than the interest rate you pay for your mortgage your are making a better return on investing the capital than repaying the debt.

Impact of inflation on debt

Every year your debt reduces in (real term) value by the level of inflation, i.e. your debt is worth less next year than it is worth this year - this is called the opportunity cost of capital. This means you (real term) earn inflation rate times debt you hold - so holding debt is good (but you have to pay for it and it's risky).

Investment returns compound

If your investment increases this year, next year the amount invested is (hopefully) higher. However, for fair comparison, paying debt down also compounds.

Tax Free Cash

As I write this in 2025, you can take 25% of your SIPP's value at retirement as tax free cash, i.e. not pay income tax on it when you withdraw it from you SIPP.

How

What I propose is that you build wealth in your SIPP during the your life and repay your mortgage when you retire.

Say inflation is 2%, which is what the bank of England try to maintain the UK inflation rate at. Each year you can expect the prices of goods go up on average 2%, your mortgage will be able to buy you 2% less in the real world (which is why things cost more and more in the shops each year), and thus if you have a £100,000 mortgage after a year of 2% inflation it is now only (real term value) £98,000. Debt can therefore be used to your advantage, being in debt is not always a bad thing.

Compare inflation to the interest rate you pay to the bank, if the UK inflation rate is 6% and you are paying 4% to the bank you are (real term) earning 2% on the debt each year, and this compounds.

Typically you would expect inflation to be at 2%, you would pay a 6% mortgage and therefore the real term cost of the mortgage is 4% (not 6% like you may think/feel).

You will have to pay the bank to borrow that £100,000 and if you only pay the interest you will still owe £100,000, but next year your £100,000 debt is now worth 2% less, and the year after that your £98,000 (discounted value next year) is worth another 2% less i.e. £96,040, on paper it is still £100,000, but the real term value of that debt is less.

Owning mortgage debt is good as it is cheaper than credit cards / loans, but it carries risk; what if the bank increases the interest rate (borrowing cost) when your deal expires, or house prices fall or you can't afford the keep the debt? Or the price of your house falls below the amount you borrowed for it (negative equity)? Then you will need to unload the debt in some way - selling the house? Taking in a tenant? Getting another job? You need to ensure that you never over leverage yourself - which is the act of taking on more debt than you can manage, and hence the reason why people reduce debt.

You are multiplying risk / reward by taking on debt.

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