Whether you could or even should pay off your mortgage before retirement very much depends on your situation. Sometimes, there are better ways to put any extra money to work such as paying off high interest debt, creating an emergency fund or paying into a pension.
A mortgage is most people’s biggest monthly outgoing, so making sure it’s paid off before retirement is a goal shared by many.
Entering retirement without a mortgage will give you the freedom to spend your pension income on other things, like your family or your favourite hobby. And you’ll also be able to relax in the knowledge that your home can’t be taken away from you.
How can you pay off your mortgage early?
Making overpayments
Mortgages are paid off in monthly installments, called repayments. Most lenders allow you to pay up to an extra 10% of your remaining mortgage balance each year. This can be done monthly or as a lump sum, and is called an overpayment.
Bear in mind that paying more than your lender’s overpayment limit can result in fees which could eliminate much of the benefit.
Remortgaging
Mortgages are one of the most competitive financial products in the UK, and interest rates are currently at all-time lows. So switching to a new deal could save thousands of pounds, depending on your circumstances.
Remortgaging is also an opportunity to increase your monthly payments and shorten the length of the mortgage, if you can afford it.
However, you may find it difficult to remortgage if you’re close to retirement, have poor credit, or have a small mortgage balance left to repay.
What are the benefits of paying off your mortgage early?
Whether you make an overpayment or remortgage to a more competitive deal, you’ll reduce the remaining size of the mortgage.
This will reduce the amount of interest left to be paid, and - if you keep your monthly repayments the same - it will shorten the length of the mortgage too.
For example:
- You have a £100,000 mortgage
- It has a 15 year term and charges 3% interest
- You make a £5,000 overpayment and keep monthly payments the same
- The remaining interest is reduced by £2,717
- The remaining mortgage term is reduced by 11 months
When does it make sense to pay off your mortgage early?
Ask yourself the following questions before putting any extra hard earned cash towards paying off your mortgage early.
Have you got any other expensive debts?
Mortgage interest rates are usually much lower than credit cards, store cards, and other unsecured loans.
According to recent reports from MoneyFacts:
- The average credit card rate is around 25%
- The average two-year fixed mortgage rate is around 2%
Because high-interest debts can grow quickly, it’s usually better to pay them off first.
Is your pension on track?
Pensions are one of the most effective ways of saving money. Not only will the government top up contributions by at least 25%, but your money can go on to grow further while it’s invested.
The amount you need to put towards your pension will vary depending on your retirement goals, but many people aim for a retirement income of two thirds of their salary.
Retirees that had a £30,000 salary might be happy with a £20,000 pension income, for example. To earn that amount, you’d need to retire with a pension pot of around £600,000.
If you’re on track to reach your pension pot goal, you may want to focus on paying off your mortgage. Otherwise, topping up your pension could be a more effective way of putting your extra money to good use.
Is your pension large enough to cover mortgage payments and other expenses?
Even if your pension’s on track to meet your desired annual income, consider whether this will be enough to cover all expenses including ongoing mortgage payments.
For example, the average mortgage payment is £669 per month, according to a 2018 Halifax report. That’s around £8,000 a year, or 40% of a £20,000 pension income.
If it looks as though your pension might not be able to cover your mortgage payments as well as all your other expenses, it could be worth focusing your attention on paying off your mortgage as soon as possible.
Do you have enough savings to fall back on?
Finding yourself with extra money in your pocket is one of life’s great pleasures. But just as it’s important to enjoy the good times, it’s also important to prepare for the unexpected.
Having an emergency fund of around three-months’ expenses is often recommended. This should allow you enough time to find a new job or make other financial arrangements, if necessary.
So before paying your mortgage off early, make sure your emergency fund is topped up.
Are you over 55?
When you turn 55 you can choose whether to take 25% of your pension pot out early, tax-free.
Such a large amount can go a long way towards paying down your mortgage, or even pay it off completely.
But while most mortgage providers allow you to pay up to an additional 10% on your monthly repayments, they often charge additional fees for going over this amount. An ‘early repayment charge’ might not make a large one-off payment worthwhile.
Bear in mind that taking such a large amount from your pension will reduce your future pension income. So check whether you can still meet your desired income first.
How do you feel about debt?
Owing money can be as much of an emotional burden as a financial one. Sometimes it’s just comforting to know that you don’t owe anyone anything, and you shouldn’t feel guilty about wanting to pay off debt simply because it’ll make you feel better.
Whether it makes sense to pay off your mortgage before retirement or not will depend entirely on your circumstances. If you’re a PensionBee customer, you can talk to your personal Beekeeper about your pension, who’ll be on hand to answer any questions you might have. However, if you need specific financial advice an independent financial advisor is best placed to answer those types of queries.
Listen or read the transcript for episode 4 of our podcast and find out more about mortgages and your retirement.
As always, we’d love to hear your feedback, so leave your comments below or get in touch with the team on Twitter!
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
