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Should I pay off my mortgage before retirement?

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A mortgage is, for most people, the biggest monthly outgoing.  Making sure this is paid off before retirement is certainly a financial goal shared by many.

Entering retirement mortgage-free will give you freedom to spend your pension on other things such as hobbies, travel or family time. So how can you ensure that your mortgage is paid off before you retire?  And is this really the best way of putting your money to work?

Paying your mortgage off before retirement

There are two main ways you could pay off your mortgage earlier.  These are:

Overpayments

Mortgages are paid off in monthly repayments.  Usually your lender will allow you to make overpayments enabling you to pay off more of the capital. Overpayments will be limited, typically up to 10% of your balance.  If you pay over this amount, you may be subject to fees which would negate some of the benefit.

Remortgaging

Depending on your current rate and circumstances, you may be able to switch to a new mortgage deal. This could save you hundreds or even thousands of pounds.  

Remortgaging to a lower rate could give you the opportunity to shorten the length of the mortgage. Or it could free up cash to allow you to make overpayments.  Either way it is likely to trim down your overall mortgage term.  

Whether you choose to remortgage, or simply make regular overpayments you should be able to reduce the remaining size of your mortgage.  This means that the amount of interest will also reduce, giving you significant savings in the long term.  

Does it make sense to pay off my mortgage before retirement?

If your mortgage is likely to overreach your retirement age, you may want to put your efforts into paying your mortgage off early.  However, before you start ploughing all your extra cash into your mortgage, have a think about the following:

Do you have other debts?

If you have credit cards or other debts it makes more sense to pay these off first. Then you can think about putting extra money into your mortgage. 

High interest debt can grow quickly, so if you can pay this off first, you’ll be in a better position to save or invest once this has been reduced. 

What does your retirement pot look like?

As a long-term investment, pensions are one of the most effective ways of saving money.   Your contributions are topped up by either the government or your employer, and the money can grow even further if invested effectively. 

Will your pension be enough to cover your mortgage payments?

Not everyone pays off their mortgage before retirement.  But if you don’t you’ll need to ensure that your pension income is enough to cover it as well as other outgoings.   If your pension is unlikely to stretch very far, you may want to plough as much money as you can into your mortgage now to give yourself a more relaxed, mortgage-free retirement. 

Do you have a rainy day fund?

With low interest rates, it may seem a wise choice to put all your extra cash into your mortgage to pay off the capital quicker, as money sat in a savings account won’t really give you that much return on your investment.  It’s worth remembering though, that money in a savings account is much more accessible than that in a mortgage.  

Having an emergency fund of around 3-6 months salary is often the recommended advice.  This can give you some breathing space if you lost your job or had to make a large unexpected payment.  Whilst you can release some of your equity by remortgaging, it’s a good idea to keep your emergency fund topped up before any extra money goes onto your mortgage. 

Whether you’re able to pay off your mortgage before retirement will depend on your individual circumstances.  But it’s always good practice to review your mortgage on a regular basis, to make sure you are on the best possible rate and not paying more than you need to.

To find out more about remortgaging and reducing the length of your mortgage term, speak to one of our mortgage experts at So Smart Money today. 

The above post does not constitute advice – financial, legal or otherwise. The information within this article is the author’s own opinion and do not necessarily reflect the views of SO Media or So Smart Money.

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

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