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Overpaying your mortgage should be a serious consideration if people have the cash as they could save tens of thousands of pounds in interest over the years, however, an expert has suggested alternative benefits of paying into one’s pension.
Both financial tactics could make a person richer under different circumstances.
Many mortgage lenders let people overpay by 10 percent of their outstanding mortgage balance each year without an early repayment fee.
Doing so could reduce one’s monthly repayments and/or shorten the length of their mortgage.
Carla Morris, financial planner at RBC Brewin Dolphin explained that although this is a benefit, people could also consider investing extra cash in a pension.
She said: “You won’t be able to withdraw the money until you reach age 55 (57 from April 2028) but putting a larger lump sum into a pension could make a big difference to your overall pot at retirement and it could be a tax efficient way to save the money.
“If you contributed £20,000 to your pension, you would be entitled to at least 20 percent tax relief. So, working on the basis that £25,000 is invested into your pension, this could grow to more than £40,000 after ten years, assuming the same five percent annual growth after fees.
“Higher-rate and additional-rate taxpayers can claim extra tax relief of up to 20 percent or 25 percent, respectively.
A pension is a long-term savings plan, so any decision people make about it, could hit their retirement plans. If Britons decide to stop paying into it, they are giving up the government top-up and, if it’s a pension at work, they’ll be losing their employer contribution too, so they’ll lose far more than they’ll gain.
On the other hand, with recent high mortgage rates, paying off some of the mortgage could be “a sensible option”.
Ms Morris said: “If you are currently still in a fixed rate mortgage deal at a historic competitive rate, paying some money off your mortgage to lower the balance when you come to re-mortgage (and keeping the cash in a high-interest account with a suitable notice period in the meantime) can help justify better interest rates if it helps on affordability or gives you a better loan to value.”
The combination of higher mortgage rates and the rising cost of living has made it even more important to be in control of your finances and to have transparency of one’s financial situation.
If someone has debt in addition to their mortgage, this could be at a much higher rate than their mortgage, so prioritising paying that down will free up extra cash to go towards the mortgage once it’s cleared.
If payments have increased, they could look at ways to reduce the mortgage balance, using savings, investment or the tax-free lump sum from their pension, but doing this could affect their future plans.
Understanding whether it makes sense to pay off some of the mortgage is a complex decision that requires careful consideration – and that’s where getting some smart advice can help.
A financial adviser can show what impact both an increase in mortgage payments or reducing the mortgage balance will have on one’s long-term finances and plans for retirement.
That way, people will feel more confident that they’ve made the right decision.
