Struck it rich? Whether you’ve got a nice inheritance from a relative or are considering cashing in on your pension plan, you want to put your money to good use. So, should you pay off your mortgage early or invest? Quick Loans Express explores the pros and cons of repaying your mortgage early to help you decide. Read on to find out what you should do!
Pay Off Your Mortgage Early or Invest- What to do?
Have you got some extra cash to use? Does it make sense to pay off your mortgage early and rid yourself of debt, or is investing your money a better choice? Quick Loans Express, your small loans lender, gives you the points you should consider before deciding how to direct your wealth.
Case Study: Ms Carol Smith – Her Present Financial Situation
Ms Smith is a middle-aged woman considering early retirement and paying off her mortgage ahead of schedule. But is that really her best option? Let’s take a look at Ms Smith’s current situation and the factors she should take into account before she makes a final decision. Should she pay off her mortgage early or invest? Let’s find out!
Ms Carol Smith is 55 years old and has worked various roles in the Metropolitan Police over the past 28 years. Despite changes in public sector pension schemes in 2015, her age and years of service give her the option to retire now if she wants.
As part of her police pension scheme, Ms Smith would be entitled to a cash lump sum of £110,000. She would also receive a monthly pension payment of £1,250 (after tax). However, she wouldn’t be able to access her state pension until she reached state pension age. That could mean a wait of at least ten years.
Ms Smith has an outstanding mortgage of £119,000 on her four-bedroom home, which is valued at £490,000. Her monthly payments on her mortgage add up to £900. She is on a fixed rate mortgage of 2.99% which is due to expire in November 2019.
Other Debts, Income & Savings
Apart from her mortgage, Ms Smith has no other outstanding loans or consumer credit debt. She has £10,000 in ISA stocks and shares. Additionally, she has a lodger who pays £650 rent every month which contributes towards her mortgage payments.
Paying Off Mortgage Early: Pros and Cons
Ms Smith is unsure if she should retire immediately and use the lump sum from her pension along with her £10,000 of savings to pay off her mortgage early or invest.
Although paying off her mortgage early seems ideal as she could start her retirement mortgage-free, it would also leave her without an emergency fund to fall back on. If she needed money in a hurry, Ms Smith would have to rely on expensive high-cost credit facilities like her credit card or personal loans with high interest rates to tide her over.
Another factor to consider is the terms of her mortgage. Are there any reasons not to pay it off right now?
What Should You Consider Before Paying off a Mortgage?
Before using her lump sum and savings to pay off her mortgage, Ms Smith should first go through its terms and conditions. Many mortgage providers allow a certain amount in overpayments each year but have an early repayment penalty. This means that paying back her mortgage in full could cost considerably more than the £120,000 she now has at her disposal. Yes, you read that correctly. Repaying your mortgage in full ahead of time could translate into overpaying your mortgage!
To calculate whether it is worth it, she needs to subtract the interest she would pay on her mortgage from the interest she would earn on her pension until November 2019. She should then compare this figure to the early repayment fees charged by her mortgage provider.
If it isn’t worth her while to pay off her mortgage early, what else could she do?
What Are Her Alternatives to Paying off Her Mortgage Early?
With her fixed rate mortgage due to expire in November 2019, it might be a better idea for Ms Smith to adopt a wait-and-see policy. Since there is some fluctuation in the economy, it might become worthwhile for her to repay her mortgage all at once. But what can she do with her lump sum in the meantime?
One option is to consult an FCA-approved independent financial adviser to discuss investing her money. Investment may bring better returns than a savings account, but she would have to weigh in the risks. There’s no guarantee that the returns on her money will be higher than being kept in a savings account, and she might even lose money.
Another risk-free option is to look for a high-yield savings account, preferably with an interest rate of higher than 2.99% (to cover the interest she’s paying on her mortgage). Because of the considerable amount of money, it would be advisable for her to divide the money between two banks or building societies. In this way, she can benefit from the Financial Services Compensation Scheme which only guarantees deposits up to £85,000.
After running some calculations, Ms Smith discovered that paying off her mortgage early is not really worth her while. Although this means her monthly expenses won’t come down immediately, it will save her money in the long run. In the meantime, she can look into other options to grow her money further.
Early Retirement – Is it Advisable?
Although Ms Smith is eligible to take early retirement, that doesn’t necessarily mean that she should. One advantage of waiting is that it would boost the pension package she can expect when she retires.
With recent changes to the state retirement age, it might be over a decade before she can receive her state pension (which is currently £165 per week). Before Ms Smith decides to retire, she should check her National Insurance records to make sure that she has made enough contributions throughout her employment. Without her state pension and after paying off her mortgage, she’ll have a monthly income of £1,900 (her pension plus rent from her lodger). Only she can judge whether this would be enough to live on.
Conclusion – Pay off Mortgage Early or Invest?
The best advice we at Quick Loans Express, a responsible direct loans lender can give Ms Smith is to defer her retirement until her fixed rate mortgage expires at the end of 2019. During this period, she should make as many mortgage overpayments as possible to bring down the sum that she owes. She should also try to set some money aside so that she has an easily-accessible emergency fund.
Nearer the time, she should go through the figures again. With overpayments and a larger pension pot, she should be able to pay off her mortgage with the lump sum, and still have some money put by as a cushion.
The case study of Ms Smith illustrates how many factors there are to consider in long-term financial planning. It also shows that you shouldn’t set any decisions in stone; rather, you should review them regularly to take account of your changing circumstances as well as shifting external factors.
It may not actually be in your best interest to repay your mortgage early in full. Instead, your best course of action might be to reduce your mortgage overall through overpayments within your budget. Simultaneously, you should try to accumulate interest payments on your money through careful investing and saving.
Now that you have the facts from Quick Loans Express, what are you going to do – pay off mortgage early or invest?