Paying off a mortgage

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Think outside the box when paying off your mortgage

The usual way of paying off a mortgage:

  • Making overpayments when we get a bonus
    or extra money comes into our hands
  • Increasing the amount on our monthly
    payments so that we are effectively
    overpaying them.

What happens if we do this?

  • With the reduction in the capital loan you may
    get more favourable interest rates.
  • You could reduce the term over which you pay
    off the mortgage.
  • The available equity will increase on your current property, making it easier to move up the property ladder. 

But what else could we consider?

Using lump-sums to pay off a mortgage

Let’s just say we reduce the amount we owe on a mortgage with an interest rate of 2%.

Our monthly repayments will reduce, which is obviously important to us. But what if the money we saved by doing this could be invested elsewhere to make better gains for us so that we are, overall, in a better financial position?

To put this simply you could be saving money on a low interest rate mortgage but making greater returns on a medium risk investment.

Returns on investment

So let’s just look at the returns made on such an investment since 2016. Even during a global pandemic, this fund has managed to deliver returns of 5.59% through 2020 and 43.31% over the past 5 years.

The returns on this investment are shown in the graph below.

It seems fairly obvious to pay off debt that we owe i.e. a mortgage, if we are able to make overpayments, but the table below identifies why this is not always within the client’s best interests:

Using a pension to
pay off a mortgage

Pensions are a very useful way of accumulating tax-free savings, and provide a lump sum at age 55 years.

With 25% of the value of the pension pot available at 55 years old, there are opportunities to consider paying off a mortgage, if best to do so within the client’s overall retirement plan.

It is also worth making sure that advantage is taken of nominating someone else to receive your pension on death. Again, this could be a useful fund to put towards clearing the mortgage, taking account of all financial considerations.

The best financial plan

Creating the best financial plan for you is something that our advisers are skilled in working through with you.

We will look at no only the fact that you need a mortgage but also how best you may be able to pay off that mortgage when the time is right. We will also make sure that you have the right insurance in place so that all your assets are properly protected should you become ill or an event makes it impossible for you to continue to work.

Need more information?

We are not here to sell you a product but to provide advice. That is the sole purpose of our business. If you need more information about home ownership click here