Should You Pay Off Your Mortgage or Invest for Retirement?
Should You Pay Off Your Mortgage or Invest for Retirement?
For many homeowners, paying off the mortgage is a key financial goal. If you have the savings to do so, overpaying a mortgage can offer numerous benefits, but there are things to consider. Paying off your mortgage is not the only option, and some might prefer to grow their wealth through targeted investments. Figuring out the right decision for you can be tricky and is likely to be determined by your individual circumstances, your appetite for risk and your plans for later life.
Hansford Bell provides independent advice on a range of matters, including mortgages, life and health insurance, and estate and tax planning. Our forward thinking approach to financial planning is about engineering the life you want, and determining the next steps for your money.
In this blog, we outline the things you should consider when deciding whether to pay off your mortgage or invest in your retirement.
What are the Advantages & Disadvantages of Paying off Your Mortgage?
Advantages
Reduce Monthly Outgoings
Overpaying or paying off your mortgage will reduce your monthly outgoings. This means you’ll have more spare cash for daily expenses and other things like projects, travel and family gifting. For many, retirement will present a decrease in income. As a result, minimising the amount of debt you take with you into these golden years can provide greater comfort and flexibility.
See more: Retirement Planning Strategies for People in Their 50s
Better Returns than Saving
The amount of money saved per month from paying off your mortgage is often better than that which you would gain by putting the money in a savings account. That’s because the interest rates on savings are likely to be lower than on mortgages.
Reduced Risk
Putting money into your home presents a fairly risk-free return compared to investments. No matter the strategy, all investments carry some degree of risk. Paying off your mortgage, however, can provide calculable savings. This degree of clarity makes it a highly attractive option for many.
Peace of Mind
Owning 100% of your home’s equity is a good feeling. The psychological benefits of paying off your mortgage cannot be understated, providing a greater sense of security as you head into later life.
Disadvantages
Reduced Liquidity
In the event of the unknown, liquidity is important. The ease at which you can access the money you have tied up in assets can make all the difference when it comes to handling things like job losses or unexpected illnesses. With property being the least liquid of all assets, paying off your mortgage means a large proportion of your wealth will not be easily accessible.
Reduced Diversity
Generally, investing across multiple asset classes is a good decision, minimising risk and maximising returns in a range of market situations. Property is typically considered a low risk investment, increasing in value more often than not. However, putting all your eggs in one basket, so to speak, is always something to be mindful of.
What are the Advantages & Disadvantages of Investing for Retirement?
Advantages
Growth Potential
Investments have the potential to provide long term returns, and substantially grow your wealth. Of course, these returns aren’t guaranteed and investing always comes with a degree of risk. But, the potential for significant growth makes investing a highly attractive option for many.
Cash Accessible
Many investments such as stocks, shares and bonds are liquid, meaning they can be quickly converted into cash if necessary. That means you will be much more able to navigate unforeseen events like redundancy, illness or the death of your partner.
Can Use Returns to Pay Off Mortgage
A smart investment portfolio that is generating steady returns can allow you to pay off your mortgage too, just over a longer period of time. This isn’t actually an either/or decision – you can use the returns you achieve to overpay your mortgage, and step into retirement with a robust portfolio and a home of your very own! More on that later.
Disadvantages
Growth Only Expected
As previously mentioned, the forecasted growth of your investment is just that: forecasted, and not known. Whilst you can work out and define the savings which will come from paying off your mortgage, predicting investment returns can be much less precise.
Risk of Short Term Losses
As we have discussed, investments can actually lose you money – particularly in the short term. If you are close to retirement age, your focus may turn from growing wealth to preserving what you have. Therefore, it may be time to rein in the risk and make more conservative decisions.
How to Decide Whether to Pay off Mortgage or Invest in Retirement.
Now you know some of the advantages and disadvantages of each strategy, it will be clear that either can make sense as long as your wider finances are healthy. So, how do you actually determine the right decision for your money? Below, we highlight some important factors to consider when thinking it through.
Overpayment Fees & Charges
Check the small print; not all mortgages are flexible. Some mortgages allow you to overpay a set amount each month without penalties – usually 10%. Anything over this amount is likely to incur Early Repayment Charges (ERCs) which can run into the thousands and significantly alter the financial picture. Some lenders will allow you to overpay as much as you want, however, these are generally mortgages on Standard Variable Rates and are likely to be more expensive. In this scenario, you might want to remortgage instead, and try to get a better deal.
Emergency Fund
Having an amount of money set aside for emergencies is generally considered a wise move. Keeping an emergency fund that can cover around 3-6 months of living expenses means unforeseen events like job losses can be dealt with without taking too much of a toll on your finances. So, make sure that whether you choose to invest or pay off your mortgage, you aren’t draining your emergency fund.
Cash-Flow Forecasting
A great way to decide which strategy is right for you is to work with a financial life planner to forecast your finances over time. Using cutting edge cash-flow software, they will be able to run different financial scenarios and help you gain a more accurate sense of what different decisions might mean for your money.
Other Debts
If you have other, more expensive debts, you need to think carefully about which to prioritise repaying first. If your finances don’t allow repayment of both, it might make more sense to clear these ahead of retirement, rather than your mortgage. On the other hand, a mortgage is essentially a loan secured against your home. That means if you don’t keep up with repayments, your home could be repossessed. As a result, some advisers would argue this is the most important debt to clear, providing better long-term security.
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Your Goals
When it comes to deciding what to do with savings or a lump sum, you need to think about your individual goals and priorities. Everyone will approach the question of mortgage and retirement planning differently. That’s why it’s important to talk to a financial life planner who understands your personal aspirations. They’ll work closely with you to create a bespoke plan that puts your goals within reach.
See more: What is the Difference Between Financial Planning & Financial Advice?
Combined Approach
Really, this question isn’t black and white. In fact, an approach that combines overpaying on your mortgage and investing is often a great solution. A smart investment strategy can allow you to put a portion of the returns towards your mortgage, and, equally, reducing your monthly mortgage outgoings means you’ll have more money to put towards investments. In this way, both approaches can be mutually beneficial, and contribute to the other. A two-pronged strategy means you’ll be on track to achieve two long term financial goals at once – clearing your debt and building wealth. This will put you in a much better position as you head into retirement.
Retirement Planning & Mortgage Advice UK.
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