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.
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.
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.
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.
Retirement Financial Services >
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?
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.