A while ago, I wrote a blog where I said that paying off your mortgage was literally the last thing you should do.
Back then, mortgage rates in the UK were the lowest we had ever seen, when the base rate dropped below 1% for 13 years. For most people fixing their mortgage, the average rates were under 2%.
And with the interest on borrowing that low, it didn’t make sense for most people to pay off their mortgage. Typically, their savings and investments were earning more than this and it was a cheap source of money. It’s what we call leverage.
But things have changed.
Over the last couple of years, mortgage interest rates have risen sharply.
They have stabilised a bit now but most typical fixed rate mortgages are currently between 4% and 5.5% – which, to be fair, is the rate that mortgages should be. If you look at house buying in the USA, Canada and Europe, it’s quite typical that people pay between 4% and 6% on their mortgage borrowing.
So if mortgages are now going to be more expensive, does that mean that we should look at paying them off… or not?
Well, let’s talk about a few key things here, so you can make the right decision for you and your family.
If you’ve got spare money coming into your account each month, you might be tempted to think about paying down your mortgage and for some people, this can be a really good option.
The first thing to look at is how much interest you’re earning on your savings. If you have a chunk of cash sitting in a savings account, it’s quite possible that you’re earning 4% – 6% on that money right now.
If your mortgage rate is lower than the interest you’re making on your savings, logic would dictate that paying off your mortgage isn’t necessarily a great idea. But when you calculate it over the long term, paying off your mortgage early can save you thousands of pounds in interest. So it’s certainly something worth considering.
But what about other uses for that money? Could it be working even harder for you?
The first thing to look at is what you have in place in terms of emergency savings.
By emergency savings, I mean having enough money tucked away for when stuff goes wrong – your head gasket goes, or your dog needs emergency surgery, or the boiler suddenly needs replacing. Have you got enough aside to comfortably cover you, if and when the unexpected happens? If so, great! And if not, it might be more of a priority to build yourself that security blanket, rather than putting the cash towards your mortgage.
The next thing is whether you’ve got any unsecured debt, things like credit cards, bank loans and overdrafts – basically debt that is not secured against your home.
The interest rates on this kind of borrowing tend to be much higher, somewhere between 8% and 25% (and some of them even more). So if you’ve got balances on credit cards or loans, it’s definitely something to look at repaying, before you focus on paying down your mortgage.
If you have your emergency fund in place and your credit cards and loans all sorted, let me give you some other things to consider before you start paying off your mortgage.
Firstly – is there a penalty for overpaying your mortgage? If so, how much are you allowed to pay each year without triggering the penalty?
This is called an early repayment charge. It’s typical with most fixed rate mortgages but usually you can overpay up to 10% of your mortgage in any year without any penalty.
And secondly, what else could you be doing with that money, besides overpaying your mortgage?
I’m talking here about long-term investing for your future, which is where pensions come in (not an exciting topic to lots of people, I know, but bear with me here!).
If you’re an employee, and your pension is taken care of at work, then yes – by all means, use your spare money to pay off your mortgage or book an extra holiday or whatever else you feel like doing.
But if you are self-employed (whether you’re a sole trader or a limited company business owner), you NEED to be making your own preparations for retirement.
For most people, this means paying into a pension. Even if you’re in your 30s, 40s or 50s and don’t have a pension, it is honestly never too late to start, so you can benefit from that compounding effect that helps to give you real financial security.
Basically, before you rush to pay down your mortgage, take some time to see whether or not you’ve got the right amount of money set up for when you want to work less or stop working altogether!
This means seeing what you’ve got already in place; seeing how much money you’re going to need; and then making sure that you are putting the right stuff in place to close the gap between the two.
If you want to know more about how to do this, I’ve got a really helpful workshop you can access instantly, which takes you through how to close your retirement gap. Here’s where you can get the Pensions POWERclass right now.
If you’ve already got a financial adviser, you can ask them what your pension looks like and whether it’s going to be enough for you to live on, when the time comes. If it’s all good, then brilliant and you can crack on with paying your mortgage off early!
But if it’s not all looking rosy – which let’s be honest, can be a pretty stressful thing to have niggling away at the back of your mind – then getting started on growing money for retirement is usually the better option. The sooner you start, the longer the money has got to grow and because you get tax relief on your pension contributions, it makes the most sense for a lot of people.
So to bring it all back to the original question… is it still worth paying off your mortgage, now interest rates have gone up? Well yes – but for most people, there’s actually other things that it makes more sense to sort out first.
If you want to know more about planning your financial future – to feel really clear on the best path for you, and to sort out your mortgage and pension and savings and everything else – then just click here to book a free call now.
We can chat through your next steps and I can fill you in on all the ways we can work together, to properly take control of all your money stuff!
Until next time,
Claire
