COVER STORY Paying off your mortgage
Not just a number Alice Haine , personal finance analyst at Bestinvest , says this is why the decision to overpay a mortgage or invest depends on your stage of life and time horizon . “ Someone about to retire with a mortgage still in place should focus on paying off that home loan first to free up income for other living expenses ,” she explains . “ On the other hand , someone in their 20s may want to focus on investing to take advantage of the time they will have in the markets .” However , she notes someone ’ s time horizon is not the only relevant factor and , depending on their circumstances , even a mortgage holder in their 20s may wish to take the safer option . As an example , Haine points out someone who is one year into a fiveyear fixed-rate mortgage can relax as they know that repayments won ’ t shoot up suddenly in the near term . “ When they do come to remortgage in four years ’ time , interest rates are likely to have stabilised , so in that scenario , it would be wiser to focus
Carrot and stick
If you decide to pay off some of your mortgage , this may result in a penalty called an early-repayment charge ( ERC ). This often applies during any fixed or discounted period and is usually calculated as a percentage of the amount you repay . Depending on your circumstances , it can still be worth paying an ERC as the interest saving could be more than the fee incurred .
Yet while you can be penalised for using any spare cash to pay off your mortgage early , Haine says that in some cases you can be rewarded if you decide to invest it instead .
“ Pension contributions gain from the gift of free cash in the form of tax relief , which is automatically granted on taxpayers ’ pension contributions at 20 % of the amount going in , while higher rate taxpayers can claim back an extra 20 %,” she explains .
However , Morgan notes you can ’ t access your personal pension until you are 55 , and this age is set to rise . “ Bear in mind too that rules on pensions and tax relief can change in the future ,” he adds .
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