Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Should I keep overpaying on my mortgage?
I’m 50 years old and would like to retire as close to 55 as possible. I have a joint mortgage for which we make overpayments of £250 per month. The mortgage is a five-year fixed rate at 1.49% which runs until April 2026.
Should we continue to make the overpayments and pay down the mortgage quicker, or would it be better to slow off with repaying the mortgage while we use the excess for investment purposes?
On retirement, is it considered a good use of the money to pay off what is left on the mortgage?
Or is it better to retain more of the pot to live off day to day, while continuing to pay the mortgage down – and perhaps use some of the pot of money for investments to fund us later in life?
Tom Selby, AJ Bell Senior Analyst says:
Firstly, if you’re overpaying your mortgage make sure you check the terms and conditions to ensure you aren’t at risk of paying a penalty for doing so.
Generally speaking, it makes sense to pay off any high-cost debts you might have before making extra mortgage payments or investing your money.
If you don’t have any high-cost debts then building up a rainy-day fund in case of emergency (e.g. broken boiler, car repair) should be your next priority. This should ideally be enough money to cover three to six months of fixed expenses.
Once you’ve done this you can start to think about saving for the longer term and, potentially, overpaying your mortgage.
From a purely financial perspective, the key will be whether your investments can deliver returns that beat your mortgage interest rate of 1.49%.
If you are employed then your workplace pension should almost certainly take priority, as not only will you get tax relief on the amount you pay in, but your employer must pay into your pension too. For a basic rate taxpayer making the minimum contributions it costs £400 to get £800 into their pension – effectively a 100% return upfront.
If you’re considering saving in an ISA or cash account then you’ll need to achieve returns of higher than 1.49% to be financially better off versus overpaying your mortgage.
However, decisions such as this are personal, based on a variety of factors including your financial circumstances, priorities, and attitude to risk. For many people there will be a psychological benefit from paying off their mortgage early, for example.
The most important thing is to think carefully about what’s important to you and understand the implications of whatever decision you take. If you’re unsure, it might be worth speaking to a regulated financial adviser to talk through your options.