Tuesday, November 29, 2022

Why investing money in your mortgage might be better than your pension

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For those who are reaching the end of their businesses, taking money that would go towards your retirement and putting it in your home may represent a better use of your money

With the average interest rate on a two-year fixed-rate mortgage reaching 6.5 percent, overpaying on your mortgage — which reduces your debt, which means fewer mortgages to pay off — has rarely made more sense.

An unexpected source of back payments could be your pension – and depending on your financial situation, this can save you money later.

While it rarely makes sense to stop paying annuity payments, it can make sense in very specific cases. For example, someone with a £70,000 mortgage that has seven years left to pay off could be £16,000 better off doing so.

If they had taken out a five-year fixed-rate contract at a rate of 2.5 per cent, which would have cost them around £900 a month, they could pay off their entire debt before the end of their debt if they chose to, £425 a month overpaying Five year fixation according to L&C Mortgages.

The income of £425 a month that would have gone into her pension pot means her pension savings were £28,215 lower after four years. But five years after paying off their mortgage, they were able to put the money they used on their mortgage – a total of £1,334 a month – into their pension each month.

If they did this for two years, their pension pot would be worth more than if they paid their mortgage and pension payments consistently, with a surplus of over £2,500 for a property taxpayer, or over £15,500 for higher rates.

However, this is not a recommended approach for everyone. It would work best for those who have, for example, ten years left to pay off their home loan and who have a private pension in addition to or in place of a company pension plan.

Those in occupational pension schemes should continue to pay, as employer contributions – effectively free money – cannot be made up later. Everyone else should keep paying.

“It’s unwise for someone to put their retirement savings on hold for too long, or you miss out on growth so you have a much bigger hole to fill with retirement contributions, and it ends up costing you more,” said Sarah Coles, a personal finance expert at Hargreaves Lansdown.

The calculations assume the person is a property taxpayer and sees a 5 percent annual growth on their investments.

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