When you’re close to retirement and there’s only a little left to pay on your mortgage, it’s tempting to just get it paid off. For many people, the idea of being ‘mortgage-free’ is a compelling one, and it might be the right decision, but there are a few things worth looking at before you make it.
The main thing to think about is that the money you use to clear your mortgage has to come from somewhere, and that’s usually your pension or your investments. If that money is growing faster than your mortgage rate, taking it out to pay off the debt could leave you worse off overall.
Then there’s tax, which is where it really matters. Money inside your pension for example grows without being taxed. If you take your tax-free lump sum to clear the mortgage, that money stops growing in a tax-efficient wrapper.
And once the money is in the bricks of your house, it’s very hard to get back out. This means that money won’t be available if you need it later for a new roof, helping a child onto the property ladder, or care costs. Having money you can reach easily matters more in retirement, not less.
The questions that really matter
This decision is mostly about numbers rather than feelings. It helps to ask three questions:
- What’s your mortgage rate, compared with what your money could earn? That applies whether your money is in the bank or invested.
- What would the withdrawal do to your overall tax position? How and when you take money out can make a significant difference.
- How much is being debt-free actually worth to you? Peace of mind has a value, and it deserves a place in the calculation.
Model it before you commit
For some people, clearing the mortgage is exactly the right decision. But it’s the kind of decision worth modelling properly before you commit to it, because once it’s done, it’s hard to undo.
Please get in touch if you’d like to know more.
