Paying off your mortgage
If you receive a lump sum payment, your first thought may be to pay off your mortgage. The attractions of this are obvious but you should consider such things as your age, your health, the type of mortgage you have, your anticipated income, the length of time the mortgage has to run, (or the time it has been running) and what resources you will have remaining if you do pay it off. Think through the following points before making a decision.
- If you pay off the mortgage, you will have no mortgage outgoings but your capital is tied up in your home and is not available for any other purpose.
- If you have sufficient free capital to pay the mortgage off, could you ‘ring fence’ it and use it to pay the monthly mortgage bill? The money is available if you want to clear the debt later, earning interest and is available if you need to get access to it.
- The rate of interest you are paying on the mortgage nowadays is likely to be higher than the net rate you could get by investing the lump sum.
- Will your lender impose a penalty for early repayment of your mortgage?
- Are you likely to need a mortgage in the future, perhaps for moving house? To increase an existing mortgage may be easier than starting afresh. You may also avoid future solicitors fees and other expenses.
- Have you considered paying off part of the capital sum outstanding. You could leave a nominal sum outstanding to give you flexibility. Your lender will tell you what minimum they allow. Find out from your lender when the best time to reduce the debt. Money paid in, say, January might not be credited until December and interest would still be paid on the debt.
- Tax relief on mortgages ceased from April 2000.
If you have an endowment mortgage, you could still consider paying off the outstanding capital. If you continued to pay the premiums of any associated with profits endowment policy you would still receive the tax free lump sum from the policy when it matures. Your endowment policy, if a long established one, may attract tax relief on the premium so that the policy may well be a valuable investment in its own right.
If it is possible to do so, the endowment policy should be continued. The main bonuses are normally paid at the maturity date and there could be a financial loss in stopping the actual policy payments. If the policy is made ‘paid up’, the bonuses may be based on the value at the time the policy payments cease.
If you are considering surrendering the policy to realise its cash value it is as well to consider selling it in the ‘second hand’ policy market rather than surrendering it to the insurance company. Prices are generally better.
It is recommended that advice is always sought when examining the whole question of paying off your mortgage. The combination of financial and ‘comfort’ factors can make a decision difficult.
The Retirement Counselling Service Ltd
8 High Street Wendover