Should You Prioritise Clearing A Mortgage Over Retirement Savings?

November 16, 2023

Deciding between debt payments and investing for the future is the most challenging decision after the 30s. Often, It boils down to the confusion between paying the mortgage or retirement savings. Both goals are lifestyle-improving goals. However, choosing the right ones is the toughest part for an individual.

Let’s analyse both situations briefly.

Paying down the mortgage first would leave you more time to invest in other ways, like a retirement fund. However, a mortgage lasts for 10-25 years. Starting investing for retirement after that would not be beneficial much. Alternatively, if you are approaching the final mortgage payment date, you must pay the mortgage first. Afterwards, you can hop on your next goal of retirement savings. It is an ideal situation for a 35-year-old individual with the last 1 year of mortgage payment. He can dedicate a good part of his earnings to a retirement fund as the next goal.

The blog discusses the part. It will help you determine the right decision for your finances and lifestyle goals.

Advantages of paying mortgage first

Paying more towards the mortgage agreement would help you reduce the interest obligations and clear debt early. It would be helpful if the existing mortgage rates were on the rise. Moreover, your mortgage provider may allow you to overpay the outstanding amount if you are near the term’s end.

With this, your credit score may improve. Additionally, it would help you save the secured asset or the property against which you got the mortgage.

Despite fixed rates falling slightly in recent months, they are still high at around 6%. The average standard variable rate is the rate that rolls into the mortgage ending date. It rose from 5.17% to 7.85% in August 2023. Thus, overpaying a mortgage may help you here. Here are other benefits of paying the mortgage first.

1.  Advantages of saving for retirement

Paying extra towards the pension pot can be a financially savvy move. You’ll not only benefit from the government tax relief on the amount you save but will boost the investment until the retirement year. Pension tax is nothing but the amount you pay as a retirement contribution. Out of this, 20% of the tax that you pay instead gets credited to your pension.

For example, a basic tax-payer receive 40% tax relief, and other receive 45% tax relief; they must pay only £60-£55 respectively to contribute £100 to their pension. Here, if you are a high tax-payer, investing more in your retirement fund will be ideal.

If you have a workplace pension, your employer will contribute some. The employer pays according to your contribution. If you contribute more, he would also do so and vice versa. Moreover, in the tax year 2023/24, you may receive £6000 as tax relief. Thus, investing in the pension pot is a good idea if you can do so.

However, if short-term debts in the credit history delay the contribution, clear them first. You can do so with the help of unsecured loans for bad credit scores. It would help you pay the high-interest debts. Later, you can pay the single loan by saving more towards retirement contributions. However, be steer clear you cannot tap the retirement savings until you turn 55. The standard age limit may rise to 58 years by 2028.

2.  Managing mortgage and retirement fund at a time: Midway solution

You can try to find a midway between mortgage and retirement contribution. Fund your retirement plan while making mortgage payments. It is an attractive option in the early stages of your mortgage payments. It is because you have sufficient time to pay the mortgage. Utilise this available phase to increase contributions towards retirement funds.

Alternatively, if the market falls, it is sensible to pay the mortgage first. It is better than risking your hard-earned money towards investments.

Individual circumstances vary according to income and financial liabilities. Thus, there is no one-size-fit approach to choosing one. Precisely, whether it is ideal to pay down the mortgage or save for retirement depends entirely on your personal financial liabilities and income.

Do not sacrifice the long-term goal of a wonderful life post-retirement due to present fears of paying the mortgage. You can re-analyse the mortgage agreement by paying more towards retirement. It is entirely a matter of priorities and life goals. By prioritising retirement savings, you can invest the remaining towards mortgage payments.

If your mortgage interest is high, a retirement would be ideal to clear that first. It is especially favourable for individuals with low income. Economic uncertainties may make it unbearable for you. Also, analyse refinancing is yet to reach the mortgage term-end. It would help you re-think the possibilities of saving towards a retirement fund.

3.  What to consider before deciding between paying a mortgage or saving for retirement?

Deciding between mortgage payments and saving for retirement requires considering some parameters. However, the viability of each factor depends on the finances and personal liabilities. Thus, when deciding between paying a mortgage and saving for retirement, you must consider the following aspects:

a)      Retirement age

One retires by 55. If you are approaching this, you must pay off the mortgage first. This is because individuals began investing usually from the age of 30. By 55, it matures, and one can withdraw from the invested funds according to the requirements.

Alternatively, paying the mortgage as you get old becomes impossible. Moreover, not having a regular income makes it further impossible. Here, you risk losing the asset. Thus, pay your mortgage first here.

b)  Risk tolerance

It is also one factor in deciding between paying the mortgage and saving for retirement. With options like generational wealth or a part-time business along with the job, you can first save for retirement. However, if you do lack one, paying the mortgage will be ideal.

Risk tolerance here implies that you will take risks for your future. By contributing more towards the mortgage, you can pay that timely but risk missing retirement funds and vice versa. Decode a mid-way here.

Moreover, you may also consider paying off debts like credit cards before paying off the mortgage. Refrain from using these again. Instead, resort to 15-minute loans from direct lenders. You can use it to finance any emergency and short-term cash requirements.

Bottom line

Decide between the mortgage payments and the retirement savings by analysing your finances and remaining mortgage terms. It would help you decide the right way to finance the payments and save towards retirement.

While you can do both simultaneously if your income permits, decide what you can dedicate towards the same. Precisely, be calculative and futuristic before deciding between the two. If the decision aligns with your lifestyle well, you are on the right path.

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