You’ll always remember those life-changing moments: meeting the person who becomes your partner, the birth of your children, collecting the keys to your first home.
How about later, when you finally pay off your mortgage? Will you remember that?
Completing the repayments on your mortgage is a major personal achievement; you may have spent 25 years or more setting aside income, considering interest rates and calculating mortgage deals. And while this landmark may be less romantic than that first date, in many ways it’s no less life-changing.
Not only will you own outright what is probably your biggest asset, you also will have access to a sizeable sum each month that previously was earmarked for your lender. And while it might be tempting to use this newfound cash on a holiday, a car or a home extension, it’s a golden opportunity to talk to an adviser to review your current budget, savings and retirement plans to see if you’re using it most effectively.
Review your finances
“There’s every reason to celebrate when you pay off a mortgage, so why not see it as a great opportunity to review your finances?” asks Claire Trott, Divisional Director – Retirement and Holistic Planning.
“There’s a good chance when you pay off a mortgage that you’re approaching peak earnings, family expenses may ease if children have grown up, and sometimes income is augmented by an inheritance or savings maturing. It’s a perfect time to refocus. However, paying off a mortgage doesn’t always translate into increased saving”.
“It’s therefore critical to spend time thinking about how best to use those extra hundreds of pounds per month that are freed up by no longer having mortgage payments”, Tony explains.
“The amount per month may seem relatively modest, so it’s easy to allow it to merge into a household budget or day-to-day spending. Yet think how powerful that same amount could be if you invested or saved it over a longer period – and you wouldn’t miss it, as you’ve had to pay the mortgage monthly for the past 25 years anyway”, explains Claire.
Plan for your retirement
As with all financial planning, it’s never too early to start thinking about how to balance paying off your mortgage with saving for retirement.
If, for example, you pay off your mortgage at 57 and work until you’re 66, you will have nine years of monthly savings to contribute towards your retirement.
And if that retirement is the long one to which we all aspire, those additional funds may be vital. If you are a 50-year-old man of average health today, the Office for National Statistics life expectancy calculator suggests you will live until the age of 84; if you are a 50-year-old woman with the same reasonable health, you are forecast to live until 87.
That would mean there are many years after retirement that will need to be funded – whether you’re just taking life a little easier, starting a brand new business, or fulfilling ambitions for travel, your family or other personal passions.
Now consider how the money freed up by paying off your mortgage can have an impact: If you save £500 per month after a mortgage term has expired, this will add up to £60,000 over 10 years – possibly significantly more depending on how it is invested and allowing for tax relief on your contributions.
The importance of advice
Even if you wait until your mortgage is nearing its full term before considering future options, it’s sensible to have a financial adviser in your corner. They can help you navigate through the different choices if you’re not sure where to start, and help your money to work as hard as it can.
Not only will they check up on your short-and long-term savings and spending needs, and the current state of your pensions, ISAs, investments and other assets an adviser can also look at the most tax-efficient use of the extra money to achieve your retirement goals, for example increasing your pension contributions or making better use of ISA allowances.
Or, if you prefer to consider other priorities, expert guidance can help here, too.
“People’s views of later life are changing, accelerated by the last few years where we’ve had more time to think of family, friends, our health and wellbeing. We can see practical evidence of people making lifestyle changes based on these factors” suggests Melloney Underhill, Head of Marketing Insight at St. James’s Place.
“Remember that monies freed up after a mortgage is paid off need not go solely into investment just to maximise personal gain. Many will now want to use it for their children, for older dependents, or to simply enjoy themselves through travel and comfort as they get older. But a balance between these desires, coupled with informed and dispassionate advice will give you the confidence that your finances will support your choices for as long as they are needed” she says.
A financial adviser can help you assess your spending and also advise on wider issues such as optimising your inheritance planning for your loved ones. This is another critical element to remember as you enjoy that warm feeling of truly owning your own home – with no mortgage to pay.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
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