As you motor towards retirement, being mortgage-free can be a huge boost. That extra money can go towards living a better life in retirement. And it doesn’t have to be just a fantasy. With forward thinking and a plan in concrete, you can pay off the mortgage and have an extra weight off your shoulders.
Mortgage terms are usually spread over 25 years. Therefore, if you took one out at 25, you would be 50 by the time it is paid off – and that’s if you haven’t extended the term.
Are you ready to bring down the repayment years to live mortgage-free? Here’s how it’s done.
Keith Smith is a 55-year-old and lives with his 53-year-old wife Sharon. In ten years’ time, they hope to call 'working life' a day and start enjoying their retirement years. Their outstanding mortgage is at a balance of £140,000 with a term of 15 years. They have a fixed rate deal on their mortgage, with an interest rate of 1.50% and it is fixed for three years. Balanced investors, they are paying £870pcm.
So, by the time they’re 65 and 63 respectively, their aim is to be retired and mortgage free.
Advice provided by Reeves Independent:
Due to their current wages and income, they can comfortably continue regular mortgage repayments until their retirement age. £870 is affordable with surplus income too.
They should start to build their savings through a Stocks and Shares ISA. In doing so, they can build their savings over the next decade whilst still working. This is a great opportunity to grow their money more than the interest rate of their mortgage, as well as benefiting from pound cost averaging. Furthermore, they’ll be able to develop this money tax-free and take a lump sum tax-free withdrawal.
Additionally, they should review their cash follow model and retirement projection. We reviewed the two options – using lump sums from their ISA’s to clear the mortgage and taking a higher income (five years) from their pension and savings. Both showed that they are on track to achieve both of their goals.
Despite things looking rosy, we never know what is around the corner and you should always plan for a rainy day. We advised Mr and Mrs Smith that they should set up a 15-year joint decreasing life insurance policy. This ensures that if one of them passes away during this period, the mortgage will be repaid. The policy will also reduce as they pay off their mortgage – win, win as it makes it more affordable for them. We also suggested that they could set up a ten-year income protection policy, which means if they are unable to work their income would be replaced and still be on course.
Of course, Reeves Independent will be by their side and help them review their position as many variables can change over the next ten-15 years:
1) Change in personal circumstances
2) Change in financial circumstances
3) Mortgage deal ending – therefore, potential to refer to a mortgage broker
4) Change in inflation
5) Change in legislation
6) There may be new products on the market.
No nonsense, just honest, transparent and friendly advice
The articles are for information only and should not be construed as advice or a recommendation. The investment strategies mentioned are examples only and may not be suitable for your particular: circumstances, tax position or objectives. Please seek independent financial advice before taking any action. The Financial Conduct Authority does not regulate tax and estate planning, including wills and probate services.
Names have been changed to protect identity.
No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.