Should I pay off my mortgage before I retire?

Which would you choose at retirement?

The attraction of being mortgage-free

The monthly payment disappears at a point when your salary may also be stopping. That can reduce the amount of income you need to generate from pensions and investments each year.

There can also be an important emotional benefit. Someone who has been perfectly comfortable carrying a mortgage while earning a regular salary may feel differently once they are relying on pensions, savings and investments.

For some people, entering retirement knowing the house is paid for provides a level of security that is difficult to put a price on.

But what are you giving up to clear it?

The other side of the decision is what happens to the money you use to repay the mortgage.

Imagine you have £100,000 outstanding on your mortgage and £100,000 available in savings and investments.

You could clear the mortgage tomorrow. But you would also have converted £100,000 of accessible capital into equity in your home.

That capital might otherwise have helped fund holidays, replacement cars, home improvements, unexpected expenditure or simply provided a useful reserve during retirement.

The question therefore isn’t only whether you can afford to clear the mortgage. It’s whether you can afford to give up the flexibility provided by the capital used to repay it.

Where is the repayment money coming from?

This can make a significant difference.

Using surplus cash is very different from withdrawing a large amount from a pension or selling investments.

For example, taking pension tax-free cash simply because it is available may not always be the best option. Relevant factors include what the money will be used for, what remains invested afterwards and how the withdrawal fits with the longer-term retirement income strategy.

Similarly, selling investments to repay a relatively low-cost mortgage means giving up the potential future returns from those assets – while retaining the investments means accepting that returns are uncertain and markets can fall.

Tax, investment risk, interest rates and access to emergency funds can all affect the decision.

What does the mortgage actually cost you?

The interest rate matters too.

A high mortgage rate creates a very different calculation from a low fixed rate with several years left to run.

But I wouldn’t reduce the decision to a simple comparison between the mortgage rate and an assumed investment return.

Investment returns aren’t guaranteed, while repaying debt provides a known saving in future interest. On the other hand, retaining investments can provide liquidity and longer-term growth potential.

The right answer depends on the wider position rather than one percentage being higher than another.

Do you actually need to clear it before you retire?

Another useful question is whether retirement and mortgage repayment need to happen on the same day.

You might be able to retire comfortably while continuing to make mortgage payments for several years.

Alternatively, your plan might show that clearing the mortgage first substantially reduces the income you need in retirement and makes the overall position more sustainable.

You may also be planning to downsize in a few years, in which case using a large amount of retirement capital to clear the mortgage now could be unnecessary.

This is where cashflow planning can be particularly useful. Cashflow planning can help illustrate how both options could affect future income, capital and flexibility.

It’s not purely a maths question

Financial planning isn’t always about choosing the option that produces the largest projected number.

If keeping a mortgage throughout retirement would cause you to worry every month, that matters.

Equally, if using most of your accessible savings to become mortgage-free would leave you feeling financially constrained, that matters too.

The best plan needs to work financially, but it also needs to be one you’re comfortable living with.

So, should you pay off your mortgage before retirement?

There isn’t a universal answer.

Factors that can form part of the decision include:

Rather than asking only, “Can I pay off my mortgage?”, I think the better question is:

“What happens to my retirement plan if I do – and what happens if I don’t?”

Looking at both options in the context of your wider finances can help make the trade-offs clearer.

Are your retirement plans on track?

Deciding what to do with your mortgage is just one part of preparing for retirement.

My free Retirement Planning Scorecard takes less than five minutes and looks at four key areas: your Retirement Vision & Plan, your Financial Foundations, Making the Most of Your Wealth, and Staying Flexible for the Future.

It provides a personalised score to help you reflect on areas that appear stronger and areas you may wish to explore further, together with practical points to think about. It is not a recommendation or a substitute for personalised financial advice.

Please Note: This article is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.

The information and guidance provided within this article is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.

Your home may be repossessed if you do not keep up repayments on your mortgage. Think carefully before securing debts against your home.

The value of pensions and any income from them can fall as well as rise. You may not get back the full amount invested.

The value of investments and any income from them can fall as well as rise. You may not get back the full amount invested.

Levels and bases of, and reliefs from, taxation are subject to change and their value will depend upon personal circumstances. Taxation and pension legislation may change in the future.