🏘️ Why it might be better to put money in your mortgage rather than your pension
With the average rate on a two year fixed rate mortgage 6.5 per cent, overpaying your mortgage, which reduces your mortgage debt meaning less mortgage to pay off has rarely made more sense as it does now.
In general, overpaying your mortgage, if available on your current deal, will let you get better rates and lower repayments whenever you come to remortgage and will allow you to pay off your mortgage in full at an earlier date.Someone with an outstanding mortgage of £70,000 with seven years left on their term could be just under £16,000 better off doing this.
If a person did this in five years, they could then move the same amount – £1,334 per month – into their pension. This would actually work out at £1,667 per month factoring in tax relief and 5 per cent growth, or £2,223 for a higher-rate payer and £2,425 for a top-rate payer. “The other risk with this approach is that you put your pension on hold for too long, you’ll miss out on growth, so you have a far bigger hole to fill with pension contributions, and it ends up costing you more in the long run,” advises Sarah Coles, personal finance expert at Hargreaves Lansdown.A homeowner with a £200,000, 25-year repayment mortgage at a rate of 2.5 per cent would have monthly payments of £897.23, according to broker L&C Mortgages.
But many will allow you to do this even if you are still in the introductory period of a fixed-rate or discount mortgage. Those on a standard variable rate are usually able to overpay as much as they like. “I use an app called Sprive that looks at my spending and tells me what I can afford to overpay on my mortgage deal. It can even allow for big outgoings like holidays.
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