Let’s talk about a choice that millions of retirees struggle with: Is it better to pay off your mortgage before your retirement? This question is the source of much debate among financial experts, retirees, and soon-to-be retirees. Some experts believe the best approach to retirement is simply being mortgage-free, while others feel keeping a low-rate mortgage as you invest is the way forward. But what’s right for you?
The decision to pay off your mortgage before retirement or not has always been a very difficult one many retirees face. Indeed, 28% of UK retirees have a mortgage debt still to pay off, says the UK Office for National Statistics (ONS). Almost one-third of homeowners over the age of 55 are still repaying their mortgage, according to UK Finance.
This decision has become more complicated in recent times, however, due to rising living costs and constant changes in interest rates. At 4.25%, the current interest rate set by the Bank of England for mortgages is still relatively high, even after this latest cut. But are you better off paying off your loan, or should you keep your mortgage and invest your money instead?
Pros of Paying Off Mortgage Before Retirement
Economic Security & Psychological Comfort
The thought of heading into retirement without a monthly mortgage payment looming over you sounds relaxing. And that’s because it is.
• UK retirees who carry mortgage debt are twice as likely to be financially insecure than those who have no mortgage, according to a report from the Joseph Rowntree Foundation.
• Monthly repayments on an average mortgage in the UK are £1,031 (UK Finance, 2023), so getting rid of this cost will go a long way towards making retirement more comfortable.
• The UK’s state pension is just £11,502 a year (2024 figures) and many of retirees would find it impossible to meet both mortgage payments and the cost of living.
Tip: If your mortgage is more than 30% of your retirement income, consider making paying it off first.
When paying a mortgage makes you spend more than 30% of your retirement income, it may be time to focus on paying it off.
Save Thousands on Interest Payments
Did you know that during the lifetime of a typical 25-year mortgage in the UK you could end up paying the same amount in interest as you borrowed in the first place?
Let us consider actual UK figures:
• Take, for example, a £150,000 mortgage charged at 5% interest with 15 left years to run.
• Over those 15 years you would pay £63,000 in interest – all money which could be spent on being free to travel, family or on health care etc.
• If you pay off your mortgage early, you no longer pay those interest payments and you’ll have more of your retirement income available.
Takeaway: It’s almost always better to pay off a mortgage early than to invest if the mortgage interest rate is higher than you could earn from investing.
Increased Cash Flow & Freedom
Once you stop making mortgage payments, you have freed up a lot of cash flow.
- The typical UK retiree pays £1,512 a month in essential living costs (excluding rent/mortgage) (Pension and Lifetime Savings Association, 2023).
- If you’re still paying off a mortgage, that might take your total monthly outgoings above £2,500, which is not a financially comfortable way of retiring.
More cash flow means you can:
- Travel more frequently
- Donating generously to family and charity
- Spend on hobbies and passions
And really – retirement is supposed to be about living, not fretting over monthly debt obligations.
The Downsides to Paying Off Your Mortgage Before Retirement
You Might Sacrifice Liquidity
After you put a chunk of money into your mortgage, that money is not easily accessible anymore.
• Then, what if you have a medical emergency and need cash fast?
• What if you wish to make a property opportunity or business you want to invest in?
The average cost of residential care in the UK is £50,000 per year, according to Age UK. If you keep some cash on hand, means you are financially prepared.
Solution: Keep your emergency fund healthy (6–12 months of expenses) even if you intend to pay off your mortgage.
You May Miss Out on Investment Opportunities
If you have a low-interest mortgage (e.g., below 3%), it may be better for you to invest that extra cash rather than pay off the mortgage early.
Consider this:
• UK Stock Market Average Return (FTSE100) 6-8% Per Annum
• With your mortgage rate set at 2.5%, it may be more worthwhile to contribute to a pension or ISA than to repay the loan early.
Example:
If you have £50,000, would you rather:
Use it to pay off a 3% mortgage, or
Invest in stocks and shares ISA and expect to get 6-8% returns over 10 years?
Tip: Do the math and see if investing might be a more financially sound option compared to an early mortgage payoff.
Early Repayment Charge
When you pay off your debt earlier than expected, most lenders charge an early repayment penalty.
In the UK, many mortgage lenders impose penalties for early repayment, particularly if you have not yet completed a fixed-rate mortgage period.
Typical early repayment charges (ERC): 1-5% of the remaining loan balance.
Example: You owe £100,000 and have a 3% ERC – you pay a £3,000 penalty for settling your mortgage early.
How to Avoid This Charge?
1. Check your mortgage agreement some lenders will let you overpay 10% per year penalty-free.
2. Your fixed-rate period is up, wait to make a lump-sum payment.
3. Talk to a financial adviser before making a choice about penalty versus possible savings.
Instead, Why Not the Best of Both Worlds?
Not ready to pay it off in full? Consider these options:
Make Extra Principal Payments
• Even adding an extra £200 a month can knock years off your mortgage.
• One make biweekly payments instead of monthly – this adds one extra payment per year.
Refinancing to Get a Better Rate
• If you have a large mortgage rate, remortgaging could lower payments and make cash available.
• Seek out a 10 or 15-year mortgage to pay it off more quickly.
Example : UK mortgage rates were as low as 1.5%
If you locked in a low rate, it could make more sense not to pay off early and continue investing.
How to Invest While Paying Off Your Mortgage
• Maintain balance – make mortgage payments but have surplus funds work.
• This provides liquidity while still allowing for debt reduction over time.
Which is the Right Option for You?
Pay It Off If you :
- Have a high mortgage rate (greater than 5%)
- Prefer less anxiety and lower cost
- Still have a strong retirement account even after adding that off
Keep Your Mortgage If You:
- Have a low interest rate (less than 3%)
- Like higher returns through investing
- Wish to keep cash available for purchases or emergencies
Do you plan to pay off your mortgage before retirement, or keep it?
Learn more:
How to deal with debt in retirement
The Silent Killer: How Debt Can Impact Women’s Golden Years
Drop a comment below!
