Paying off your mortgage before retirement – good idea or waste of money?

For many people, the paying off of their mortgage is an eagerly anticipated destination in time and often seen as a major bump in stability, security and peace of mind.

Yet is it always the best option?

Given the low interest rate environment of today, the rate on your mortgage may be relatively low.

Consequently, it may make sense for you to hold onto your mortgage, and diversify your money into other, high return ventures.

There is also another large advantage to not paying off all of your mortgage.

As the only way to get money out of a paid for house is to either borrow against your home, create a reverse mortgage, or sell it – it may be beneficial to retain funds in more liquid assets.

This can help against unexpected emergencies, medical treatment, and to help out family members.

To this end, here are five reasons why you might not want to pay off your mortgage.

You have debts with high interest rates

With many fixed-rate mortgages way below 4.5%, it might not make sense to funnel your money into unnecessary payments on a low interest rate mortgage, rather than high interest rate debts.

Rather than paying off your mortgage, you may therefore want to use the money to pay off any higher interest rate debts you have such as student loans or credit cards.

You aren’t matching your company’s pension contribution

If you are paying into a pension which your employer matches, it makes sense to make your entire company matching contribution; rather than pour more money into your mortgage.

Some companies offer as much as 50% in matching pension contributions (up to a certain percentage of your earnings); meaning a bigger contribution from you can make a massive difference to your pension in what is effectively free money.

You may need cash for emergencies

Fidelity estimates that retirees in America will need around USD 220,000 for medical expenses during their retirement, meaning it might be the smart choice to leave your money in a liquid, easy to access asset rather than an illiquid mortgage.

Medical expenses however is only one spectrum of cash-draining possibilities during retirement.

You may have to help out family, or perhaps pay for elder children’s education.

And once funds are tied into paying off your mortgage, it will much harder to access your cash.

Missed opportunities

When you pay off your mortgage, you miss out on the gains you could have made if you invested the money in a high return asset.

To determine whether investing in a fund might be more beneficial than paying off your mortgage, you should compare your current mortgage interest rate to the rate of return on an investment (after tax).

This could include a high-quality municipal bond – which offers the stability you will require if you are approaching retirement.

As an investment will arguably make you more money, it may be better to diversify your portfolio with cash you had previously earmarked for mortgage payments.

You may want to move

If there is chance you might sell your home, it could be beneficial to retain your cash rather than finish paying off your mortgage.

This would be beneficial if the real estate market either crashed or depreciated – as you would have more options for financing than if you owned your property outright.

For more information about your unique circumstances, you should seek the aid of an experienced and regulated independent financial advisor.

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