Should we pay off our mortgage or save into a pension? DAVID HOLLINGWORTH replies

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My husband and I jointly own our home, which has a £86,000 mortgage left to pay. It has 18 years left and we have one year remaining on our current 1.69 per cent fixed rate.

Our property has about £260,000 equity in it due to house prices rising in the past and extensive renovations. 

We are both 49 and work full time on average salaries. We have no pension apart from state pension; our only asset is the property. We have a plan to downsize once our daughter, who is 10, leaves home to help pay for retirement.

My question is, is it worth trying to pay the mortgage off faster?

We could probably put a £20,000 lump sum towards it, and make an overpayment of £500 each month. This would mean we could pay it off in six years rather than 18. 

But would we be better off just putting the money into pensions instead? 

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David Hollingworth replies: You are at a point in your life where a number of goals and requirements are all competing for priority.

Even though it may seem a while away yet, you may already be thinking about planning ahead for future costs as your young daughter grows up, including further education.

At the same time, it's not unusual for thoughts to turn to financial provision after retirement.

I'm not a pension adviser, but it makes sense for you to be considering how you're doing with your retirement savings now, and where you'd like them to be.

Taking stock of your current pension pot and looking at your targets will help. There are plenty of online resources, such as the MoneyHelper website which has a pension calculator you can play with. 

A financial adviser will be able to help you understand the possible options to hit your goal.

This of course all comes alongside the standard cost of living including the mortgage payment, utilities, travel and other regular day to day costs. 

The good news is that your mortgage has so far avoided the impact of the rise in interest rates in the last couple of years. 

> What next for mortgage rates? 

No pension plan: While paying down the mortgage is often a top priority, paying into a pension could be more beneficial in the long run

Where are mortgage rates headed? 

Your fixed rate is very low, and must clearly have been locked in prior to the interest rate hikes which started at the end of 2021. 

That has given you great insulation against the rise in payments that many homeowners have had to grapple with. 

With another year left to run on your fix, it makes sense to be thinking about how things may look when your deal comes to an end.

The Bank of England base rate is expected to fall as this year progresses and inflation is brought back under control. 

Even though base rate is expected to ease, there's no anticipation of a return to the ultra-low rates that existed when you took the current deal.

The lowest five-year fixed rates for remortgage customers are still only a touch below 4.5 per cent, which could add around £120 per month based on your current mortgage.

You're therefore right to want to make the most of the remainder of the current rate to help deal with the higher costs to come. 

Your lender, Nationwide, will probably allow you to make overpayments of up to 10 per cent each year without an early repayment charge. 

Rather than base this on the outstanding balance like many lenders, Nationwide will allow up to 10 per cent of the original balance to be repaid each year without incurring a penalty.

That would give you the ability to make some regular or lump sum overpayments now, whilst your monthly costs are lower - but it is important to check that you won't go over your allowance. 

Alternatively, you could consider saving into a higher-rate savings account. 

Savings rates are likely to outstrip your current mortgage rate and could help you build a bigger lump sum to pay off when you review your mortgage. Be sure to account for any tax that could be payable on the savings interest.

You need to retain a liquid cash balance as an emergency fund, but reducing your mortgage more quickly is unlikely to feel like a bad decision. 

> Is a five-year fixed mortgage the best option as interest rates set to stay higher?

Safe for now: Although our reader is currently protected from higher rates by their fixed deal, they are readying themselves for costs to jump next year when they remortgage

Pension vs mortgage 

The difficult bit is getting the right balance, as all your aims are clearly important. 

Rather than focus only on the mortgage, you may want to spread your resources.

You have a few key considerations. You need to ensure you have an adequate cash buffer in place, so don't use all spare cash to plough into the mortgage or pension.

Take specialist advice on where your pension savings sit, and what you need to do to hit your targets. Ask about the pros and cons of increasing your pension contributions, now or in future.

Aiming to pay off the mortgage more quickly isn't a waste of assets, and I'd encourage you to try to make inroads once you consider what flexibility you have, and how you may be able to spread resources to better achieve your goals.