Hundreds of thousands of Britons do something rather special each year: they pay off their mortgage.
Years of sacrifice and hard work come to fruition when the letter drops through their front door telling them that their mortgage company is hightailing it out of their lives and there will be no more dreaded monthly repayments.
Years of sacrifice and hard work come to fruition when the letter drops through their front door telling them that their mortgage company is hightailing it out of their lives and there will be no more dreaded monthly repayments.
The mortgage-free years prior to retirement are a golden opportunity to set your finances on the right footing. But what to do with the extra cash you no longer have going out each month?
Just because your outgoings are now well below your incomings, it doesn’t mean you have to spend to make up the difference.Spend and save
Of course you deserve to enjoy some of the fruits of your hard work and perhaps earmark some money for that expensive holiday of a lifetime but do budget so that you can leave yourself a decent amount of money for your future.
Aim for 80 per cent of what your mortgage would have been.
1. Share investments
The further away you are from retirement the more risks you can take with your new-found extra cash. Risk doesn’t mean heading down to the bookmakers or flying to Las Vegas but looking at investments, which have a five or ten-year investment timeframe. This is considered enough time to smooth out the peaks and troughs of performance.
Share investments fit the bill. Not only do they offer the chance for capital growth over the medium and long-term but income as well, as individual companies often pay dividends.
This gives you the chance to enter a virtuous investment circle where you buy shares, earn income from them in the form of a dividend and then re-invest this income to buy more shares.
2. Pay more into your pension and enjoy the tax benefits
Putting more money into your pension may seem like the last thing you want to do having finally thrown off the financial shackles of your home loan but there are good tax reasons for so doing.
All contributions into a pension are free from tax so if you are a 40p income-tax payer, for every £10 you pay into a pension you will get £4 of tax relief.
Over time this tax relief really boosts the size of your pension and the more you put in, the more tax relief you enjoy.
What’s more, it is no longer the case that your pension is locked away until you retire. You can access your pension from age 55 and from next year you will be able to use your pot as you wish and no longer be compelled to buy an annuity.
3. Take on another mortgage, and opt for buy to let
I know this seems like madness but bear with me. Mortgages have never been cheaper and are undoubtedly the cheapest form of borrowing available at the moment. You could use the money to invest or to purchase a buy-to-let property.
You will be in a very good position to negotiate the best possible rate with the lender and if you invest wisely you should be able to comfortably beat the interest charged on the loan.
You need only have the mortgage for a few years while your buy to let or other investment grows in value and you enjoy the benefits of a regular investment income, then sell up and be mortgage-free again.
There are, of course, warnings that come with this route of action as your home is at risk if you don’t keep up repayments.
4. Get life and critical illness insurance
You may have been so committed to your mortgage payments that you have forgotten some key insurance policies, which you ought to have in place to insure yourself and your family’s future.
The most obvious protection policy you may now want to go for is life insurance, which will pay out should you die while the policy is active.
Another insurance, which is crucial but often overlooked, is critical illness. This will pay a big lump sum should you suffer a life-threatening condition such as cancer or a heart attack.
Insurances you can do without now include mortgage-protection insurance and possibly income protection.
5. Savings, shares and alternative investments
Having more money each month to save and invest gives you a better opportunity to diversify your investments.
In the past, with a mortgage dragging your finances down, you may only have had enough to put into a cash savings account. But now with more money you can start to introduce shares, bonds and even more exotic alternative investments such as wine into the mix.
Diversification of investments is a good thing as risk is spread and it makes it less likely you will suffer major losses.
The theory is that the more investment types you have the greater the chance that over-performers will make up for the underperformers, therefore smoothing out returns.
New jobs and new horizons at 50
Being mortgage-free means lower outgoings and this will allow you to spend a little more and to save harder. However, the benefits don’t stop there.
You could decide to cut back on work or go for that dream job that may have a lower salary but is something you have always wanted to do.
Whatever path you choose, being mortgage-free is a major opportunity to supercharge your finances and even redraw your life as you make your way through your fifth and sixth decade.
Written by Anthony Kim
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