I’m often asked by clients if I think they should pay off their mortgage more quickly when they have more financial leeway, or if they need to take steps now to pay off an interest-only mortgage that is years away from expiring.
After all, it is often argued that having no debts is the best way to manage your money. But while I can sympathise with the sentiment, I am not sure that is always the case. Take paying off your mortgage for example. For some clients it is a sensible move, but not for everyone.
If you are nearing retirement age, having paid off your home will mean you have lower monthly costs, a great benefit when you have potentially a lower pension income. Don’t forget, however, that there may be a financial penalty to pay your bank if you pay off your mortgage too quickly because they want to recoup some of the “lost interest”.
Not all pensioners are mortgage-free
Some pensioners have fully paid off their mortgages by the time they retire. In fact, statistics show that almost 30% of Dutch pensioners up to the age of 75 have paid off their mortgages and that figure rises to 58% among those over the age of 85.
But several million people have an interest-only mortgage that they keep paying while retired, and if you are in that position, you have to do your sums to decide whether or not it is financially worth it to try to pay it off.
One way to approach the problem is to look at repaying your mortgage as a question of the return you are making on your investment. For example, if you are paying 1.9% in mortgage interest, you might get a better return from a savings account or by investing.
Negotiate a lower interest rate
However, you may also be able to negotiate a lower interest rate with your mortgage provider if you agree to pay it off partially. This is because the debt relative to the home’s value decreases, and so does the risk for the lender.
You should also think about what else you could do with the money. Is it worth putting all your spare cash into paying off your mortgage when you could use that money to make your home more energy efficient, help your grandchildren buy a home or even just go on that fabulous holiday?
And if you think you may want to move to a more suitable home in the future, you should also think about the impact of having no or little savings. It is very difficult to find age-appropriate property in the Netherlands, whether to buy or rent, and you could end up needing your cash to help buy a new place to live, or to make changes, such as adding a stair lift, to your current home.
Keeping your costs down
As I said in a column earlier this year, getting a mortgage after you have reached 57 is much more difficult. Interest-only mortgages are also a way of keeping housing costs down, with the knowledge that the loan can be repaid by selling the home in the future.
The Box 3 asset tax issue is another aspect to take into account. The amount you still owe on your mortgage has a role in determining how much asset tax you need to pay. This can be incredibly complicated to work out and while the government has plans to change the current asset tax system, which will impact on home owners, nothing has been agreed on yet.
As you can see, there are a lot of things to take into account when deciding whether or not to pay off your mortgage. I’d always recommend you talk through the options with a financial advisor. They say buying a house is the most expensive thing you will ever do. So that specialist help is worth every euro.
