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overpaying the mortgage or investing for retirement part 1
WSA adsense code -->Free Money Finance posted earlier on whether it is better to invest for retirement or pay off your mortgage earlier.
I think that there are two sides to this. The first is which strategy - if stuck with - will result in the larger financial gain. The second, is which strategy is easier to maintain.
Lets think about which strategy will result in the larger financial gain. The return on paying off the mortgage earlier is essentially the interest saved and as an illustration, the interest rate on my mortgage is 5.48%. The return on retirement investment is usually estimated in the UK as 7%. This means that if both of these assumptions hold for the life of the mortgage, investing for retirement will win out. However, 5.48% is actually quite a low mortgage rate, in the early 90s when the interest rate went up to 12%, having a 7% mortgage rate was a good deal. In addition, returns on investment are not guaranteed. Over a time period of more than 10 years, it is likely that the return will be 7%, but not necessarily so. A final complicating factor if you are considering investing for your retirement is the tax advantage, which adds 22% onto a basic rate tax payers return, and 40% onto a higher rate tax payers return.
It seems that in the present market, it makes more financial sense for to invest for retirement rather than pay the mortgage off early. However for a basic rate tax payer, if your mortgage interest rate is greater than 8.54% (assuming retirement investments will grow at 7%) or you believe your retirement investments will grow at less than 4.49% (assuming a mortgage rate of 5.48%), then it makes more financial sense to pay the mortgage off early rather than invest for retirement.
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