To Repay or Not To Repay

Kenny345

I currently have a 5 year 5.45% fixed rate repayment mortgage. My current mortgage debt is approximately £127,000. The fixed rate element concludes in August 2012 and early repayment penalty charges would be around £3,000+ which I am loathe to pay. I will shortly retire from a final salary pension scheme which means I am in the fortunate position of considering paying off my mortgage. Independent financial advice last year suggested I should not repay the mortgage until the end of the fixed term and, instead, invest my pension to generate further interest. When I look at the amount of annual gross interest I pay on my mortgage (£7000+) I'm not entirely sure this is the correct course of action.

Any (accurate and factual!) advice gratefully accepted.

CloudCuckooLand

Its not just about the interest on the mortgage versus the lump sum sitting in a bank account, though. Have you sought advice on the effect to your pension income, of taking a lump sum?

The simple side of things, i.e. mortgage/saving interest comparison;

£127k in the bank, getting say 2% after tax = £2540 pa.
5.45% on the same mortgage balance = £6921 pa.
If you wanted to take a punt on stock market movement, you could get a return to match the mortgage. But there is a risk of losing some of the capital...
Cash ISAs might be found near to 3%. But only a fraction could be put in, by Aug 2012.
Fixed deposit products may be found around 3.3%ish, so 2.7% after tax = £3429 pa.

£3000+ ERC? What exactly is the ERC ? £3001 and its looks worth paying it off. £3999, and waiting looks favourite.

If waiting until August 2011 reduces the ERC, that's another thing to factor in...

But that's just the mortgage/lump sum timing considered. Not whether the lump should even be taken...

The wider picture needs to be considered. By how much will such a lump sum withdrawl reduce your pension income? Not much point avoiding £7k in mortgage payments, at the expense of a permanent loss of more than £7k of income, for example.

Depending on the remaining term of the mortgage - presumably quite a bit less than 25 years - you could miss out on tens of thousands during your retirement for this one off choice.

It depends on your overall income situation, potentially IHT planning and so on...which the IFA presumably went through..?