Paying off a mortgage early – your options

Mortgage rates may have started to fall from the peaks seen in recent years, but they’re still higher than the lows seen in early 2022. It’s perhaps not surprising that many people are looking to pay off their mortgage early.

Paying off your mortgage early will not only mean cutting your monthly outgoings and saving on interest, but could also bring peace of mind from knowing you own your property outright. On the other hand, it may also mean missing out on investment opportunities that have the potential to grow at a greater rate over the long term.

Paying off a mortgage early: pros and cons

Pros	Cons
Lower monthly outgoings Save on interest Peace of mind Become debt-free sooner	Possible early repayment fees Missed savings interest/investment growth Missed tax benefits such as pension tax relief and tax-free growth on Individual Savings Account (ISA) contributions

If you’ve weighed up the pros and cons and concluded that paying off your mortgage early is right for you, the next step is to decide where to draw the money from. It’s important to consider this carefully and seek financial advice; otherwise, you could end up creating an unnecessary tax liability or disrupting your longer-term financial objectives.

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To help you get started, here are four of the main options that may be available to you.

Inheritance or bonus

Using an inheritance or bonus is likely to be the simplest way of paying off a mortgage. The money will be readily available, and you won’t need to worry about depleting your emergency fund or creating a tax liability. If you have money left over after paying off your mortgage, you could use the remainder to save and invest for your future.

It was announced in the 2024 Autumn Budget that pensions will be considered part of an individual’s estate from 6 April 2027. With this in mind, parents may choose to gift some of their wealth earlier than they had originally planned. You can receive a monetary gift without having to pay any IHT, so long as the donor survives for seven years after making the gift. This is called a ‘potentially exempt transfer’ (PET).

If the donor dies within seven years, you’ll be liable to pay IHT. How much you’ll pay depends on when they died.

Years between gift and death	Rate of tax
0 to 3 years	40%
3 to 4 years	32%
4 to 5 years	24%
5 to 6 years	16%
6 to 7 years	8%
7 or more years	0%

Cash savings

Using excess cash savings is another relatively simple way of paying off a mortgage. However, it’s important to check your account’s terms and conditions. Fixed-term savings accounts usually charge a penalty for withdrawing money before the end of the term, so wait until the term has ended or draw money from easy-access savings accounts instead. Make sure you still have enough savings to fund at least six months’ worth of essential expenditure, and that you don’t need the money for other one-off planned expenses, such as a new car or kitchen renovation.

Investments

Selling investments to pay off your mortgage is unlikely to be a sensible move. Your investment portfolio is designed to meet your longer-term objectives, which could be disrupted by selling assets to fund short-term needs. By leaving your investments untouched, your portfolio will have the opportunity for further long-term growth potential and will be able to harness the full power of compound returns. This is when you get returns on your returns as well as on the initial capital, and it can be very powerful over long periods.

If you sell investments in a taxable account, you could also end up creating or increasing your capital gains tax (CGT) liability. This is a particularly important consideration as the annual CGT exemption was held at just £3,000 for this tax year.

Pension tax-free lump sum

If you’re 55 or over, another option could be to use your pension tax-free lump sum to pay off your mortgage. It’s usually possible to take up to 25% of your pension fund free of income tax (capped at £268,275). However, it’s really important to consider the longer-term repercussions of drawing a lump sum from your pension. The smaller your pension, the less income it will generate; this may be insufficient to fund your desired lifestyle in retirement. Making a large withdrawal could be particularly risky if your investments have fallen in value. You could end up depleting your pot too quickly and running out of money in retirement.

Make sure you speak to a wealth manager about the impact that a pension withdrawal could have on your plans for the future.

Next steps

When considering paying off your mortgage, it’s important not to make any rash decisions. Making a mistake could prove very costly and derail your long-term plans. At RBC Brewin Dolphin, we can help you decide whether paying off your mortgage early makes sense. If it does, we can also advise on the best place to draw the funds from. That way, you’ll feel more confident that you’re doing the right thing with your money. Let our ideas help you plan for the future with confidence.

Find out more from our dedicated support team by calling us on 020 7246 1111. Opening hours are Monday to Friday 9am to 5pm.

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The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. You should always check the tax implications with an accountant or tax specialist. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.