Our children have left house – can we clear our mortgage and go travelling?

For the first time in more than 20 years, my wife and I are now back to living alone, as our two children aged 21 and 19 have left home.

We are both 54 and have six years left on our mortgage. We had always planned to continue paying this and working until we were both 60 but a long after-dinner conversation over a bottle of wine got us thinking: what if we could pay it off as soon as possible and free ourselves up to do something different?

Ideally, we would clear the mortgage over the next two years – which is when our five-year fixed rate deal at 2 per cent ends – leaving us free to potentially take a year off work and travel.

Our plan would involve clearing the mortgage, then working for about six months more while saving all of the £2,000 a month that currently goes on the mortgage. 

This would build up a pot that we could use to boost our savings and travel on.

We both work full-time, earning £150,000 between us and after our pension contributions we take home about £4,000 a month each. 

We could put about £15,000 of our savings into paying down the mortgage now. Could we then clear the £130,000 we have left on our mortgage in two years, instead of six?

Ed Magnus, of This is Money, replies: It’s great that you are closing in on the holy grail of being mortgage free. 

It’s equally great that you have a goal. Too many people spend their working lives saving, investing and paying off debts without having a clear plan of what they are working towards or even knowing when enough will be enough.

When it comes to your mortgage, the one problem with clearing it too fast will likely be that it could open you up to early repayment charges (ERCs). 

Fixed rate mortgage deals typically limit borrowers to overpaying a maximum of 10 per cent of the outstanding mortgage amount each year.

For anything paid over the limit, these charges kick in that can typically range from anywhere between 1 per cent to 5 per cent of the amount being repaid. 

If your lender allows for 10 per cent fee free annual overpayments, you should be able to clear up to £13,000 straight away without incurring an early repayment charge.  

However, lenders have different rules on ERCs. It’s worth checking with your mortgage lender or broker to find out what penalties might apply to you. 

To avoid being penalised, you could wait until your current fixed rate mortgage deal ends in two years time – which is before the end of the six years left on the term – and pay off as much as you like without ERCs

You could also overpay what you are allowed to for the next two years, and then use a savings account to potentially beat the mortgage interest costs you incur by keeping your mortgage for longer. 

For example, a best buy savings rate above 4 per cent is likely to return more in interest than you’ll save by paying off parts of your mortgage being charged at 2 per cent – even after paying tax on the interest – it’s worth crunching the numbers to find out. Opt for a top cash Isa deal paying 5 per cent or more and you won’t have to worry about savings tax.

You can find the best saving rates highlighted across This is Money’s independent best buy savings tables.

You may also be tempted to invest the money, rather than save. But a two year timeframe would make that a risky strategy.

You say you are both taking home about £4,000 each after tax and pension contributions. You need to work out how much you can afford to live off each month and then put what’s left over towards either savings or paying down the mortgage.  This is Money’s household budget calculator can help with that.

What experts say on clearing a mortgage

We spoke to Felicity Holloway, head of mortgages at Moneybox, Brian Byrnes, head of personal finance at Moneybox and Mark Harris, chief executive of mortgage broker SPF Private Clients for their views on what you should do.

Brian Byrnes replies: First of all, it’s fantastic that you took the time to sit down and discuss your financial goals and what is really important to you both. 

This may sound like an obvious first step, but it is often missed or not reviewed regularly enough and over a bottle of wine is a great way to do it.

Once you know what your priorities are, the actions you need to take to achieve your goals quickly become a lot clearer. 

You say you take home about £4,000 a month each and the crux of the matter is going to be how much of this you can dedicate to your goal of being mortgage free. 

It sounds like this may be your one and only financial goal over the coming years, so you may be able to dedicate significant amounts to overpaying your mortgage.

It is worth noting that barring significant interest rate cuts in the next two years, you are likely to be paying a much higher interest rate when you come to renew your mortgage deal at that time, so reducing the outstanding mortgage balance as much as possible at that point will save you future interest payments as well as freeing you up to travel.

You mentioned you are both making pension contributions which is great but depending on how large your current pension provisions are, you may be able to direct some of these funds towards paying down the mortgage. 

However, given how tax beneficial pension contributions are for higher earners, I would recommend you contact a financial planner before making such a decision.

Paying the mortgage off early?

Mark Harris replies: Paying off your mortgage early would free you of your mortgage payments and save you some interest. 

The first step is to ascertain whether your lender has any overpayment limits; otherwise, you could be incurring early repayment charges (ERCs) for trying to do the right thing and pay off your mortgage early. 

If you utilise the penalty-free allowance, you can reduce the capital balance and the overall interest paid even if you can’t pay it all off in one lump sum. 

Any surplus monies could be paid into a savings cash account earning as much interest as possible until you are able to pay off another lump sum. 

For example, if you could live off one salary and save the partner’s income, £4,000 each month for two years would equal £96,000.

Then put that into a savings account earning between 4 and 5 per cent interest. This, in addition to the £15,000 existing savings, would clear a significant amount of the outstanding mortgage.

Focus on savings rather the mortgage?

Felicity Holloway replies: As your mortgage rate is fixed at 2 per cent, which is low compared to what you could get today, it’s very likely that you could earn more interest by keeping that £15,000 in a savings account right now, than you would save in interest by making the lump sum overpayment right away.

When your fixed rate deal ends in two years you’ll be free to overpay with no penalties, and so your priority today is to work out the absolute maximum that you can afford to save each month from your £8,000 of take home pay after you’ve paid your £2,000 mortgage and other fixed monthly expenses.

Having done some rough calculations based on your balance and interest rate, this would need to be around £3,000 per month to pay off the mortgage in full, as well as the £15,000 you can use from your current savings. 

If this isn’t feasible, another option is to save and pay off as much as you possibly can; but at the end of the two years you will still have a mortgage balance outstanding.

Another option would be to assess interest rates in two years time and see if it’s feasible to leave the smaller remaining balance on a standard variable rate, so that you can make unlimited overpayments in the six months you still plan to work before going travelling and try to repay the remaining balance off that way. 

However, this could mean delaying your travel plans.

How else can they clear their mortgage? 

Mark Harris replies: Depending on the outstanding balance there may be an opportunity to utilise other assets, such as pension pots, to pay off any outstanding balance, as long as it also meets your long-term retirement goals. 

You would be older than 55 in two years’ time and potentially able to access 25 per cent of your pension pot tax-free, which could go towards this goal.

It may also be worth considering other options, such as delaying your travel plans or downsizing your property to clear the mortgage. 

You may also be able to travel while you still have the mortgage in place and rent your property out in the meantime but if so, you will need to obtain a ‘consent to let’ from your lender if there is still a mortgage on the property. 

There may be conditions around the granting of this and it varies from lender to lender – as well as any potential increase in rate, intention to reoccupy the property, a maximum period and potentially, if refinancing to a new mortgage provider, a minimum time before a consent is granted.

What savings account should they use? 

Ed Magnus, of This is Money, replies: A fixed rated savings account will probably not be suitable for you given they only offer you a short timeframe to pay into them and you want to make regular payments in.

They also mean your money isn’t accessible for a fixed period of time – whether that be one year, two years or longer.

A regular savings account could be another option to consider. They often offer the highest interest rates, but they also limit how much you can pay in each month – typically between £200 and £300 each month. 

The monthly limit on how much you can put in may therefore be too low and there can be restrictions on who can apply and when money can be taken out.  

The best regular saver deals are offered by the big banks to their existing current account customers.  

The next port of call is an easy-access savings account, as they often allow you to pay in and out of the account as and when you like. 

However, some providers place limits on the number of withdrawals that can be made each year – sometimes allowing cash to be taken just two or three times. 

It’s vital that savers check the withdrawal limits before committing.  

The best easy-access savings account currently pays 5.04 per cent. But bear in mind the rate is variable so could change in the future, particularly if the Bank of England begins cutting interest rates.

Yet, you will likely need to pay tax on the interest you earn, if you use a standard easy-access account or fixed rate savings deal and that’s where a cash Isa comes into play.

It sounds like you are both higher-rate taxpayers. This means you’ll only get the first £500 of interest tax free and then you’ll be taxed at 40 per cent on the remainder.

That means your return after tax could be quite a lot less than the headline rate. For example, a 5 per cent rate will effectively become 3 per cent after tax.

The best way to avoid the tax problem is to use a cash Isa account – that is unless you are both already maxing out your £20,000 Isa allowance each tax year.

If you use a cash Isa as a savings vehicle, any interest you earn is shielded from tax. 

The best rates are currently better than you would get with a standard taxable savings account. 

The best easy-access cash Isas are currently being offered by two savings and investing app providers, Plum at 5.17 per cent and Chip at 5.1 per cent, but this allows unlimited withdrawals and is a flexible Isa.

A final option to consider is NS&I Premium Bonds. This is a fun way to save and potentially earn tax free prizes in the process, ranging from £25 to £1,000,000,

They are easily accessible online and are backed by HM Treasury. The average annual prize fund rate per customer is currently 4.4 per cent and is tax free.

Whether or not you get the average return will depend on luck. In a lucky year you may do much better than the quoted 4.4 per cent, whereas in an unlucky year you could do much worse.