Use Pension Lump Sum to Pay Off Mortgage?

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_pete_
_pete_ Posts: 213 Forumite
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in Pensions, annuities & retirement planning
Firstly, apologies for asking this - I know that it's a common question on here and I have looked at the other threads. I just want to check out my understanding in relation to my particular situation...

My house is worth £320k. I'd like to move to a home worth £400k. I'll have moving expenses of up to £15k. Therefore I need £95k to cover the balance. I currently have a current account mortgage (very old product form Virgin One). I paid off the mortgage element years ago but have used it as my current account since then. The facility on the current account is £30k, which I regard as a useful emergency cash fund.

The mortgage provider is happy to lend me the £95k.

I can will be able to access my pension in a year's time. As things stand, I would be able to pay off the mortgage with the 25% lump sum. Would this be a sensible course of action?

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  • Keep_pedalling
    Keep_pedalling Posts: 16,641 Forumite
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    As you don’t seem to have an actual emergency cash fund, I would hold some back for that, but whether it is wise to pay off the mortgage after just a year rather depends on the interest rate and if there are early repayment penalties in place.
  • dunstonh
    dunstonh Posts: 116,387 Forumite
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    You havent told us anything about the pension but the most common type of pension investment has been doing around 6% p.a. after charges. How does that compare with the mortgage rate you will be paying?

    i.e. will you be using a pension earning 6% to reduce a mortgage costing 3%?
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • _pete_
    _pete_ Posts: 213 Forumite
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    dunstonh wrote: »
    You havent told us anything about the pension but the most common type of pension investment has been doing around 6% p.a. after charges. How does that compare with the mortgage rate you will be paying?

    i.e. will you be using a pension earning 6% to reduce a mortgage costing 3%?

    Sorry, I should have said:
    - pension is a SIPP, roughly split 60/40 stocks and bonds in tracker funds
    - mortgage rate is 3.9%
    - there are no early repayment penalties. The mortgage operates as a current account with the loan value effectively an overdraft facility with the 'overdraft' charge being the 3.9% mortgage rate.

    It does seem on first analysis that I should be max out the mortgage and put any spare cash into the pension, but I thought I would check on here first (seeing as the advice on this forum has saved me thousands of pounds over the years).
  • atush
    atush Posts: 18,726 Forumite
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    that is a very high rate in this day and age when many like me are paying just over 1%?
  • _pete_
    _pete_ Posts: 213 Forumite
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    atush wrote: »
    that is a very high rate in this day and age when many like me are paying just over 1%?

    I know. I haven't actually paid that rate since 1999 - ever since then the account has been in credit. This (no longer offered to new customers) product seems to suit me well, despite the rate. As a self-employed sole trader I am able to put everything except my SIPP into the account (all taxes I'm due to pay, emergency cash etc). This seemed to work very well indeed for me when I actually had a mortgage to pay off (which I was able to do in two years last time). So I'm seeing it as a very flexible short-term loan.

    Thank you for highlighting this, though. I'm very happy to be challenged further on any aspect of my plan - that's why I started this thread.
  • newatc
    newatc Posts: 846 Forumite
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    On a money saving I shouldn't say this but ... Years ago I managed to get a large work bonus and used it to clear off my mortgage. I never considered whether it was the best financial move but it was such a great feeling to be mortgage free.
  • _pete_
    _pete_ Posts: 213 Forumite
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    newatc wrote: »
    On a money saving I shouldn't say this but ... Years ago I managed to get a large work bonus and used it to clear off my mortgage. I never considered whether it was the best financial move but it was such a great feeling to be mortgage free.

    Yes, I do think feeling happy/comfortable matters a lot. I had to smile recently when I noticed that the value of a new fund I had purchased had dipped 1% in the 2 weeks since I invested it. My first thought was 'oh no, I've made a mistake' and I had to have a sharp word with myself. It brought home to me why Dunston et al emphasise people being honest with themselves about how comfortable they will truly be with their investments losing value during a downturn.
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