Should I do something else with my OP?

Escapar2020 · 5 December 2017 at 9:44PM

Hi all

I'm looking for some advice, suggestions or ideas to help me think about planning for the future, so thanks for taking the time to read this…..

I've been overpaying on my mortgage for some years, but in earnest for the last 12 months, since I gained a promotion (and became a high rate tax payer

). My MFW diary is on here if you need some sleep! The main outcome I want to achieve is a better life, but I'm not sure that early mortgage repayment will achieve that, I've struggled to imagine life after achieving mortgage freedom.

My current balance is in my signature, I'm on the SVR at 2.29% currently, the house is worth about £140k and I don't have any plans to ever move. I have about £12k in an easy access savings account (earmarked for some home improvements) and an LGPS pension, but no other investments, and no other debts.

My plan has been to finish the mortgage early, in around 2 ½ years, but I don't have a plan for after that. I'm not looking to achieve complete financial independence, at 44 I think I may have left it too late for that! Equally, another 20+ years working fulltime in a job I don't enjoy feels like a prison sentence! So, I'm basically looking to significantly improve my work life balance ASAP. It occurred to me recently that op the mortgage might be limiting my options, and might mean I have to stick at this job to save more cash to fund my change of lifestyle, whatever it is I decide I want to do.

Despite the recent rate rise, my standard mortgage payment has dropped to £288pm, which I could probably manage to continue for the full term to 2028 if I had to in a different life. I'm op by £712 plus any other spare cash each month. Should I be doing something else instead of overpaying? Alternative options I've thought about include putting the op into a savings account and then:
1. Paying the mortgage off in one go in a couple of years and go part time or find a different job, but employment opportunities are limited in this very rural part of the world

2. Continuing to save for a while longer after becoming mortgage neutral, even to 2028

3. Save the overpayments and then invest them somewhere, such as own business, buy to let property, or financial product. I'd expect to have £20-30k saved by 2020 if I stopped mortgage op.

4. Switch some or all of my op amount into my pension, but it would be locked away for a good few years

I'd be interested to hear what you would do if you were me, or if there are any options I haven't thought of.

Thanks in advance

Escapar2020

Lomcevak · 6 December 2017 at 7:09PM

For what it's worth, when I took a long hard look at my finances about five or six years ago (when in my mid-30s) I decided I had two urgent goals - firstly to get the mortgage down to a point where we could pay reasonably comfortably on a single income (we were in the classic two-income, large mortgage position where we would be in trouble if one of us lost our job and/or if rates went up a lot) and save (much) more for retirement.

The most pressing at the time was the mortgage, so I came up with a five-year plan to fix that by OPing £600/month with the occasional lump sum on top - five years on and a touch under £100k repaid in total (around £50k of which are OPs) and it's now in a place that we could remortgage to a longer rate and let it tick over in the background if we ever had to. In the meantime I switched my focus to my pension, and for the last couple of years have saved all of my £40k annual personal allowance there. Finally, any extra above the pension allowance goes back on the mortgage. For me that's the right balance of tax-efficiency and risk. But i'm sensitive to the mortgage, when I was a teenager in the early 1990s we lost the family home when my over-indebted, single-income father lost his job.

I say all that because it seems to me that you've dealt with what was my first priority - you say you could let your mortgage tick over to completion - so I'd look at the rest of your future and your work-life balance.

So maybe look at a model where you build some longer-term savings, boost the pension a bit (I'm on a DC scheme (plus SIPP) so have a different pension model, but believe that AVCs can be a good tool with a DB pension, for example), and put yourself in a position for a more substantial lifestyle change in 5 - 10 years time. That's pretty much what i'm doing. I find that a stressful job isn't so bad if you've got a concrete plan to get out of it in a few years time

MM10 · 6 December 2017 at 8:18PM

Hi, I think 44 is a good age to aim for financial independence by the way.

If there is a tax advantage pension scheme, I will fill that first. ( that's what I do, I am 42)

The rest I throw at the mortgage.

Once the mortgage is paid off, then I start saving for a business.

The reason I'd do it in that order is that the higher reward business is mostly always higher risk and I would not want to leverage my home on a business.

Escapar2020 · 6 December 2017 at 9:55PM

Thanks both

Putting more into my pension seems to be a common thread and apparently might lower my tax rate, so i'll be looking into that. Im not sure how much extra i'd need to pay in, and wouldn't want to lock away a bug chunk for another 20+ years as I couldnt see me ever improving my worklife balance before normal retirement age of 67!

DiggerUK · 6 December 2017 at 10:59PM

Digger Mansions is nearer full retirement than we want to be. I say that because I want to be free from the need to work for money. Everything in final planning stage at moment.

We got were we are by clearing mortgage asap, after that it was all saving for retirement.

Like you we have LGPS pensions. So what’s your boggle. Get yourself grounded, get yourself debt free.

For christs sake, you still owe the best part of £43,000. Look in the mirror and say that back to yourself........three times..._:eek:

Escapar2020 · 6 December 2017 at 11:38PM

Thanks digger!
I know what you mean. I started this journey to achieve freedom, but the question that keeps bugging me what I'll do once I'm mortgage free!?

Any way, the reflection in my mirror isn't that bad as I will have got the mortgage balance down to £30k by the end of 2017.

I'm start to think that my best option might be to put enough extra into my pension to get some tax relief, and out all other spare cash into savings until I achieve mortgage neutrality and then decide whether to pay the mortgage off. Sort of the best of both worlds perhaps?

getmore4less · 7 December 2017 at 9:19AM

you could probably squeeze the mortgage rate down your LTV should get you under 1.5% but on such a small mortgage the interest saving is low.

£31k 2.29% 10y(2028) the interest is £3,715
£31k 2.29% £1kpm the interest is £985.

the obvious first change to look at is the money at 40% tax sticking that in a pension option has a lot of advantages and still leave you with £45k gross £2,800 net to play with.

You could start saving so you have enough to bridge the gap between downsizing the job and the pension kicking in.

or start living a bit now.

Have a play with a long term budget and see where you could have saved enough to bridge the gap.

You can then look at options to improve that date by earning more/investing better or make it later by saving less and living more or earning less

edinburgher · 7 December 2017 at 9:33AM

Whatever you do, you should be avoiding higher rate tax, as it's gone forever once it's taken. Quite straightforward, just subtract the higher rate threshold from your salary and pay at least this much into pensions. Subtract your monthly payment from LGPS and pay that much into a SIPP?

Escapar2020 · 7 December 2017 at 8:20PM

Why doesn't someone teach this stuff, or did I miss that day in school!?

I never expected to be a hr tax payer, so never thought about relief. So, my salary is about £54k gross pa, and about £3050 net per month. Am I reading it rright that of I put an extra £9k pa into my pension, my net would still be £2800 per month? I think I could still cover living costs and op/save on that.

Could I put more into my lgps pension, or would I have to/should I put it in a different pension?

Thanks

Escapar2020

wishingthemortgaheaway · 8 December 2017 at 8:14AM

Sounds to me like you need to speak to a financial advisor. Get some recommendations from people you trust and don't hand over a penny of your money to anything until you understand what's going on.

Paying more into your pension because you are in that higher tax bracket is definitely a popular option for people in your situation. But it's got to be right for you.

museumworker · 8 December 2017 at 9:13AM

My partner is a higher rate tax payer, and this year I got ill due to work life imbalance, as well as discovering financial independence. We have previously overpaid about £50k from our mortgage, which is currently £95k.

After much soul searching, research, blog reading, podcasting listening, googling etc we have made the following changes:
* increased OHs pension contributions, which are currently at 44%.
* reduced my hours at work to 4 days, soon to be 3 days
* paused mortgage OPs

Once you take into account tax, paying more money into you pension is almost like doubling it. I don’t know any other simple way to get that sort of immediate return on your money. You don’t mention if you have any children but there is also a benefit of reducing your take home pay as you won’t have to pay back your child benefit if it your pay after pension contributions and childcare vouchers is below £50k.

If you are unhappy at work I would seriously look at what changes you can make to improve the situation. There’s no point shovelling money into savings for a happy future if every morning you are filled with dread. Balancing present and future needs is really important.

I plan next year to increase my pension contributions to 9% as that is the most tax efficient ratio for me. We should have paid off last year’s tax bill and not owe any more due to the enhanced pension contribution so will be in a better place to consider other investment vehicles. Am considering a regular contribution to a S&S ISA and a smaller amount to OP mortgage, then any additional earned income (ebay sales, cashback etc) will go straight off the mortgage.

Hope this helps

Should I do something else with my OP?

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