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  • FIRST POST
    • iwilson16
    • By iwilson16 17th May 17, 11:23 AM
    • 19Posts
    • 13Thanks
    iwilson16
    Why overpay mortgage while interest rates are so low?
    • #1
    • 17th May 17, 11:23 AM
    Why overpay mortgage while interest rates are so low? 17th May 17 at 11:23 AM
    I can fully understand the psychological temptation to pay off my mortgage as soon as possible .... its a very compelling urge!

    However I find it hard to justify compared with paying more into my pension instead.

    I'm 54, a higher-rate taxpayer, with £130k remaining on mortgage. I've a repayment mortgage with First Direct. Payments are £950 per month, of which approx £180 is interest (I think). Its due to be paid off by the time I'm 66.

    I could overpay by £500-£1500 per month. But surely it makes more sense to put that into my pension, and get the extra tax relief (plus investment return)?

    I've enough in my pension such that I should be able to afford the mortgage payments when I retire (at 59 or 60).

    Am I missing something ... ? Only thing I can think of is the possibility of a rise in interest rates.

    Thanks
    Ian
Page 1
    • dark^knight
    • By dark^knight 17th May 17, 12:15 PM
    • 446 Posts
    • 886 Thanks
    dark^knight
    • #2
    • 17th May 17, 12:15 PM
    • #2
    • 17th May 17, 12:15 PM
    Hi Ian,

    You are right, paying off the mortgage may not be best option for everyone.

    For some it gives peace of mind.
    Aiming to be mortgage free by Dec 2018.
    • getmore4less
    • By getmore4less 17th May 17, 12:29 PM
    • 29,451 Posts
    • 17,605 Thanks
    getmore4less
    • #3
    • 17th May 17, 12:29 PM
    • #3
    • 17th May 17, 12:29 PM
    investment decision like any other where is the best(ish) return

    If using pension an assessment of the risk of the money being inaccessible for some of that period before the term finishes.
    • somethingcorporate
    • By somethingcorporate 17th May 17, 1:03 PM
    • 8,784 Posts
    • 8,482 Thanks
    somethingcorporate
    • #4
    • 17th May 17, 1:03 PM
    • #4
    • 17th May 17, 1:03 PM
    Pension goes up and down but the tax relief should more than offset that variability. You could do both, but put the cash into the pension with a view of using the 25% lump sum to pay off the mortgage.

    Make the most of the tax relief whilst it lasts.
    Thinking critically since 1996....
    • Wookey
    • By Wookey 17th May 17, 1:24 PM
    • 727 Posts
    • 350 Thanks
    Wookey
    • #5
    • 17th May 17, 1:24 PM
    • #5
    • 17th May 17, 1:24 PM
    With only 12 years left on your mortgage then the benefit of overpaying is negated by quite a bit compared to overpaying with 20-30 years left on the term. No one can predict with certainty what way interest rates, inflation, stocks and shares markets, global events and pension funds will react in a years time or 12 years time, if you do decide to go the pension route just be hopeful that if/when you cash out you are at or near a peak and not a trough.

    Perhaps at your age then maybe a sipp could prove beneficial maybe even more so if your private pensions are effective on retirement as there is no obligation to cash out a sipp on retirement and you could hold of on drawing it until a peak in the marketplace, a sipp is also drawable on from age 55 currently as well. I would defo be sitting down and looking at the numbers and a few scenarios, perhaps some small overpayments to get yourself mortgage free just before retirement so that pension lump sums or payments don't have to go towards a mortage might be something that appeals to you, or not, the choice is yours.
    Last edited by Wookey; 17-05-2017 at 1:26 PM.
    Norn Iron Club member No 353
    • greent
    • By greent 17th May 17, 2:37 PM
    • 6,066 Posts
    • 61,316 Thanks
    greent
    • #6
    • 17th May 17, 2:37 PM
    • #6
    • 17th May 17, 2:37 PM
    We repaid ours early (even though it technically made more financial sense not to) because of the peace of mind - a big factor here with 4 children, OH having had several periods of no work and mental health issues at times. Now we're concentrating more on investing for our future. For us it was the right thing to do to do it the 'wrong' way
    I am the master of my fate; I am the captain of my soul
    Repaid mtge early (orig 11/25) Bal 01/09 £124616 01/10 £104927 01/11 £89873 01/12 £76317 01/13 £52546 01/14 £35356 01/15 £12133 07/15 £NIL
    Next: BTL Mtge 12/16 £69786. 2017 OPs (#18) £4070/£3286
    Net sales 2017 £763.00/£500 PAYDOX17 £10787/£10k Decluttered 1284/2017 items
    • Tropically
    • By Tropically 17th May 17, 4:03 PM
    • 112 Posts
    • 343 Thanks
    Tropically
    • #7
    • 17th May 17, 4:03 PM
    • #7
    • 17th May 17, 4:03 PM
    For you, it probably does make sense to put more into your pension because you can access it soon. I can't access my pension for 30 years, provided they don't change the rules again. I put in a reasonable amount into my pension (10 %) but not more, because I have weighted liquidity higher than the tax relief.

    I also will have the mortgage for a long time if I don't overpay, and I expect that mortgage rates will be very high in 24 years time (current mortgage term left). I consider paying it off now while interest rates are low to be 'future proofing' my finances. If I overpay now, when interest rates go up I will be able to make lots more off my savings (and I'll be able to save lots with no mortgage). In the future if I didn't overpay, I would make a good interest rate off my savings but still have a high interest rate on my future mortgage.

    I realise that I can receive a greater return in the market, and I do have investments in the market. But I can't keep everything I have invested in stocks and shares, but regular cash savings rates are SO low that they are close to my mortgage rate. My priority goes like this:

    1. Reasonable cash emergency fund.
    2. Investment in stocks and shares with as much risk tolerance as I have.
    3. Overpay my mortgage with the leftovers.
    Mortgage started at £318,000 in June 2016. Original MF - 2041
    Emergency Savings - £12,737.83/£10,000
    OPs: £3229/£7000
    Side goal: Save £4000 and get that mortgage below £300,000!!
    • Lomcevak
    • By Lomcevak 17th May 17, 6:29 PM
    • 646 Posts
    • 3,938 Thanks
    Lomcevak
    • #8
    • 17th May 17, 6:29 PM
    • #8
    • 17th May 17, 6:29 PM
    I could overpay by £500-£1500 per month. But surely it makes more sense to put that into my pension, and get the extra tax relief (plus investment return)?

    Am I missing something ... ? Only thing I can think of is the possibility of a rise in interest rates.
    Originally posted by iwilson16
    There's psychological, but there's also pragmatic - i'm early 40s, and although the tax relief is a major benefit I don't want all my assets tied up somewhere that I can't access them for at least a decade.

    Probably our biggest financial risk would be Mrs. L losing her job (it's relatively easy for me to find another one, she is in a specialist niche). So for us, the aim over the last few years has been to balance pension and mortgage overpayment to get to a place where we could comfortably pay the mortgage on one salary if we needed to. Once we are there - we aren't yet, really - we could reassess priorities.

    As it happens, in recent years my salary has reached a point where i'm using all of my annual pension allowance anyway, so it has become a different question, and paying the mortgage down to zero is quite attractive - saying that, my overmortgaged father's finances blew up when he lost his job in the early-90s recession and we lost the family home, so the psychological aspect is important to me
    MFiT-T4#126, £135k to 60k: £35,429/£75,000(47.25%), 2017 MFW#11 £4,200/£10,000 (42.00%)
    £30k-in-’17#56 £16,544.72/£30,000 (55.15%)
    • freshcotton
    • By freshcotton 17th May 17, 7:19 PM
    • 222 Posts
    • 565 Thanks
    freshcotton
    • #9
    • 17th May 17, 7:19 PM
    • #9
    • 17th May 17, 7:19 PM
    I would never put money into a pension and intend on creating and managing my own retirement so aiming to be mortgage free in my 30s to give me time to then solely focus on my portfolio.

    Your position is different though. But peace of mind and the general sense of achievement plays a big factor also
    Mortgage Start - August 2013 £145,000 ************ Balance at April 2017 - £59,000

    Target - Overpay by £2,500 each month ************** Mortgage free by December 2018!
    • iwilson16
    • By iwilson16 17th May 17, 8:27 PM
    • 19 Posts
    • 13 Thanks
    iwilson16
    Thanks for all the feedback. Always good to get different perspectives.

    I'll probably take the mortgage down to about £500 pm, and leave it at that for the remainder of its term. (Providing interest rates don't go up too much).

    Then I'll start putting more into the pension whilst maintaining a few years equivalent spending in cash and premium bonds. (Emergency/stock-market-crash money).

    I currently put in 7% into my pension in order to get max from employers contribution. I have a good pot built up already in a SIPP. Total contributions (Salary sacrifice) are approx £1200 pm.

    Thanks,
    Ian
    • genieuk
    • By genieuk 17th May 17, 10:00 PM
    • 303 Posts
    • 1,176 Thanks
    genieuk
    For me not having worked all my life due to living overseas and following husbands career, I feel happier paying off the mortgage and saving £40K+ in interest. OH is the main breadwinner if he fell ill or lost his job at least our home would be safe.
    My view my change next month as we are having a pension brief at work I did toy with the idea of making additional contributions but was already on the road to being mf.
    Mortgage
    June 2011 £145,943.13; Dec 16 £74,537; Feb 17 £71,503; April 17 £67,075; May 17 £64,414.58; June 17 £62,882.99; July 17 £60,938.59
    • Dandytf
    • By Dandytf 17th May 17, 10:25 PM
    • 702 Posts
    • 295 Thanks
    Dandytf
    Ive been making regular overpayments for e few years since 2012 thinking rates would rise at some point of my latest mortgage 2009.

    Times in fiancial terms are different, though at least I have some security in overpayment reserve already reduced balance and saved some interest.

    overpaymrents I find are easier than saving though thats my thinking not everyones.

    Think I'll need to stop them as I moved to part time shifts though I'' prob continue with much smaller overpayments-£10-25 p/month.
    sc dmp 2012 13k

    Jan 2017 7380 paid. 50% ish...
    • rasputin_thorpedo
    • By rasputin_thorpedo 18th May 17, 11:22 AM
    • 390 Posts
    • 2,670 Thanks
    rasputin_thorpedo
    1) I am on my own, so I want the security of owning a home - more short term security than guaranteeing a pension (mum and dad will die and leave a pension pot to me eventually, even if they fall ill etc)


    2) Feels good


    3) Interest rates - well, you never know - they might rocket. I doubt they can go much lower as they are circa 1.5%, so an increase is inevitable really in the mid-long term. I would rather have no mortgage than remortgage 5 years 11 months and counting
    NEW SIGNATURE COMING SOON
    • somethingcorporate
    • By somethingcorporate 22nd May 17, 2:47 PM
    • 8,784 Posts
    • 8,482 Thanks
    somethingcorporate
    For me not having worked all my life due to living overseas and following husbands career, I feel happier paying off the mortgage and saving £40K+ in interest. OH is the main breadwinner if he fell ill or lost his job at least our home would be safe.
    My view my change next month as we are having a pension brief at work I did toy with the idea of making additional contributions but was already on the road to being mf.
    Originally posted by genieuk
    I am 32 (almost 33).

    My pension (according to SL) has had £40k of investment growth in the last 8 years (since I started it). Plus a third of the rest is tax relief and a bit over a quarter is employers contribution.

    Just some numbers to compare to yours.
    Thinking critically since 1996....
    • LadyTC
    • By LadyTC 22nd May 17, 3:28 PM
    • 8 Posts
    • 15 Thanks
    LadyTC
    My first post on this board but funnily enough I have been advised (family member) that the 42% tax and Nic saving on my pension contributions is likely to be much better financially over the next 5-10 years than paying down my mortgage (base+ 0.65%) but with a big proviso that mortgage rates stay low and the tax relief doesn't get chopped?
    • LadyGnome
    • By LadyGnome 22nd May 17, 6:12 PM
    • 420 Posts
    • 1,538 Thanks
    LadyGnome
    There was an interesting thread on the Pensions board about calculating the number i.e. the target income you would require when retired. I think it is an very individual decision what works best for you.


    If your pension income is likely to be lower than you really want then I can see a value in prioritising your pension over overpaying. On the other hand if your pension is likely to be sufficient but you will have to delay retirement because of the outstanding mortgage then prioritising overpaying would be better.


    I think the decision has to be made as part of a wider life / lifestyle plan. I am in my 40's I have a fairly decent pension pot building up and income from BTL which should get us beyond our minimum income requirement. So for me the priority is paying off the mortgage so I have some time to build up funds to help the children and to bridge to pension dates if I want to leave work before my pension is available.
    Mortgage
    Start Nov 2012 £310,000
    June 2017 £248,590.81 Reduction £61,409.19
    MFW 2017 #42 £2386.30/£3100
    End Oct Sept 2034 but I have a cunning plan...
    • TropicalDreamer
    • By TropicalDreamer 22nd May 17, 6:19 PM
    • 1 Posts
    • 0 Thanks
    TropicalDreamer
    We have no emergency savings but overpay an interest only offset mortgage which I can borrow the money back from in case I need it. It also means I only need to pay the interest portion (which is reducing monthly) in case of redundancy. For me overpaying the mortgage gives the greatest return for the least risk as well as being satisfying.
    • Durban
    • By Durban 22nd May 17, 7:26 PM
    • 73 Posts
    • 185 Thanks
    Durban
    1) I am on my own, so I want the security of owning a home - more short term security than guaranteeing a pension (mum and dad will die and leave a pension pot to me eventually, even if they fall ill etc)


    2) Feels good


    3) Interest rates - well, you never know - they might rocket. I doubt they can go much lower as they are circa 1.5%, so an increase is inevitable really in the mid-long term. I would rather have no mortgage than remortgage 5 years 11 months and counting
    Originally posted by rasputin_thorpedo

    Surely your parents will use their pension in their retirement and not leave their pension pot to you. You cannot possibly predict their future and their possible care needs.
    Mortgage at highest start date - 25/9/2014 - £92000
    Mortgage now 21/3/17 - £62,880
    MFD - October 2025 MF Goal Date 2021
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