Am I Really Better off with Capital Repayment

jamesd

dunstonh wrote: »

Pension mortgages were a good idea in theory when tax relief was much higher but the problem with pensions is that they are there to provide an income. Not capital growth. Whilst 25% (or an amount comparable to that) is available, will it be enough to meet the mortgage? do you want to put your last big payment before you die into the mortgage potentially leaving you with low capital and no way to replace it in retirement?

That's a little unfair to the pension mortgage option. If you're doing it you should be increasing your pension contributions by the difference between repayment and interest only monthly mortgage payments. Then you take 25% of the higher total pension pot value to pay some of the mortgage, leaving you with higher pension income than you would have had that you can use to build up a capital pot.

Whether the 25% is enough to pay off the whole mortgage depends on investment returns. A fallback plan and careful monitoring are needed. 50% of the mortgage payment difference into pension and 50% into ISA would be safer, letting up to 100% of the ISA portion be used if necessary.

It's definitely not for everyone, particularly not many basic rate tax payers, but personally I can do with the potential extra pension income.

getmore4less

With many occupational(final salary schemes) you have to take the lump sum or the conversion rates to pension are not good, so including that as part of mortgage planning can make sense as can increasing contributions to maximise the lunp sum if the scheme allows this.

It depends on the conversion rates on offer with the scheme.

paying of the mortgage and having a large lump sum which will produce taxable income may not be the best stratagy, diverting the payments to ISA and using the lump sum to pay off the mortgage effectifly makes the future income from the lump sum tax free.

Niemand

jamesd wrote: »

Niemand, the overpayment loses you savings account interest from the time you make the overpayment until 31 December so the best time to do that is a few weeks before then. It avoids having to pay the early repayment penalty on the amount.

[...]

On July 1: mortgage 5% - savings 1% = 4%. Must adjust for time left in the year, 6/12 months so 4 * 6 / 12 = 2%. This is the same as the 2% penalty charge so there's no difference between the two, pick either. Months before this favoured capital payment (5/12 or 4/12 etc. times 4% will be below 2% penalty). Months after this favour overpayment (7/12 times 4% etc. will be above 2%).

Thanks for your detailed reply jamesd but I must admit to not understanding all of it. You talk about savings account interest and early repayment penalties etc. but the latter does not apply as I'm several years into the mortgage and I don't understand where savings account interest comes into it unless you're saying that the money used to pay off the mortgage may be better sitting in a savings account earning interest.

As it happens, today I arranged with the lender to overpay by £100 a month thereby reducing the capital by £1200 per year. I know my repayments won't be adjusted until next February, but the main thing is to reduce the amount of capital I owe.