Mortgage or Pension which should it be?

Jofneytoad

Morning All,

Right I have a bit of a dilema going on in my head. Here's the long and short of it.

Myself (38years old) and my partner (37years old) have about £7500 in a 10 year bond which matures in 2012 which we pay £100 a month into as it currently stands with the stock market not doing so well we are £500 down on what we've put in.

We currently both have a private pension and put in around £180 each per month (£360 total).

As it stands our mortgage is about £146,750 (23years left to pay) give or take a few pounds and is on a 5 year fixed at 5.15% due to end on 21st Nov 2011. Our mortgage payments are about £945.00 per month currently.

So my question/dilema is this, should I stop my pension contributions and cash in my shares (Preferably when I can get out at least what I put in) and put all my effort into bringing the mortgage down by over paying and hopefully in the long term pay it off quick and make more of a saving than what I'll currently be achieving?

I realise it's a lot like looking into a crystal ball time but I've got a lot of doubts about pensions and what the state of these will be when we're due to retire at least if the house is paid off if needs be we could sell and downsize to release some equity.

If anyone can share their views, good bad or indifferent I look forward to reading them.

Thanks in advance
Regards
Jonathan

dimbo61

An overpayments you make on the mortgage will save you 5.15% guarenteed !
But you also need to consider your retirement fund
You are paying out £100 on a bond each month, £360 on your private pension and £945 on the mortgage plus all the other bills.
Can you overpay a little each month on the mortgage as well ?

Jofneytoad

dimbo61 wrote: »

An overpayments you make on the mortgage will save you 5.15% guarenteed !
But you also need to consider your retirement fund
You are paying out £100 on a bond each month, £360 on your private pension and £945 on the mortgage plus all the other bills.
Can you overpay a little each month on the mortgage as well ?

Morning Dimbo, yes I think we could probably pay a little more each month off the mortgage maybe something like £100 max but my concern with the shares and pension scenario is that I'd hate to be paying into them for years when paying the mortgage off would have been a better option in the long term.

None of us know what the future holds so it's impossible right now to say which is best I guess but just wanted to hear other peoples views to see what they would recommend.

Thanks again
Jonathan

dunstonh

but my concern with the shares and pension scenario is that I'd hate to be paying into them for years when paying the mortgage off would have been a better option in the long term.

Mortgage interest rates are cheaper than long term average. Units in most funds are cheaper than any time in the last 2 years. No-one knows the future but conventional wisdom is that you buy when cheap.

The basic state pension is £4700 a year. So, lets say you give up paying into the pension and go for the mortgage instead. That will clear your debt quicker but what do you think you are going to live on in retirement?

Downsize never releases much due to the costs of moving unless you happen to move from a very good area into a very poor one or you have a significantly large enough property to downscale.

Equity release means you just end up borrowing again and paying a lot of money for the benefit of doing so. Even people with retirement planning in place often go on to do equity release as they dont provide enough for themselves. At age 38, you should be looking for around £40k-50k in your pension pots at this time. How are you doing in respect of that? Are you self employed (lower state pensions if you are)? Do you want to retire at state pension age of 67 (yes, yours is 67)? Are there employer contributions into the pension? Are you a higher rate taxpayer? Do you get childrens/working tax credits?

wymondham

This is quite a dilema these days. We could not afford to do both, so threw everything at the mortgage, then once that went we could then set to work on the pension (good timing with pension now things have taken a nose dive!). We looked at it that the main objective was to not have a mortgage anywhere near retirement - reducing out outgoings... good luck with your choice....

Jofneytoad

dunstonh wrote: »

Mortgage interest rates are cheaper than long term average. Units in most funds are cheaper than any time in the last 2 years. No-one knows the future but conventional wisdom is that you buy when cheap.

The basic state pension is £4700 a year. So, lets say you give up paying into the pension and go for the mortgage instead. That will clear your debt quicker but what do you think you are going to live on in retirement?

Downsize never releases much due to the costs of moving unless you happen to move from a very good area into a very poor one or you have a significantly large enough property to downscale.

Equity release means you just end up borrowing again and paying a lot of money for the benefit of doing so. Even people with retirement planning in place often go on to do equity release as they dont provide enough for themselves. At age 38, you should be looking for around £40k-50k in your pension pots at this time. How are you doing in respect of that? Are you self employed (lower state pensions if you are)? Do you want to retire at state pension age of 67 (yes, yours is 67)? Are there employer contributions into the pension? Are you a higher rate taxpayer? Do you get childrens/working tax credits?

Many thanks for your input dunstonh,

To answer your questions,

I'm self-employed and earn about £20k per year

My partner is in full time employment and earns £38k per year plus bonus.

As far as I know I'd say I have between 25k-30k in my pension pot (I froze it for a number of years when I was saving up for a deposit on a house) but it has been restarted for about 2-3 years now, I had 3 policies which two have been merged into one and another would have worked out to expensive with fees to move.

We have no children as of yet

We would hope to retire before 67 years of age but it all comes down to being able to afford it.

I think this answers what you asked.

Many thanks

dunstonh

I'm self-employed and earn about £20k per year

The key thing there is that you only qualify for the basic state pension, not SERPS/S2P. So, that means £4700 a year for you. In real terms your current pot will pay £2,000 a year. So, that puts you on £6700 a year income in retirement on your side.

Planning for retirement is vital. Failing to do so is planning to be poor basically. Your retirement provision should be treated almost like gas, electric and other bills. Paying off the mortgage may feel good but if you then have to borrow on it later, it will end up feeling a waste of time. In the short term, prices may be volatile but its periods like these that have historically proven to be the best times to buy units in funds. That is the advantage of regular contributions. They average out the ups and downs. Also, remember that your pension can invest in cash, property, gilts and fixed interest as well as shares. So, you can tweak the risk of your ongoing premiums and existing funds to suit how you feel.

getmore4less

Retirement planning is about replacing income to cover costs so paying for your house reduces costs which is part of retirement planning.

Currently there is is an anomoly in the benifits system that house value does not count.

One option is to put all the money you can into housing and have no extra pension and then you get all the benifits council tax and pension credits etc but still have potential access to capital.

There is a point it is not worth saving money in pension wrappers unless you can save enough or have defined benifits system or contributions from an employer.

Gorgeous_George

It is a difficult time to plan for anything. Money is disappearing fast. An opportunist might just make a few quid but they are just as likely to lose everything

dunstonh wrote: »

Mortgage interest rates are cheaper than long term average. Units in most funds are cheaper than any time in the last 2 years. No-one knows the future but conventional wisdom is that you buy when cheap.

That long term average is in the past. The long term history if you like. No-one knows if rates are low looking forward. Of course, it is likely that rates are currently low looking over the next 25 years but what about over two years or five years? What about ten years?

It was long term averages that sold people endowment policies in the 80s. Don't fall for it again.

I'm no expert but I'd overpay the mortgage first. That is guaranteed to earn (save) you 5.15% (equivalent to 6.4375% before basic rate tax). If/when the credit crunch eases, then decide how to save for your retirement.

If you want my long term wisdom, a bird in the hand is worth two in the bush.

GG