Overpay on mortgage or contribute to pension

Rob71

Make hay whilst the sun shines...

Take advantage of the low rate, clear what you can, make up the shortfall on the pension later... we're only probably talking about a year or so before rates start to rise, so the short term boost to your equity will pay dividends in the long term (and will make finding a good deal (when the time comes) easier).

Of course you need to have a balanced approach to your finances, but sometimes you need to tip that balance to get the best out of your cash in the short term for your long term benefit. The interest you save long term *could* outweigh the gain on your pension at the moment (potentially, depending on your plan etc).

What would happen if you were made redundant tomorrow (heaven forbid)? Is the house or your pension more important at this point in your life? It's a tough choice to make, but it really polarises things when it happens to you (been there done that:o). I'm currently awaiting new plan with new employer, but my contributions will be minimal until I feel more "safe".

Thrugelmir

Israfel wrote: »

Cheers Dunstonh, it was never my intention to stop the pension full stop but simply to put it on hold for year or two, putting the excess money into the mortgage instead to lower the term while interest rates are low. When the BOE rate starts to increase I'll lower the overpayments and restart paying into the pension so it would only be short term. Do you think that would be worth the effort?

Whilst interest rates are low it makes sense to maximise the contributions from your employer into your pension scheme.

When interest rates start to increase then focus back on the mortgage.

jamesd

Israfel wrote: »

When the BOE rate starts to increase I'll lower the overpayments and restart paying into the pension so it would only be short term. Do you think that would be worth the effort?

Not remotely close to worth it if your employer is providing matching contributions. That's 100% interest rate paid to you on the day your pension contribution is made. Compare that to under 5% mortgage interest rate saving by putting that money towards the mortgage. Just twenty times more short term gain using the pension than the mortgage and the pension has the better long term prospects as well.

If you were contributing more than required to get the maximum employer match then it might be worth dropping back to the maximum the employer matches because you don't get the spectacular immediate gain above that. Even so, a time of low interest rates is a time when increasing and sustaining debts is good and buying investments is likely to be a better choice.

Beyond that there's a prospect of higher inflation that will reduce the real value of debts compared to earnings, so there's potential gain there from keeping the mortgage debt as high as possible and investing instead.

High inflation may lead to higher interest rates to control it and then having a smaller mortgage would help. But it'll still be unlikely to gain you as much as the pension contributions matched by your employer.

What paying off the mortgage offers is certainty. That much debt is definitely gone.