Should I pay off my mortgage discussion

emh_2

Thanks Jamesd

This is more complicated than I thought! I guess we have always believed the mortgage was the best place for our money.

We are both under 40, pay into company final salary pensions (should we being paying the extra into them or a seperate pension? Never heard of a pension mortgage are they only useful if over 50?

Want to be fairly low risk as have young children.

msb5262

I've read everything indicated on here and got my brain in a knot. I would be very grateful if anyone can advise me.
I'm currently 14 months into a 5 year fixed rate mortgage deal - fixed at 6.08%. At the outset (September 07), the mortgage was for £70100 and the term remaining was 18 years 7 months.
In September I finished saving for a car and bought one for cash, thus demolishing my savings, and started a cash ISA paying in £225 a month. This currently has £450 in it!
I also save a further £85 per month for things like holidays, replacing white goods when needed, pets' expenses etc.
I'm now 42 so my current mortgage will run out when I'm 60. The question is, should I be making overpayments on the mortgage rather than putting cash into savings each month?
Thanks for your thoughts.

Welshlassie

msb5262 wrote: »

I've read everything indicated on here and got my brain in a knot. I would be very grateful if anyone can advise me.
I'm currently 14 months into a 5 year fixed rate mortgage deal - fixed at 6.08%. At the outset (September 07), the mortgage was for £70100 and the term remaining was 18 years 7 months.
In September I finished saving for a car and bought one for cash, thus demolishing my savings, and started a cash ISA paying in £225 a month. This currently has £450 in it!
I also save a further £85 per month for things like holidays, replacing white goods when needed, pets' expenses etc.
I'm now 42 so my current mortgage will run out when I'm 60. The question is, should I be making overpayments on the mortgage rather than putting cash into savings each month?
Thanks for your thoughts.

You should have 3-6-9 month emergency savings before you start thinking about overpaying, in addition to saving for things like pet expenses, christmas, birthday white goods etc. Once you have this included in your budget each month as standard then look at what you have over and decide how much you can afford to OP. You'll be surprised how a small amount can make a big difference on your mortgage.

MrMicawber_2

The significance of pension mortgage and age 50 is that you can only take a pension when you hit 50 (rising to 55 on 6/4/2010), so if you want to pay your mortgage off before, in your cases 55, a pension mortgage wouldn't be the way to go.

A pension mortgage is a variant on paying off [usually] an interest only mortgage with a supporting investment. Endowments are the best known but you could use stocks and shares ISA's, cash ISA's or even savings accounts. The key thing is that the returns off your investment (savings) vehicle have to be higher than your mortgage rate and this brings risk into the equation. Historically it has been unlikely that the net returns on savings accounts are sufficient. So if your mortgage is 6.08% and the net rate (i.e. after tax) on your savings is 5% you are losing money.

As jamesd says the 25% tax free lump sum you can take from a pension makes it tax efficient but if your pension is in stocks and shares there is a risk (just look at endowments). If you put your pension into cash the fact that you pay no tax on the 25% lump sum but you get tax relief on your contributions boosts the face value of the cash rate in the pension. The remaining 75% of the pension is liable to income tax. You can see it is a quite complex set of choices. Cash at 4% in a pension would equate to a return of about 7.96% after 10 years but this reduces to about 5.5% after 25 years. This assumes tax relief at 20% on your pension contributions. It's obviously much better at 40% tax relief - about 13% and 7.2% respectively. (That's from some quick calcs I've done - so don't take my word for it - get it checked). Remember that the remaining 75% of your pension is liable to income tax when you convert it to an annuity negating the rate boost for a 20% tax payer but leaving some benefit if you got relief at 40% on your contributions but your pension income is taxed at 20%.

If you are using a pension mortgage and you are going to rely on the pension from it to live on as well then you need to make dead sure there will be enough to pay off the mortgage AND provide you with an income. So you need to pay in a lot more than if it were just for an income.

Personally I'd keep mortgage and pension [and other investments] separate but that's just my preference. The complexity and risk and lack of clarity put me off - but others like it and who's to say I'm right - not me.

Bargain_Rzl

Welshlassie wrote: »

You should have 3-6-9 month emergency savings before you start thinking about overpaying, in addition to saving for things like pet expenses, christmas, birthday white goods etc.

That's not necessarily true if you've got a flexible mortgage where overpayments can be withdrawn at any time. msb5262 has a fixed rate of 6.08% and would be hard-pressed in the current climate to find a net interest rate on savings which would beat that. If the overpayments can be accessed in future, then the mortgage can be used as a tax-efficient savings account.

Between my overpayments fund and my (currently fixed-rate) savings account, I've got about five months' net salary in hand, but as soon as the high fixed rate ends on my savings it is likely to prove most efficient to retain the bare minimum in cash savings and opt for mortgage overpayments instead. I'll be on SVR by then and able to overpay an unlimited amount. A further consideration for me is that this should succeed in knocking my LTV below 75% and make me eligible for a decent fixed rate, but this doesn't apply in mb5262's circumstances.

jamesd

emh, you'd use personal pensions (either insurance company or SIPP, whichever you prefer). The work final salary pension is unlikely to allow you to take out the lump sum before the normal retirement age of the scheme and in any case, there's merit in diversification from different pension sources.

You'd make pension contributions of about 2.5 times the repayment part of the mortgage payments. Then from age 55 you could take out the mortgage balance and leave three times that in the pension. Assuming the investments do reasonably (it's fairly cautious to contribute 2.5 times).

If three times the mortgage balance is a larger pension pot than you want then you'd cut back to achieve your target pension value and either use investments outside the pension or make mortgage payments directly.

The common alternative to this is a stocks and shares ISA mortgage, where investments in S&S ISAs are intended to pay off the mortgage. Not applicable to you if you're already both using your full S&S ISA allowances and intend that for other things.

With no tax relief at all the next option would just be investing instead of paying off the mortgage directly.

For all of these you can control how much of each you do (a mixture is probably best) and adjust based on how the various things perform, so you don't have the lack of transparency that helped endowments to get a bad reputation. You control the investments, so you can adjust the mixture to get any level of risk you want, using component investments that range from government bonds with no significant risk, to emerging markets with quite high risk.

Whether it's of value to you depends on your interest in accepting some investment risk and whether you're interested in the extra pension opportunity. If you're not interested in both of those then it won't be of use to you.

dagrowler

hallo!

right, i think this is thick/obvious... so i took out a 2 year tracker mortgage in February/March time whcih i got a letter about today to tell me that it's dropping to 3.09% (MMMMMM!). i'm guessing at the moment the best thing to do is to maybe get an ISA? don't have one at the moment.

oh and i'm allowed to overpay up to £500 a month and then get it back if i need to.

Welshlassie

If you don't have an ISA then get one, especially if your mortgage rate is that low at the momemt.

dagrowler

Welshlassie wrote: »

If you don't have an ISA then get one, especially if your mortgage rate is that low at the momemt.

OK - done :T

applying now, thaaaanks

gelato_cat

In the article, Martin says:

Martin wrote:

Checklist of when to pay First establish how the mortgage interest is calculated; call the lender and ask if need be. If it’s daily there’s no problem. If it’s monthly, quarterly or annually, ask for the date the calculation is made.
Then rather than making mortgage overpayments willy-nilly, simply move it into the top instant access savings or instant access cash ISA, so you’re earning interest in the meantime. Then arrange to make the mortgage overpayments a few days before the calculation is made.

Can I just clarify the last sentence - is he recommending this so that the payment hits the mortgage account before the calculation is paid, thus ensuring that the calculation is made on a lower balance?

Suze

MSE_Wendy wrote: »

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