How should I pay off my mortgage?

Mita

I'm thinking of taking my pension early at 56 (end of April)

I would like to pay off the £76,000 mortgage (May) and am not sure whether to:

a) Pay it off using savings
b) Pay it off using most of savings and 19% pension pot
c) Pay it off using some savings and 25% pension pot.
d) Pay it off using part pension pot, part savings, part shares sale.

Due to a recent redundancy my current income is approx £12,000 per annum which is from a part time job and shares income.

Any advice gratefully received please.

Thanks.

kidmugsy

Mita wrote: »

I would like to pay off the £76,000 mortgage (May) and am not sure whether to:

a) Pay it off using savings
b) Pay it off using most of savings and 19% pension pot
c) Pay it off using some savings and 25% pension pot.
d) Pay it off using part pension pot, part savings, part shares sale

i) Is its interest rate so high that you feel you must pay it off?
ii) Is your pension defined benefit (e.g. final salary) or defined contribution (i.e. do you have a pension pot to be divided between lump sum, and annuity/income withdrawal?).

Mita

Thank you so much for your speedy response.

The mortgage was fixed for two years and the term finishes at the end of May.

It's an offset interest only mortgage so offset against my current savings (I do also, however, have shares so won't be left destitute!).

My pensions (I have two although one is worth a lot less than the other) are defined contribution.

kidmugsy

Mita wrote: »

The mortgage was fixed for two years and the term finishes at the end of May.

It's an offset interest only mortgage so offset against my current savings (I do also, however, have shares so won't be left destitute!).

My pensions ... are defined contribution.

Then what to do depends on your decision on the mortgage. jamesd may be along soon to make his customary, powerful case against people clearing mortgages early: for what it's worth we kept ours going for years after retirement.

So suppose instead that you dig in your heels and are determined to clear it now.

i) With defined contribution pensions it is almost always wise to take the whole 25% lump sum: you must decide whether to use the rest to buy an annuity (expensive at age 56) or use Income Withdrawal/Drawdown instead, until you are much older; say 75-80.

ii) Thereafter the only question is tax shelters because, as they say, money itself is fungible - one pound is as good as another. If your 25% is enough to clear the mortgage, if you are happy to hold on to your shares, and if your savings are within Cash ISAs, then use the money that is not tax-sheltered i.e. the lump sum. If the detail is different just pursue the same logic to suit.


iii) If you are left with money that is not tax-sheltered, then you would probably be wise to shelter it as opportunity permits, with one proviso: interest-bearing current accounts are paying preposterously good interest rates at the moment, so that even after tax they pay more than instant access Cash ISAs. On the other hand the ISA money is tax-sheltered for life, or until a change of government policy.

Mita

Thank you so much for this. I really do appreciate it.

I am pretty keen on clearing this mortgage 'debt' and would also be looking at an annuity rather than withdrawal/drawdown: not to be pessimistic but I have high cholesterol so.........

The 25% would not be enough to clear the mortgage, it would be approx £33,000 and I would use the savings to pay off the remainder. The other pension pot would be approx £19,000. I would prefer to take just one pension early and leave the other resting but again, am not sure which I should take early?

The savings are in an ordinary deposit account, earning low interest. I also have ISA savings but would prefer to leave them where they are.

Do you think I should consider selling any shares to pay off part of the mortgage or just use a combination of the deposit account savings and pension pot?

dunstonh

I'm thinking of taking my pension early at 56 (end of April)

are you retiring?

Any advice gratefully received please.

We need more information. Nobody can answer your questions with any degree of accuracy without knowing more about your financial position, health, tax objectives etc.

Mita

Semi-retirement, I guess. I was made redundant a few years ago and freelance work has dried up so I have a p/t job that brings in approx £6000 a year. I also have shares that bring in approx £6-7000 pa. Other savings are as stated above.

Health is good apart from high cholesterol but I'm working on that!

Financial position is OK but obviously not as good as it was which is why I'd like to get rid of the mortgage. I have no other debts aside from this one.

jamesd

All four choices you've given are bad ones. Your best option would probably be to wait until state pension age and pay it off out of the increased income from the state pension. That would avoid the unnecessary reduction in your income before then.

You probably need the income you can generate from savings and investments more than you need the mortgage gone and it's not hard to generate more income than typical mortgage interest rates.

However, this does depend to some extent on what your mortgage interest rate will be, because at present you probably can't remortgage due to your reduced income. Yet you have an offset mortgage, so you can just cut the mortgage spending by using the offset account, while fully preserving the irreplaceable availability of that mortgage money.

Given your age buying an annuity is a very poor deal unless you're extremely intolerant of investment risk.

Your use of savings accounts for large amounts of money suggests very low risk tolerance. Or maybe just lack of familiarity with investing.

Please say more about your knowledge of investing and investment risk tolerance, since that's pretty critical to whether you really need to do the very expensively bad things you're considering doing. If your risk tolerance is low enough you might well prefer avoidable poverty to taking the investment ups and downs but I really dislike seeing people choosing to be poor when they can avoid it.

To give you some idea, you should be able to take 4-6% of your capital as income using investments and pension income drawdown and have it be quite sustainable, with low or little drop in value, depending on just how much is taken. The non-pension portion would be tax free within a few years. You could deliberately have it drop to boost income until the state pension starts.

Since your reduction in income seems permanent, now's a particularly bad time to be blowing capital on unnecessary extravagances like getting rid of a mortgage that doesn't yet need to be paid off. You can undoubtedly generate more income with the money than the mortgage interest cost and end up in profit from having it until it's closer to ending. Which of course is also worth knowing - just when does the mortgage term end?

If you really want to do some mortgage clearing, do it with excess investment returns or income from work and investments that you find you haven't spent.

Mita

Thanks James for your detailed response.

The mortgage term is only for two years and finishes at the end of May this year thus my questions about whether to pay off the mortgage or to reduce it. I was concerned that when it comes to renegotiating a new mortgage that:
a) Interest rates would be a lot higher
b) Given that my employment status is different, renegotiating would be more difficult.
c) An offset interest only mortgage might not be in the offing (for the above reason). I took it because it was the best deal at the time and all the financial pages were advising that offset interest only mortgages were a good deal.

I have had savings in higher earning accounts (although at the moment, interest rates are so low that any gain is pretty minimal). However, in order to get this mortgage two years ago, I had to put those savings into an account which the mortgage could be offset against.

Mita

PS Apologies but I don't understand this section:

"To give you some idea, you should be able to take 4-6% of your capital as income using investments and pension income drawdown and have it be quite sustainable, with low or little drop in value, depending on just how much is taken. The non-pension portion would be tax free within a few years. You could deliberately have it drop to boost income until the state pension starts."

atush

You can merge the two pots together if you like.


I would NOT buy an annuity at 56, the rate would be laughably low. I would leave your pot invested if you dont' need the income and use Drawdown for income until you are at least 65.


Does your current PT job offer a pension?


If you have substantial cash Isas and unwrapped cash that is only getting a low income I might be inclined to use some of the unwrapped cash to lower your mtg. Depending on how much other cash you have in Isas. then I would look into a repayment mtg while rates are low.