Should I overpay my mortgage or add to my pension

jamesd

Kua wrote: »

OK, supposing I change things slightly and decide I would like to use BTL to fund my retirement. What is the best way for me to invest my cash in order to allow me to buy a second property?

There's at least one fund that has its investment returns linked to the Halifax House Price Index. Since you'll be wanting to buy residential property an investment that matches residential property prices is one good choice.

Kua wrote: »

Presumably over paying the mortgage wins out...

Mortgage overpayments are linked to the mortgage interest rate, not house prices or investments, so they are usually not the best choice, unless you have an unusually expensive mortgage or have a low risk tolerance. If you have a low risk tolerance, starting a BTL business probably isn't for you.

jamesd

enjoyyourshoes wrote: »

Psychologically if overpay Mtge you will be debt free in less than 10 years

What you'll have lost is the ability to fund your other living costs if you're not earning for some reason.

This is an area where each person is different. Some want the mortgage gone because they don't feel safe with it, others feel safe knowing that they have years worth of mortgage payments and other loving costs available instead. Others just don't have the risk tolerance to use investments and for them overpaying on a mortgage can beat savings rates much of the time.

enjoyyourshoes wrote: »

Also you will have prepared yourself to fund your extra pension with both the mtge payment and the overpayment. Also your life has adjusted to these increased payments and its an easy step to put such a large wedge onto pension saving.

That's true but you'll probably never be able to recover from the lost compound growth of not starting the investing sooner. The difference between 5% plus inflation (say 8-9%) and mortgage interest rates is just too big to catch up with if it takes more than a few years to get rid of the mortgage.

Even someone who's strongly in favour of mortgage first should do some investing because that gives practical experience with he ups and downs of investing and it's important to be comfortable with that. Seeing a periodic 20% drop or even less is way to frightening for a lot of people unless they have seen that it's just routine.

enjoyyourshoes wrote: »

Savings seem to me to be psychological or do I really mean spending is psychological ?

Both. However it's done those who overpay or invest are all committed to improving their financial future.

Thrugelmir

jamesd wrote: »

Overpaying on the mortgage doesn't increase your choices, it reduces them.

?????

Relationship breakdown , ill health, redundancy. To name a few.

Property ownership allows choices to be made. A pension is locked up money.

The long term return of the UK stock market has averaged around 5% plus inflation over the last hundred plus years.

Not so good over the past 15 years or so. Long term averages distorts the reality. This is a different era to ones gone by.

jamesd

I was writing more about non-pension investments than pensions, except for those who will be over 55 at the time of need. The pension has a worse lock-up property than the property until age 55.

I doubt that the return of say the FTSE All Share total return index for say £100 a month has been bad for around fifteen years. You were probably thinking more of a lump sum than regular overpaying or investing, knowing that fifteen years ago was just before a big drop in the index value.

Kua

elantan wrote: »

I feel i have to ask ... why does it have to be one or the other? both have advantages and disadvantages... why not do a 50/50 split or maybe 60/40 etc ( i would do 75/25 personally speaking but thats what works for me)

play about with the figures and see what happens

I already am doing both but want to figure out which is best for me because I'm able to put more away

jamesd

There's no guarantee with investments but they are expected to be of more value than overpaying because of the generally higher investment returns compared to mortgage interest rates. But a big part of this is what various people are comfortable with and it's really tough to know that until you've lived through a substantial drop with a significant amount of your money invested.

If you'll be 55 or older at the time you need the money, the pension option is a pretty good one, otherwise it'd be S&S ISA as first choice.

Kua

It occurs to me that one way to get around the tax issue, if I'm in a position to retire at 55 and therefore claim my personal pension, is to withdraw the 25% tax free then draw down 10k a year, or whatever the first income bracket is at that time, until 68 (probably older by the time i can claim) when I get state pension.

I know this is certain to change but is my logic sound if I were 55 now and retired tomorrow?

Kua

jamesd wrote: »

Mortgage overpayments are linked to the mortgage interest rate, not house prices or investments, so they are usually not the best choice, unless you have an unusually expensive mortgage or have a low risk tolerance. If you have a low risk tolerance, starting a BTL business probably isn't for you.

Yes of course... I'm not a mortgage free wanabee but a have-the-choice-to-retire-early wanabee.

What is the effective saving rate of over paying your mortgage. I understand it is slightly higher than the actual % of your interest rate.

I wouldn't say i have a low risk tolerance, have traded in shares in the past. But I do have a very low tolerance to stress which makes me think pension > btl because its much easier to manage.

I'm basically spreading what I put into my pension so far between a few different index linked unmanaged funds. FTSE 100 etc.

Kua

Of course, thrown into this mix is the question of whether or not I want to try one day to upgrade my current property!

jamesd

Heh, upgrades are another issue alright.

Tenants can be pretty stressful. If you haven't been doing it you might want to read some landlord forums or the house buying section here to get some idea of the hassles.

The effective savings rate of overpaying your mortgage is the mortgage interest rate, compared to the AER of tax free savings accounts or investments inside a tax wrapper like an ISA or pension.