Overpay mortgage or other investment?

adonis10

DrEskimo wrote: »

No, because that ignores everything I wrote above about how student loan debts differs to that 0% 'normal' debt.

To me, the greatest risk in having any 'normal' debt is the fact that it becomes a liability when you no longer have an income to service it. The repayments will still need to be made on a 0% interest loan, despite the fact I have no job.

This is not the case with student loans. If I no longer have a job, I stop paying for it. Yes it will accrue interest, but as stated this is a very small amount, and will never rise above inflation. Since March 2009, it has remained at <1.5%, even dropping to 0%, meaning it has been costing less than inflation. Furthermore, if I never earn enough to pay it off, it is just written off. It does not get passed on.

True, I fully understand that but realistically I am not likely to not have a job and as such stop paying it back. Never say never, obviously, but I can't decide not to overpay because one day I won't have a job and therefore will stop repaying anyway.

DrEskimo wrote: »

Student loans represent very low risk IMO.

I appreciate your logic in that you are only paying a small proportion of your surplus income towards it, so if that's what you are comfortable doing, then who am I to say otherwise! I just wanted to be sure you had all the information about how student loans work to make an informed decision.

Comparisons of student loans to just about any other type of debt is not really of any use, and as such it needs to be treated completely different...well IMHO anyway..:)

Fair enough. I understand how they work and the logic, however I just decide to pay 1/16 of what I save and invest to the SLC rather than anywhere else.

Wobblydeb

aj23 wrote: »

Some people put security of a dry roof to sleep over investments and work towards being debt free. As a mortgage is a debt.. Especially if you're a family with young children.

I do not see why you'd have the value of your mortgage in an investment when you still have that mortgage, at all. I would have cleared that mortgage already.

I've got a young child and investments and a mortgage, and am happy to play the numbers game.

In the last 4 years my S&S ISA has made an annual return of 6.5% after costs. The mortgage cost was 2.69%. I would be £8k worse off if I had paid down the mortgage. The trade-off is even more marked now that the mortgage rate is at 1.59%.

There are lots of factors to weigh up when deciding how risky it is to keep debts versus investing.

First and foremost, is there sufficient return for the risk you are taking? It seems pointless to me to go for a risky 6% return if your mortgage is costing you 5%. Much better where the gap is bigger.

Next, what is the likelihood of you being unable to service the debt?

• Could you cover it with just one salary?
• Is the chance of both of you losing your income at once negligible?
• Do you have illness/redundancy insurance that would kick in?
• Are there any changes likely in the future that might cause you problems, like children or a change of location?
• Do you have alternative income streams available - e.g. A side gig, wealthy family?
• Can the investment be realised easily to repay the debt - i.e. is it bricks and mortar, fixed term bonds, cash etc.

Finally, if you cannot afford to service your debt, what options do you have?

• e.g. A capital repayment holiday? (much the same principle as applies to student loans).
• Is Support for Mortgage Interest available to you from HMRC?
• Will other benefits from HMRC kick in?
• How easy is it for the debt holder to force repayment - e.g. if it is a car, they can take it away very easily. It is a much more drawn out process with a house, and most lenders will seek to work with you, such as offering capital repayment holidays.

DrEskimo

adonis10 wrote: »

True, I fully understand that but realistically I am not likely to not have a job and as such stop paying it back. Never say never, obviously, but I can't decide not to overpay because one day I won't have a job and therefore will stop repaying anyway.


Fair enough. I understand how they work and the logic, however I just decide to pay 1/16 of what I save and invest to the SLC rather than anywhere else.

Well my motivation for not overpaying is because I would rather use the money towards an investment that will try an beat inflation, rather than a debt that is guaranteed to never be higher than inflation! Not because I think I'll lose my job anytime soon!

My point was that I personally tend to ignore this 'rule' of not overpaying when the debt is less than inflation (even 0%) because of the risks associated (e.g. is a liability if I lose my job). I am just more risk averse and plan for the worse, however unlikely.

But these risks do not apply to student loans, therefore I do not apply the same rules. In other words, if the 0% interest loan had the same stipulations as the student loan, I wouldn't overpay on that either. I would use it to make greater gains by investing/saving it at higher interest, as there is no risk in doing so.

adonis10

adonis10 wrote: »

Back again for advice as I am in the month long window to change pension conts!

Financial situation not massively different (past year most of my surplus has gone towards credit card debt for essential house spending and a new car), but the weightings have changed slightly (58:42 cash:investments). Current state of play:

Cash - £37.5k
S&S ISA - £11k
S&S LISA - £5k
Workplace pension - 23k (29% contribution, 13 e'ee, 16 e'er)

Other info:
Debts - 141k mortgage, 13k student loan (overpaying £100/month), £700 surplus cash after bills, essential and discretionary spend.


Thinking of upping pension conts to 16-18% but wonder if I am then committing too much to funds that are not accessible.


Not a huge change from last year but any advice appreciated.

It's that time of year again and I'm back for advice!


Financial situation has changed for the worse this year as we are getting married in August so I have saved next to nothing and had to dip into my savings considerably.


Updated finances:


£49k in cash and ISA's
£36k workplace pension
£34k salary




£136k mortgage (on a £360k house)
£2.5k interest free credit card (another 20 months to pay off so not a pressing concern).
£12k student loan


No great changes in the past year other than a horrible dip in cash savings and the credit card debt so my only question is do you think it is worth upping my workplace pension contributions? Currently contribute 16% and considering going up to 20% which would be an extra £113/month into the pot for a cost of only £67 net pay. The increase won't change my employer conts (max is 16%) but I am going along the lines of contributing the same percentage as my age (36 next month) in a vain attempt to catch up.


The only other change of note is that my fiance changed jobs and halved her salary which is a blow, but doesn't affect our ability to pay the bills and me to have £500/month left over once the wedding is out of the way. However, this means she is no longer in the Teacher's pension scheme and cannot save a penny after bills, hence my desperation to squirrel away as much as possible into a pension.


Any advice (other than 'get higher paying jobs'!!) appreciated.

Alexland

Sorry I haven't read the entire thread again but generally speaking if you are paying 40% tax on any of your income then, if you can afford the reduction in take home pay, making additional pension contributions to defer taxation until retirement when you will probably be paying a lower rate of tax is almost always the best option.

adonis10

Alexland wrote: »

Sorry I haven't read the entire thread again but generally speaking if you are paying 40% tax on any of your income then, if you can afford the reduction in take home pay, making additional pension contributions to defer taxation until retirement when you will probably be paying a lower rate of tax is almost always the best option.

Not paying 40% tax, unfortunately.

Alexland

adonis10 wrote: »

Not paying 40% tax, unfortunately.

Then how would an addtional £113/month voluntary contribution only cost you only £67 net pay?

adonis10

Alexland wrote: »

Then how would an addtional £113/month voluntary contribution only cost you only £67 net pay?

£2,836 gross salary * 0.04 (contribution increase from 16% to 20%) = £113.44 additional contribution


Savings on the above:
Tax @ 20% - £22.69
NI @ 12% - £13.61
Student Loan @ 9% - £10.21
Total - £46.51


113.44 - 46.51 = 66.93


So £113 extra into my pension = £67 less in my net pay

Alexland

Aah yes its the reduction in student loan repayment that made it look like you were aiming for 40% tax relief. By delaying repayment of the student loan it isn't really saving you anything if you expect that you will have to repay it all eventually anyway.

Still if you can save both 20% income tax and 12% NI via salary sacrifice then, if you can afford the reduction in take home pay, making additional pension contributions to defer taxation until retirement is still likely to be the best option. The saving in income tax will be negligable (mainly the 25% tax free) so the main advantage will be that pensioners don't pay NI... unless that changes.

Another option would be to continue to take the income, and repay the student loan and put money into a S&S Lifetime ISA which provides a similar benefit to salary sac pension contributions.

Alex

adonis10

Alexland wrote: »

Aah yes its the reduction in student loan repayment that made it look like you were aiming for 40% tax relief. By delaying repayment of the student loan it isn't really saving you anything if you expect that you will have to repay it all eventually anyway.

True, but I am willing to take the risk that the extra tenner/month into the pension will grow more than the 1.75% interest it will incur on the loan. But I do get that it is worth clearing as soon as possible as it will be paid off before being written off as I am currently clearing ~£900/year net of interest so circa 13-14 years, but more like 16-17 years when you factor in the inevitable interest rate hikes.

Alexland wrote: »

Still if you can save both 20% income tax and 12% NI via salary sacrifice then, if you can afford the reduction in take home pay, making additional pension contributions to defer taxation until retirement is still likely to be the best option. The saving in income tax will be negligable (mainly the 25% tax free) so the main advantage will be that pensioners don't pay NI... unless that changes..

That's what I was thinking, the NI saving would make it worthwhile. Obviously that is based on what we know now and I imagine that in 30 years time all such benefits will have been wiped out, but we can't really second guess these things until they occur. That said, I may not even be paying tax on my pension as I will likely be below the threshold for tax so it could work out to be a larger saving in the long run.

Alexland wrote: »

Another option would be to continue to take the income, and repay the student loan and put money into a S&S Lifetime ISA which provides a similar benefit to salary sac pension contributions.

Alex

Good point but one for future tax years as I have maxed out my LISA for 19/20.