To overpay or to save, that is the question?

Frugaliza

Hi, I'm Frugaliza and I've been reading the MFW threads. I have been inspired and kicked up the derrière to address my own mortgage. The numbers are as follows:

I recently remortgaged to a tracker deal at 1.69% for two years on a sum of £140,000. Current redemption figure is £137, 750.17 as of today. Redemption date September 2033. But I'll be 67 by then. Gah!

I'd like to be free to retire at 60 if possible (I'd like to be free right now but hey ho). I was already overpaying by a couple of hundred a month but that took me to a redemption date around age 63ish - still not nice.

So this overhang of mortgage past retirement age has to go. Following advice gleaned from you guys and Martin's mortgage overpayment calculator on the main site I figured out I have to overpay by £440/month to be mortgage free by 60. Ouch!! And another thing should I overpay or should I save? That is the question... I do like the idea of seeing that magic number go down so I've a preference for overpaying.

£440 saved or overpaid means all fun money gone. So how can I 'frugalize' my way to having it all? Your comments tips and advice would be really welcome....

Tropically

A rule of thumb you could use is to have 3 to 6 months of expenses in an emergency fund to prepare you for any potential job loss or house emergencies. Then use the rest to pay off debts.

Martin's money makeover is incredibly helpful for 'frugalising'. A particularly helpful trick for me was to make sure that all my current money was working for me. Laziness sometimes takes over and I didn't switch an expired ISA rate (0.05%) into a new one.

Frugaliza

Thanks Tropically, that's a great idea. I've got the emergency fund covered but I need to go right back to basics and do the money makeover in the Christmas hols (Merry Christmas kids!)

I did the money makeover 10 years ago when newly divorced and recall it really helped me economise and survive on a tight budget. Inertia crept in over the years though, started working full time and took in the odd lodger so things weren't so tight. Anyway. Frugaliza has been born now and so if I'm to have happy choices at 60 I have to focus.

Further to your prompt Tropically I found a page on the main site that covers my overpayment versus save question. I'm just inside the higher rate tax bracket and so apparently can now earn £500 interest on savings tax free (that's changed from the old days) The calculator says I have to earn at least 2.8% on any savings for saving to be better than overpaying the mortgage - not sure if that means 2.8% after you've earned the first lot of £500 interest or 2.8% full stop. Presumably the former - do any of you guys know?

Currently most savings earning practically nothing as they are in premium bonds - had two £25 wins in two years. I got them to buy a chance to dream really, but perhaps that's daft. I need to scour interest rates now to beat 2.8%. Still not totally sold though as like the idea of watching that redemption figure get smaller over the years....

Anyone any ideas for beating 2.8%?

TheShape

For your first £500 worth of interest (as it's tax free) you only have to beat your mortgage rate of 1.69% to make more from saving than you would from overpaying the mortgage. After you've 'earned' £500 interest you'd need to earn 2.8% to match your mortgage rate.

If you look at the budgeting and bank accounts thread you'll see ways to get up to 5% interest. It is very easy to get 3% interest with immediate access to your money. At 3% you wouldn't reach your Personal Savings Allowance (PSA) until you had £16,666 at that rate.

edinburgher

If you're wanting to have your cake and eat it, might I suggest investigating your pension options as opposed to either saving or overpaying? As someone who went from having a large cash balance at 5%, I would argue that it's no longer particularly easy to maintain a good savings rate, this trend will only get worse.

You have 17 years of potential investment gains and tax relief to enjoy, meaning that you can meet your goals (pay off the mortgage by the time you retire, have any money left to enjoy life before then).

Your £440/m OP becomes a £352/m pension payment (SIPP/personal pension), or more like £300/m if you have a pension that offers salary sacrifice. Even if you assume no investment gains over 17 years, you'd still have enough to pay off the mortgage. That's a significant difference over the period.

Two things to consider off the top of my head:

1) At this point, you can take a pension commencement lump sum of up to 25% of your pot. This wouldn't necessarily cover all of the outstanding mortgage balance, but I assume you already have some pension savings?
2) Political risk - the government could do away with the PCLS, make you wait longer etc.

bournefree

Hello Frugaliza,
The decisions we make vary and change over time. 50 is a good time to think of what your needs will be in 10, 20, 30 years time. The sooner you can pay off your mortgage, e.g. by 60, the sooner you will have more choice over the decisions you make from that point. This is important to consider if redundancy or ill-health loom. As well as this, you hopefully have time to maximise your pension, plus build up some other savings and investments before you retire. So it's a bit of a juggling act between mortgage, pension and savings / investments, I think. In a perfect world we'd all have no mortgage, a massive pension, and lots of savings / investments, but in the real world we have to strike a balance between things. I'd weigh up these things depending to your circumstances, and spread your money across them accordingly.

Frugaliza

Three very helpful responses - thank you!

TheShape, you have clarified that beautifully - I shall check out those boards you mentioned - I've just opened a FlexDirect with Nati0nwide earning 5%. I feel a spreadsheet coming on - may have to brush up my excel skills which are very very basic.

Yes Bournefree as in lots of things about life it's all about balance and I can see that it's not just about overpaying if we want to make our money work as hard as possible for us.

Now Edinburgher you have really given me food for thought with your pension idea (in fact your idea woke me up at 4:16am today so could you be less exciting please?). I've had since that time to dig out my pension statement that comes once a year, gets thrown in the drawer and forgotten about.

I'm a civil servant so it's a defined benefit scheme. I'm part classic and part alpha. I think the income side of things is taken care of but apparently can buy civil service AVCs which can be cashed in from age 55 - I pay some and the government pays some - as in salary sacrifice. I'm wondering how that all knits in with the PCLS changes? Can I pay in over the next 10 years and then take my contributions in a lump sum rather than income? If so that seems to be the most efficient way of saving to pay off the mortgage at 60 - have I got that right? It's not got the excitement of seeing the magic redemption figure shrink but is super sensible....

Blimey this is getting involved. I thought I'd come on here and get a few tips on how to pimp my washing powder and use coupons to reduce the food bill. My mortgage provider will get yet another phone call today cancelling the overpayment I only arranged last week! I think whilst I decide I need to get used to living without the 'overpayment' amount (£440) and decide how to be clever with it.

So there's still scope for pimping my washing powder to be able to save all those pennies...

Jonbvn

Frugaliza wrote: »

Three very helpful responses - thank you!

TheShape, you have clarified that beautifully - I shall check out those boards you mentioned - I've just opened a FlexDirect with Nati0nwide earning 5%. I feel a spreadsheet coming on - may have to brush up my excel skills which are very very basic.

Yes Bournefree as in lots of things about life it's all about balance and I can see that it's not just about overpaying if we want to make our money work as hard as possible for us.

Now Edinburgher you have really given me food for thought with your pension idea (in fact your idea woke me up at 4:16am today so could you be less exciting please?). I've had since that time to dig out my pension statement that comes once a year, gets thrown in the drawer and forgotten about.

I'm a civil servant so it's a defined benefit scheme. I'm part classic and part alpha. I think the income side of things is taken care of but apparently can buy civil service AVCs which can be cashed in from age 55 - I pay some and the government pays some - as in salary sacrifice. I'm wondering how that all knits in with the PCLS changes? Can I pay in over the next 10 years and then take my contributions in a lump sum rather than income? If so that seems to be the most efficient way of saving to pay off the mortgage at 60 - have I got that right? It's not got the excitement of seeing the magic redemption figure shrink but is super sensible....

Blimey this is getting involved. I thought I'd come on here and get a few tips on how to pimp my washing powder and use coupons to reduce the food bill. My mortgage provider will get yet another phone call today cancelling the overpayment I only arranged last week! I think whilst I decide I need to get used to living without the 'overpayment' amount (£440) and decide how to be clever with it.

So there's still scope for pimping my washing powder to be able to save all those pennies...

Good post!

I can see you have realised that the issue is not just your mortgage, but your overall "wealth" strategy in the long term that you should consider.

edinburgher

I'm a civil servant so it's a defined benefit scheme. I'm part classic and part alpha. I think the income side of things is taken care of but apparently can buy civil service AVCs which can be cashed in from age 55 - I pay some and the government pays some - as in salary sacrifice. I'm wondering how that all knits in with the PCLS changes? Can I pay in over the next 10 years and then take my contributions in a lump sum rather than income? If so that seems to be the most efficient way of saving to pay off the mortgage at 60 - have I got that right? It's not got the excitement of seeing the magic redemption figure shrink but is super sensible....

I am unsure as to whether CS AVCs can be taken as a lump sum. I have a few ££££ of incoming coming to me eventually from the Nuvos scheme, but I opted to buy extra income, as opposed to AVCs. Are you sure the government will pay anything towards your AVCs? Sounds overly generous - or are you just thinking of the tax benefits of having your contributons 'grossed up'?

Your scheme administrator/staff website will be able to provide specific details, so best to check there.

Re. pimping your washing powder - I swear by L1dl's Formil non-bio tablets, they're a steal at £2.xx for 36. We are lucky (soft water), so I get 36 loads of washing for about 6p a load

Suffolk_lass

Frugaliza wrote: »

I'm a civil servant so it's a defined benefit scheme. I'm part classic and part alpha. I think the income side of things is taken care of but apparently can buy civil service AVCs which can be cashed in from age 55 - I pay some and the government pays some - as in salary sacrifice. I'm wondering how that all knits in with the PCLS changes? Can I pay in over the next 10 years and then take my contributions in a lump sum rather than income? If so that seems to be the most efficient way of saving to pay off the mortgage at 60 - have I got that right? It's not got the excitement of seeing the magic redemption figure shrink but is super sensible....

I believe that alpha does not accrue a lump sum for you - you would have to sacrifice a proportion of your pension "income" to convert to a lump sum. If you bought AVCs you could withdraw up to all of this, tax free, if it does not exceed 25% of your pension benefits. If you have a preserved portion in Classic, you will still get a lump sum associated with that. I think if you are 50 the issue with taking your pension at 60 would be the actuarial reduction to your alpha pension (currently 5% per year) - I believe alpha aligns to the state pension age so you would lose 35% of your accrued benefits in alpha by going at 60.

If you want to consider another option... Some people I know have opted out of the CS Pension and then opted back in, which means their accrued benefits up to the date of the opt out then get index linked from then on. You could look into this with a view to increasing your classic by the indexation (you have only paid into alpha for less than 2 years). Then when you rejoin - you accrue a new alpha pot from the opt in (a month later). You then stop paying into this second CS pension at 60 (when you stop work) but do not draw it until you reach state pension age. That second CS pension would be index-linked for 7 years but not actuarily reduced because it is no longer tied to your classic pension and you can draw it at the later date (you can't have two dates with the part classic part alpha model that I assume you transferred to because you were too young to stay with classic) - this fixes that. You might find ten years of indexation to frozen classic benefits gives you a tax free lump sum boost that would significantly contribute to your mortgage pay-off, especially if the predicted rise in inflation follows the EU Exit.

Just be aware that if you opt out for a month you are not "insured" by death in service benefit while opted out - for you to further consider if you need life insurance to cover that period (some with dependents do).

Good luck!
SL

Frugaliza

Johnbvn - right 'overall wealth strategy' is now my thing rather than a narrow focus on mortgage overpayments.

Edinburgher - I was talking about the tax benefits of grossing up. What I realise now is that I get 40% tax relief on the way in to a CSAVC and then 20% tax (on 75% of the lump sum) on the way out (age 60) A 20% gain. BUT. It's less immediate than seeing mortgage go down or savings go up and is vulnerable to fund performance and political interference. Hmm, scratching chin...

Wow Suffolk Lass you are really on it in terms of Civil Service pensions. Respect! I've read your post about 4 times to understand it, hopefully I've got it. I had no idea I had to opt out and in again to be able to take my Classic part of the pension age 60, my Alpha part age 67 and not have the latter actuarily reduced. Now that's another job on my financial to do list AND I have to avoid being knocked off my bicycle whilst briefly outside the scheme.

I fear parallasis by analyses could set in. I need to act. The Classic pension has a lump sum which will be roughly equivalent to the amount of mortgage remaining to be paid when I'm 60. But I had that money mentally set aside for backpacking the globe and buying Zimmer frames and such. So I must frugalize to make the most of my OWS (overall wealth strategy.)

I've cancelled the mortgage overpayment which I got all excited about arranging last week - what am I like?! I think I'll put a little bit in the CSAVC - £100/month which equates to £140 after grossing up. Then save up until I've reached and maxed out my tax free interest allowance, then overpay the mortgage after that. This way I don't put all my eggs in one basket. I get to see numbers going up and down but am sensibly taking advantage of the pension benefit.

A friend also mentioned that a stocks and shares ISA might have an advantage over pension contributions because there's no tax on the way out at all. Any thoughts?

Now on to things I understand. Washing powder - Cut your powder to save pennies and boost cleaning power! Take 1 part Ari3l, 1 part cheapest washing powder you can find and a bag of soda crystals. Blend all three together and voila - great washing powder. It's like Breaking Bad meets Mrs Beeton in this house:beer: