SIPP vs Mortgage Overpayment

Makkusu

Hi, I can't seem to find a definitive response to what would be more beneficial, I'm currently amending my budget from previously overpaying mortgage as much as possible as I'm reading pensions are a smarter choice?

Info:
27 year old
£160k mortgage - 2.59% 5 year fixed (HTB scheme £45k equity loan)
£38k salary + up to £8k commission
Live with partner on £14k, no children

Current monthly savings:
£400 mortgage overpayment
£125 SIPP
£125 LISA (will discontinue if HR taxpayer)
£250 S&S ISA
1% workplace pension (nest)

Any thoughts if this is a good split or a bit nonsensical? Should I weigh it more in favour of mortgage or pension? I'm really unsure. My idea was to make use of the lower mortgage rate to build up more equity before we move house/repay HTB loan.

Thanks.

AnotherJoe

Once you get to being HR taxpayer, pension (apart from locking it up for years) is a financial no-brainer compared to most other options.

And the great deal on HR tax relief is (IMHO) unlikely to be there long term so take it whilst its going.

Personally I also wouldn't be making the mortgage overpayments, I'd be saving that amount in high rate regular saver accounts in order to pay off the HTB loan when it comes due,

Thrugelmir

1% is a very low pension contribution rate.

What plans do you have to repay the HTB element of the mortgage?

Makkusu

Thrugelmir wrote: »

1% is a very low pension contribution rate.

What plans do you have to repay the HTB element of the mortgage?

Yeah quite unfortunate regarding the pension but it's purely the Nest minimum contribution, hence why I'm starting to think my personal pension needs to be much higher.

With HTB one of three options; (i) move in 5 years time and play back the loan, if the value has tumbled I'll have cash & overpayments to spare, (ii) increase mortgage, currently could borrow an additional £100k approx, or (iii) wait till savings are high enough if we want to stay there.

(iii) = very unlikely, so I am kind of banking on the first two, also why I'm overpaying the mortgage currently.

atush

I would stop overpaying and increase both pension and S&S isas

Makkusu

atush wrote: »

I would stop overpaying and increase both pension and S&S isas

Can you help me understand please? I feel like I'm missing something really stupid.

Is the idea to just pay full interest on the mortgage then the 25% tax free withdrawal can be used as a lump sum withdrawal?

My mortgage estimates I will have paid £180k in interest, but if my pension is say £360k in value at retirement then investing in pensions is £180k better off?

I work in finance yet I feel like such a klutz trying to get my head around this.

What if I clear the mortgage within 20 years then I have double the amount to contribute into a pension from age 47 onwards, is that not more beneficial?

Thanks.

Fatbritabroad

Makkusu wrote: »

Can you help me understand please? I feel like I'm missing something really stupid.

Is the idea to just pay full interest on the mortgage then the 25% tax free withdrawal can be used as a lump sum withdrawal?

My mortgage estimates I will have paid £180k in interest, but if my pension is say £360k in value at retirement then investing in pensions is £180k better off?

I work in finance yet I feel like such a klutz trying to get my head around this.

What if I clear the mortgage within 20 years then I have double the amount to contribute into a pension from age 47 onwards, is that not more beneficial?

Thanks.

There's a well known saying that time in the market beats timing the market.

At a basic level you just need to look at interest rate on mortgage. 2.59% vs the average stock market return which is around 7% and even lower volatility funds tend to do 4 to 5 % meaning you'd be twice as well off leaving money in the pension for longer than y ou would paying mortgage off. The caveat is whether you will need the money in 5 years to increase mortgage or pay off htb. With stocks and shares over 5 years you run the risk of their being a crash and having to crystallise losses to pay the mortgage.

The other consideration is will overpaying your mortgage allow you to remortgage at a better rate. I over payed massively over the last two years when really I'd have been better off putting into a s and s isa with hindsight.
but I wanted to get my ltv Down to 60% which I've managed. This means I can fix for ten years at the same rate as you and over 10 years I can now simply pay the standard limit and stick the funds in an isa knowing that realistically I will get a better return over the ten years. And worst case I will have paid another 20% or so off in the interim.

Fatbritabroad

PS at 47 you will have less time for the fund to appreciate. Still a decent time but youre better putting more in early I'd say to give it more time to grow

Mogley

One thing not showing on your savings is an emergency savings instant access cash fund. Do you have this in place?

Makkusu

Mogley wrote: »

One thing not showing on your savings is an emergency savings instant access cash fund. Do you have this in place?

I was thinking of leaving emergency cash at around £5,000 minimum which would cover us for around 5 months at a push.

I've used the 5% nationwide accounts already so only have access to 3% savings.