Why overpay mortgage while interest rates are so low? 17 May 2017 at 10:23AM in Mortgage-free wannabe 17 replies 3.6K views

iwilson16

I can fully understand the psychological temptation to pay off my mortgage as soon as possible .... its a very compelling urge!

However I find it hard to justify compared with paying more into my pension instead.

I'm 54, a higher-rate taxpayer, with £130k remaining on mortgage. I've a repayment mortgage with First Direct. Payments are £950 per month, of which approx £180 is interest (I think). Its due to be paid off by the time I'm 66.

I could overpay by £500-£1500 per month. But surely it makes more sense to put that into my pension, and get the extra tax relief (plus investment return)?

I've enough in my pension such that I should be able to afford the mortgage payments when I retire (at 59 or 60).

Am I missing something ... ? Only thing I can think of is the possibility of a rise in interest rates.

Thanks
Ian

dark^knight

Hi Ian,

You are right, paying off the mortgage may not be best option for everyone.

For some it gives peace of mind.

getmore4less

investment decision like any other where is the best(ish) return

If using pension an assessment of the risk of the money being inaccessible for some of that period before the term finishes.

somethingcorporate

Pension goes up and down but the tax relief should more than offset that variability. You could do both, but put the cash into the pension with a view of using the 25% lump sum to pay off the mortgage.

Make the most of the tax relief whilst it lasts.

Wookey

With only 12 years left on your mortgage then the benefit of overpaying is negated by quite a bit compared to overpaying with 20-30 years left on the term. No one can predict with certainty what way interest rates, inflation, stocks and shares markets, global events and pension funds will react in a years time or 12 years time, if you do decide to go the pension route just be hopeful that if/when you cash out you are at or near a peak and not a trough.

Perhaps at your age then maybe a sipp could prove beneficial maybe even more so if your private pensions are effective on retirement as there is no obligation to cash out a sipp on retirement and you could hold of on drawing it until a peak in the marketplace, a sipp is also drawable on from age 55 currently as well. I would defo be sitting down and looking at the numbers and a few scenarios, perhaps some small overpayments to get yourself mortgage free just before retirement so that pension lump sums or payments don't have to go towards a mortage might be something that appeals to you, or not, the choice is yours.

greent

We repaid ours early (even though it technically made more financial sense not to) because of the peace of mind - a big factor here with 4 children, OH having had several periods of no work and mental health issues at times. Now we're concentrating more on investing for our future. For us it was the right thing to do to do it the 'wrong' way

Tropically

For you, it probably does make sense to put more into your pension because you can access it soon. I can't access my pension for 30 years, provided they don't change the rules again. I put in a reasonable amount into my pension (10 %) but not more, because I have weighted liquidity higher than the tax relief.

I also will have the mortgage for a long time if I don't overpay, and I expect that mortgage rates will be very high in 24 years time (current mortgage term left). I consider paying it off now while interest rates are low to be 'future proofing' my finances. If I overpay now, when interest rates go up I will be able to make lots more off my savings (and I'll be able to save lots with no mortgage). In the future if I didn't overpay, I would make a good interest rate off my savings but still have a high interest rate on my future mortgage.

I realise that I can receive a greater return in the market, and I do have investments in the market. But I can't keep everything I have invested in stocks and shares, but regular cash savings rates are SO low that they are close to my mortgage rate. My priority goes like this:

1. Reasonable cash emergency fund.
2. Investment in stocks and shares with as much risk tolerance as I have.
3. Overpay my mortgage with the leftovers.

Lomcevak

iwilson16 wrote: »

I could overpay by £500-£1500 per month. But surely it makes more sense to put that into my pension, and get the extra tax relief (plus investment return)?

Am I missing something ... ? Only thing I can think of is the possibility of a rise in interest rates.

There's psychological, but there's also pragmatic - i'm early 40s, and although the tax relief is a major benefit I don't want all my assets tied up somewhere that I can't access them for at least a decade.

Probably our biggest financial risk would be Mrs. L losing her job (it's relatively easy for me to find another one, she is in a specialist niche). So for us, the aim over the last few years has been to balance pension and mortgage overpayment to get to a place where we could comfortably pay the mortgage on one salary if we needed to. Once we are there - we aren't yet, really - we could reassess priorities.

As it happens, in recent years my salary has reached a point where i'm using all of my annual pension allowance anyway, so it has become a different question, and paying the mortgage down to zero is quite attractive - saying that, my overmortgaged father's finances blew up when he lost his job in the early-90s recession and we lost the family home, so the psychological aspect is important to me

freshcotton

I would never put money into a pension and intend on creating and managing my own retirement so aiming to be mortgage free in my 30s to give me time to then solely focus on my portfolio.

Your position is different though. But peace of mind and the general sense of achievement plays a big factor also

iwilson16

Thanks for all the feedback. Always good to get different perspectives.

I'll probably take the mortgage down to about £500 pm, and leave it at that for the remainder of its term. (Providing interest rates don't go up too much).

Then I'll start putting more into the pension whilst maintaining a few years equivalent spending in cash and premium bonds. (Emergency/stock-market-crash money).

I currently put in 7% into my pension in order to get max from employers contribution. I have a good pot built up already in a SIPP. Total contributions (Salary sacrifice) are approx £1200 pm.

Thanks,
Ian

genieuk

For me not having worked all my life due to living overseas and following husbands career, I feel happier paying off the mortgage and saving £40K+ in interest. OH is the main breadwinner if he fell ill or lost his job at least our home would be safe.
My view my change next month as we are having a pension brief at work I did toy with the idea of making additional contributions but was already on the road to being mf.