Savings v Mortgage conundrum

Running_on_empty_2

Hi forum posters,
We have a bit of a savings/mortgage related conundrum which we can’t quite work out.
We have a £32k chunk of a mortgage (added from a house move) which we can pay off from £40k of Premium Bond savings we have worked up.
On our mortgage we currently pay base rate +0.99% on the mortgage with 18 years to go (leaving us with £180k to pay). Our property it worth around £525k. We also have life insurance on the mortgage, as well as other additional life insurance premiums (so an argument that should the worst happen we are covered anyway). We’re both professionals with permanent (but high pressure) jobs in education and want to retire by 60 if possible (on almost full USS and TPS pensions), with joint salaries over £100k (but have other financial commitments we cannot avoid).
If we were to pay the £32k off we would have £8k left in premium bonds & also £12k in a S&S ISA too - but no other real lump sums/investments. We were going to keep these going and either overpay on the mortgage each month or out that money back into these each month.
Our main aim is to be financially independent and able to retire by the time we hit 60 (15 years to go), so we can look at retirement or going part time.
So, our conundrum is should we keep saving and paying the mortgage back on the £32k chunk, or would we be better paying off the £32k chunk - but then losing our nest egg of savings....? Indeed, are there any suggestions people might have that we haven’t considered?!

All advice appreciated - thanks in advance. :-)

PS – we posted this in the “mortgage-free wannabe” and "mortgage" forum, so obviously had biased responses there already, so this is for some more ‘objective’ advice!

Alexland

Hi,

It all depends on your risk tollerance. I am guessing if you hold lots of premium bonds you are happy to sacrifice return for security? If so then overpaying your mortgage with some of the money would match that profile.

However 15 years is long enough that you might consider investing and seeking to make a better return if you can handle the volatility? Still worth keeping some cash for rainy day, cars, home improvements, kids, etc.

The return on the cash will depend on if you are willing to put the effort into keeping on top of short term 5% accounts. For every £1 in these accounts that's the equivalent of saving the interest on £4 of your mortgage debt.

Have you considered if your pensions would give a commencement lump sum to tidy up any mortgage balance? I assume it is a repayment mortgage so would be nearly clear at 60 anyway.

Alex

Audaxer

Hi there, rather than paying a chunk of the mortgage I would think it would be better cashing in all the PBs and transferring it to S&S ISAs - you could put in £20k each this tax year to fund(s) with a level of risk/volatility that you are comfortable with. I think that would be better for the long term as PBs are likely to have lower returns than a cash savings account, unless you are very lucky and have a big win.

I'm sure you have good pensions but if you want to be financially independent and retire at 60 on the same standard of living you are currently on, I think you need to save a lot more between now and then into the S&S ISAs or to SIPPs, to be able to supplement your pensions at 60.

atush

at that rate of interest, i'd be heavily paying into a pension and getting TR. Nothing is better than pensions for retirement planning. What ar yours like?

Keep some cash in PBs if you like (or current acct paying interdt if not) for emergencies, and maybe a S&S isa too.

You can always use saved cash and S&S isas to pay off some of your mtg if rates go up. But waiting to invest later after paying off the mtg means you dont gain fromt he magic of compounded returns.

Running_on_empty_2

Bump
Thanks for the replies so far everyone - anyone else add anything here? I think Audaxer's response is an interesting one that we will look into as well!

bowlhead99

Audaxer's idea to invest and grow your nest-egg by moving it into S&S ISAs is fine if you are looking to grow it in the long term or even just to have a better chance to keep pace with inflation.

However, you do not really need that £32k currently sitting in your premium bond pot to keep pace with inflation - because the eventual purpose of the £32k is to pay off the mortgage, and the mortgage is not growing with inflation. It is growing at 1.24% a year at the moment. So the desire for inflation-busting growth is not as urgent as although it would be nice to grow your money, it sacrifices certainty.

The basic point often missed by those on the MFW board who say they love the 'financial freedom' of being mortgage free, is that to pay off a mortgage that's only charging interest at 'about a percent' with money that was earning 'about a percent', is not something from which you are going to get much of a financial advantage, and it has drawbacks. At the moment that £32k you're willing to pay off is sitting in PBs (close to cash) or actual cash. It is good to have that nice large pile of cash which represents about four months' combined gross salary (and more than that on a net salary basis) on your £100k joint income ; it gives you a lot of flexibility for living your life, dealing with any emergencies or unexpected events or whatever fate besets you in your high pressure jobs.

It does not make much practical sense to throw that amount at the mortgage which was charging you not much interest, instead of having the money on hand and earning a similar level of not much interest. You would take the disadvantage of having suddenly lost your sizeable cash buffer, in exchange for what? Peace of mind that your mortgage is lower? That's a nonsense because you already have the peace of mind that your mortgage could be lower because you could pay £32k off it whenever you liked with your big stash of cash / PBs.

If you move it into S&S investments then you take risk of the value going down instead of up. If it did that, you might be in a situation where you can no longer pay £32k off your mortgage at a stroke, because you don't have all the £32k any more. So, although the investment loss on paper would be hopefully temporary, in pursuit of long term gains - if you are keeping an eye on the mortgage and eventually plan to pay the mortgage off with the money (e.g. if interest rates rise substantially or your deal ends and you find yourself with a worse deal) you may feel you do not want to take that risk. Having £32k of investments does not have the same flexibility as £32k of cash or PBs because the investment value might only be £25k next year when you want to take some action with it.

Age 45 and having at least one of you a 40% taxpayer (inferred from joint salary 100k) I would agree with atush that if you are considering investments it is generally sensible to do those investments inside pension which can be accessed from your late fifties - then you get 40% tax relief now, which you would not get with S&S ISAs. The advantage of S&S ISAs is that you could access them earlier than your late fifties if something came up. However, investments are a long term thing (because of risk of loss or underperformance in timescales of under a decade or so). So if you are willing to invest for a decade in S&S, you might as well do it inside a pension (a new private pension if the deal on extra contributions to your workplace one isn't great) rather than S&S ISA.

justme111

what is your projected pension at 60? what part of it is already accrued ? what part of pension do you intend to take at 60 - I take it that part of it accrued before 2015 you can take unreduced and part would have to be reduced if you take it at 60. what is your "number"? how much would you need to supplement your pension/bridge the time till you can take it? when is mortgage finishing?

Audaxer

Taking into account of what bowlhead has said, maybe the best plan would be to keep the cash buffer (possibly as high interest current accounts if you want a better return than is likely from PBs), but start a private pension/SIPP (or an S&S ISA if you prefer) to invest future savings to supplement your workplace pensions at 60.

Running_on_empty_2

Thanks everyone!

Initially I think what we may do is:
1. Not pay off the mortgage chunk
2. Max out our S&S ISA up to the £20k limit this year from the PB money
3. Look at investing in another ISA (not sure what though) with the remaining £13k PBs (or leave it until next year and then add it to the S&S ISA again in May)
4. Annually top up all of this/these on a monthly basis

We both have TPS/USS pensions and are currently getting quotes for 60 (but it is so complex!). Reckon we will both be on around £20k per annum (work pension). Our mortgage finishes when we are 62 - so would have lump sums and investments left, plus house at around £550k (now) and no dependents.

Thoughts?

justme111

as I asked before , what is your number?

Running_on_empty_2

Sorry - not sure what you mean exactly (my bad)