Pension contributions as repayment vehicle for mortgage. Feasible?

pinklady21

Hello
Looking for a repayment vehicle for my mortgage.

Currently owe around £160k on interest only.
I could overpay around £500 - £600 per month and have it paid off by the time I reach 65, which is my expected retirement age in 15 years time.

I am trying to work out whether I am better overpaying on my interest only mortgage, or whether I should put that £500 - £600 into an AVC with my employer's pension scheme, with a view to using that cash to repay the capital on the mortgage.

I am a higher rate tax payer, and already paying in about 22% of salary in combined employer and employee contributions.

Looking for pros and cons of overpayments on mortgage vs additional payments into pension.
If I overpay then I will benefit from (non) compounding of the interest, on the other hand, if I use pension contributions, then there is a tax advantage.

Can anyone help me to work out which is the right thing for me to do?
Thank you!

Noobie2011

We were always planning on overpaying on lur mortgage to reduce the term and save on interest as opposed to pension contributions however with the savings in interest on the mortgage being less than the tax/ni saving and interest growth on our pension we are now deciding against it.

I think which would save you more money is an easy calculation but the other thing to look at is how easy you may want access to the money. If paid into your mortgage then easier to get access to as opposed to it being locked away in a pension

Cottage_Economy

One thing you might want to factor into your plans is mortgage amortisation.

You would save the most interest in the first half of your mortgage term, as providers front-load it. The second half of your term you pay more capital than interest.

Personally I'd only do it in the first half of the term.

greatkingrat

The problem is the tax. If you accumulate a pot of 160k when you are 65, you are not going to be able to access it all at once in order to pay off the mortgage without getting a large tax bill.

Dox

There's an inescapable emotional (i.e. not wholly rational!) element to paying off your mortgage. The feelgood factor often outweighs any other consideration.... I think the happy news is that neither route would definitely be 'wrong' - both are effectively ensuring you have extra cash in later life.

dunstonh

Looking for pros and cons of overpayments on mortgage vs additional payments into pension.

shortfall risk & investment risk - e.g. if you pay contributions on the basis of a 5% target growth rate and you average say 4% then you will fall short
legislative risk - Governments like playing with tax wrappers. Rules today may not be the rules of tomorrow.
tax - The conventional method for pension mortgages is to get the 25% to cover the mortgage. Not the 75%. If you draw the 75% then the tax could be heavy.

I am a higher rate tax payer, and already paying in about 22% of salary in combined employer and employee contributions.

As a higher rate taxpayer, the financials of overpaying a mortgage are very poor compared to paying into a pension. Your mortgage interest rate is probably around half the returns you are getting on the pension. And you are effectively getting 40% of free money on the pension. So, overpaying shouldnt be a priority from a financial point of view. Paying into the pension should be.

If I overpay then I will benefit from (non) compounding of the interest, on the other hand, if I use pension contributions, then there is a tax advantage.

And pension returns are likely double the mortgage interest in the current environment.

Obviously, you need to do something to clear the mortgage in the timescale. have you worked out the cost to do that?

atush

as a HRTaxpayer I would pay 100% of all of your Annual allowance that isnt covered by the 22% paid now. You can pay 40K pa, plus you can claw back unused alowance fromt he past 3 years. Only you can owrk this out, so do and tell us.

Then once you give the rest of the details we need, such as your mtg interest rate, we can give further opinion.


As said, you can only count on 25% of your pension pot fro the mtg, as that is all that is tax free. Plus you really should have emrgency cash.

Have you considered downsizing and a smaller mtg now?

SuzieSue

dunstonh wrote: »

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As a higher rate taxpayer, the financials of overpaying a mortgage are very poor compared to paying into a pension. Your mortgage interest rate is probably around half the returns you are getting on the pension. And you are effectively getting 40% of free money on the pension. So, overpaying shouldnt be a priority from a financial point of view. Paying into the pension should be.

Yes, as long as the additional contributions would still get higher rate relief as the OP is already paying a lot in to their pension.

bostonerimus

Do you feel lucky?

I hate interest only mortgages as you are always left having to pay off the principal at the end. If you have enough in your 25% tax free pension lump sum and or ISAs that you can use that's great. But this is a bill you know you'll have and what happens if it comes due during a market crash. So if you are going to invest to pay off the mortgage rather than making payments against principal do it in something that's fairly low risk.

kidmugsy

OP: is your current occupational pension a DB scheme? If so, is it one where you expect to be able to withdraw much of the AVC money tax-free?

Thrugelmir

pinklady21 wrote: »

Currently owe around £160k on interest only.
I could overpay around £500 - £600 per month and have it paid off by the time I reach 65, which is my expected retirement age in 15 years time.

Worth modelling some "What If" scenario's. Anything could happen in the next 15. We are not even 10 years forward from the near collapse of the entire UK banking system. While times may feel normal they most certainly aren't.