Higher Rate Tax Payer - Should I overpay?

FIRSTTIMER

Hi,

I took out my mtg over 40 years to keep payments down, I am contemplating reducing the term to 30 years when I remortgage - however, I seem to be getting advised to not do this and continue with the same term and just overpay into my S&S ISA/LISA and/or pension instead. Worst case scenario, keep payment down in case of emergency and repay as extra standing order....Anyone any thoughts on this?

MTG rate currently 1.74% with First Direct.
VANGAURD S&S return is currently 6.75%
LISA 1%
PENSION - government care one

Thanks in Advance

middleclassbutpoor

Hi

Lets look at your options

Pension contribution

Your pension is the government career average scheme so you pay a % of your income into the scheme which is fixed. if you were to decide to add more money towards your retirement then you would need to look into setting up an AVC, which used to be done through prudential.

The benefits of paying into your pension would certainly mean you basic rate tax band was extended meaning that you would have some good tax savings. How much benefit would depend how far into the HRT band.

There could be other benefits to paying into your pension as it could in essence provide benefits such as allowing you to have child benefit paid - if you have children and earn over £50k.

The downside to paying into a pension.....Your additional payments would be locked away until you were aged 55-58 depending on your age now.

Overpaying your mortgage

The benefit of overpaying your mortgage is that you reduce your debt more speedily.

You are only saving 1.75% currently but it could put you in a better position in the longer term should interest rates rise in the longer term.

The downside is that again if you ever need that money again, unless you have an offset mortgage, you are at the mercy of lenders to lend you money to get it back out of your property.

Paying into your S&S ISA

You may find that you want to keep that money quite flexible and just keep paying into your ISA would do this because you can build a pot which over the medium to long term has the potential to out perform your current mortgage rate.

You could access at anytime.

However you are not guaranteed a return and your capital is not guaranteed and if you need the money at the absolutely worst time, you are at the mercy of markets and could end up with less money than you invested.

Paying into your LISA

Whilst it doesn't offer you the same tax benefits of the Pension, there are some benefits to doing this. You need to account for the bit the Governement adds onto it which on top of your 1% return would make it better than just paying off your mortgage from a % return v % saved on interest.

Downside is that you are tied down with term and penalties if you want to access before hand.

Summary

They all have their for and against points. You need to probably seek professional advice with someone who can understand your full circumstances and situation.