Pay off Help to Buy, Overpay Mortgage or increase Pension pot

leicesterfarthing

Good afternoon, a bit of sage advice please. Sorry to post on the pension forum, but it seemed the most relevant part because we are in our late 40's and its all about "downsizing" and future planning

We have an outstanding mortgage of £187k on a house worth £475k

However we would only receive 80% of its value upon sale (£380k) as 20% is owned by the government under the help to buy scheme (equity loan)

We can, at a squeeze, afford to remortgage for the additional £95k. I'm 49, my wife is 47 and we have 17 years left to run on the mortgage.

If we do nothing, we are charged 1.81% interest on the 95k by the government agency (target) which is £150 a month rising to around 2% in five years time (around £200 a month) this interest payment remains until we sell or buy them out

The extra borrowing would cost us an extra £532 a month based on a five year fixed (we are fairly risk averse with mortgages)

So, the nett increase would be around £380 bearing in mind we would no longer be paying the government agency their fees

It will cost around £1100 to achieve this in legal costs etc.

Could we be doing something else? Should we just overpay on the existing mortgage? I'm mindful that the additional borrowing is at 2.1% interest, so that will cost us more than the equity loan interest in the first few years

We both have healthy pension pots (250k plus) and are higher rate tax payers, is this something we should be looking at paying more into? I would need to reduce my payments in to my pension in order to be able to afford the higher remortgage costs

The house is not our forever house, we are looking to move in 5 years time to a more rural house, probably around 80-90% of the value.

We have the choice to pay back half of the equity loan, but this would still cost the same in fees.

It's a five year old house, and it has only risen £10k in value since new

Answers on a postcard please!!!

Dox

See an IFA and get proper advice based on an understanding of all the facts. Well worth the fees.

kidmugsy

ilovehouses wrote: »

Keep paying into the pension? Take the higher rate tax rebate then pay off a chunk of mortgage when you're 55 with tax free cash?

What's the point of paying off a mortgage (other than feeling good) when you'd have to use post tax income and mortgage interest rates are so low?

Yep, that would be my instinct too. With all the usual assumptions - other debts paid off, emergency cash fund salted away, suitable insurance policies in place, ... - then bag the 40% relief while it's available. And if salary sacrifice is also available, even better.

MEM62

So, crux of your question appears to be 'shall I pay off a mortgage with money that has cost me 40% in tax or should I put the whole of that amount before tax into a pension that should earn me inflation +5% in the long term?'

For me at least, it's a no-brainer.

Even without considering you status as higher rate tax payers you would need a compelling reason over and above the financial one to pay of a debt costing you 1.8% with money that is earning you 5%.

FatherAbraham

MEM62 wrote: »

So, crux of your question appears to be 'shall I pay off a mortgage with money that has cost me 40% in tax or should I put the whole of that amount before tax into a pension that should earn me inflation +5% in the long term?'

For me at least, it's a no-brainer.

Even without considering you status as higher rate tax payers you would need a compelling reason over and above the financial one to pay of a debt costing you 1.8% with money that is earning you 5%.

I think your analysis is dangerously flawed.

The "debt" is costing far more than 1.8% p.a., because that's interest on an EQUITY loan. It's therefore costing 1.8% plus house-price inflation. That's ghastly.

Furthermore, you've failed to take account of income taxation when money is drawn out of the pension pot.

FatherAbraham

leicesterfarthing wrote: »

Good afternoon, a bit of sage advice please. Sorry to post on the pension forum, but it seemed the most relevant part because we are in our late 40's and its all about "downsizing" and future planning

We have an outstanding mortgage of £187k on a house worth £475k

However we would only receive 80% of its value upon sale (£380k) as 20% is owned by the government under the help to buy scheme (equity loan)

We can, at a squeeze, afford to remortgage for the additional £95k. I'm 49, my wife is 47 and we have 17 years left to run on the mortgage.

If we do nothing, we are charged 1.81% interest on the 95k by the government agency (target) which is £150 a month rising to around 2% in five years time (around £200 a month) this interest payment remains until we sell or buy them out

The extra borrowing would cost us an extra £532 a month based on a five year fixed (we are fairly risk averse with mortgages)

So, the nett increase would be around £380 bearing in mind we would no longer be paying the government agency their fees

It will cost around £1100 to achieve this in legal costs etc.

Could we be doing something else? Should we just overpay on the existing mortgage? I'm mindful that the additional borrowing is at 2.1% interest, so that will cost us more than the equity loan interest in the first few years

We both have healthy pension pots (250k plus) and are higher rate tax payers, is this something we should be looking at paying more into? I would need to reduce my payments in to my pension in order to be able to afford the higher remortgage costs

The house is not our forever house, we are looking to move in 5 years time to a more rural house, probably around 80-90% of the value.

We have the choice to pay back half of the equity loan, but this would still cost the same in fees.

It's a five year old house, and it has only risen £10k in value since new

Answers on a postcard please!!!

If it was worth buying 80% of the house using credit repaid from taxed income, why on earth is it not worth buying the remaining 20% using the same means?

Either buy the part of the house which you're currently renting from the state, or sell the part the house which you currently own, so that you can put that capital into your pension, and rent a residence.

kidmugsy

FatherAbraham wrote: »

I think your analysis is dangerously flawed.

The "debt" is costing far more than 1.8% p.a., because that's interest on an EQUITY loan. It's therefore costing 1.8% plus house-price inflation. That's ghastly..

It's not often that I disagree with you, Pops, but if house price inflation is going to become negative (and it seems to be that way already in parts of London) then presumably their costs become less than 1.8%, maybe even less than zero.

With an adroit flourish of market timing they could then exploit "we can, at a squeeze, afford to remortgage for the additional £95k" at close to the market bottom, when the necessary extra mortgage debt would be less than £95k. Yippee!

MEM62

FatherAbraham wrote: »

I think your analysis is dangerously flawed.

The "debt" is costing far more than 1.8% p.a., because that's interest on an EQUITY loan. It's therefore costing 1.8% plus house-price inflation. That's ghastly.

Furthermore, you've failed to take account of income taxation when money is drawn out of the pension pot.

Dangerously? That's a bit dramatic. But flawed, maybe. However, in order for that to be the case that would require a pretty drastic increase in house prices before the advantage is eroded. Bear in mind also that a lot of individuals that are 40% tax-payers when contributing to their pensions are 20% tax-payers when taking it.

leicesterfarthing

Thank you to you all for your advice! Really interesting. After some heavy duty spreadsheet work, and taking into account a sensible house price inflation rate, we have decided to do a combination of overpaying on the existing pension and increasing pension contributions. It is all very marginal, but we have concerns about the size and type of house that it is, new build and very large, but on a cramped new estate. I think it is vulnerable to any downturn. I trust the pension more. I!!!8217;m 49 and in six years I could always take the tax free lump sum to pay off some of the mortgage, but we will be on our way to our 80% house by then.

This forum is very useful, I particularly like the warnings about downsizing property, but we are eyes wide open on that front and would be happy with a smaller house in the same area. I!!!8217;ll let the government take the risk with their 20%!!

Sapphire

leicesterfarthing wrote: »

let the government take the risk with their 20%!!

Don't you mean taxpayers?