Mortgage versus pension

Cgreen13

We are currently paying off an extra £500 a month on our mortgage and are wondering whether we would be better paying this towards our pension instead. Our mortgage rate is 1.9% and we have 18 years left to pay.

atush

Given the tax relief, not to mention any extra employers contribution- the pension is a no brainer.

But for peace of mind you could put 100 onto mtg and 400 into pension if you wanted to (or any combination)

AnotherJoe

If you are high rate tax payer(s), extra into pension is as close to a no-brainer as you'll ever find.
If standard rate, pension still wins but depending when you plan to retire and your interest rate you may still decide to overpay some, though I wouldn't because you have a long time for stock market growth in a pension to overhaul a mortgage at perhaps 2% even with the odd crash along the way? May be if rates go back up to 5 or 6 %, reconsider.

kev2009

Might also be worth overpaying mortgage to get a better deal on a fixed rate when your LTV comes down?

My mortgage rate is currently higher than I can get on any savings account so i plan to make 1 lump sum over payment this year and next as my 5 year fixed rate ends next year so i'm hoping to get a better rate when I take out probably another 5 year fixed rate.

Current thinking is to overpay to reduce any effect of interest rates going up also as well as getting my monthly payments down to a more reasonable level as I've still got 27 years to go on mortgage, which naturally I don't want to have for that long hence the OP to reduce the time or at least reduce the monthly payments considerably.

Kev

atush

i would hope someone close to retirement (ie 55+) would not be carrying a mtg on a high %, so might not have LTV problems. But is a valid point,

JoeCrystal

Cgreen13 wrote: »

We are currently paying off an extra £500 a month on our mortgage and are wondering whether we would be better paying this towards our pension instead. Our mortgage rate is 1.9%, and we have 18 years left to pay.

You should do both ideally. You need to work out if you are setting aside enough to be on track for your retirement goal. If it is insufficient, then, by all means, increase the pension contribution. You got a lot of time left to pay off the mortgage after all.

shangaijimmy

I've had the same dilemma recently. Everything in my heart says 'mortgage' to try and get rid of the debt, but every voice in my head says 'pension'. So i went for 25% mortgage and 75% pension split of the spare cash and worked back from aiming to have mortgage paid by 50 an aiming to start retirement (however that looks) at 58.

MEM62

Cgreen13 wrote: »

We are currently paying off an extra £500 a month on our mortgage and are wondering whether we would be better paying this towards our pension instead. Our mortgage rate is 1.9% and we have 18 years left to pay.

It's not rocket science.

You make your mortgage payments with money that you have already paid tax on and will save 1.9% on any additional capital that you repay. You pay into your pension tax-free and it is reasonable to expect that money to earn you inflation plus 5% in the long term.

You will be significantly better off by throwing the money at your pension rather than the mortgage - particularly if you are a 40% tax-payer. If there is any balance remaining on your mortgage at the point of retirement you can use some of the (substantially larger) 25% TFLS that you will have to pay it off.

If, at any point, interest rates and /or pension rules change and that balance changes then your can rethink & adjust your plan as appropriate.

Marcon

MEM62 wrote: »

You will be significantly better off by throwing the money at your pension rather than the mortgage - particularly if you are a 40% tax-payer.

One factor you do need to consider is the security of your current employment/income stream. If you suddenly faced redundancy, with little other than statutory redundancy pay, do you have enough savings to tide you over for a decent period until you can get a new job? Throwing money at your pension is all very well, but not if you then have to borrow to live today. A smaller mortgage means lower outgoings now. There's always a balance to be struck in these things and it isn't always easy to find.

MEM62

Marcon wrote: »

One factor you do need to consider is the security of your current employment/income stream. If you suddenly faced redundancy, with little other than statutory redundancy pay, do you have enough savings to tide you over for a decent period until you can get a new job? Throwing money at your pension is all very well, but not if you then have to borrow to live today. A smaller mortgage means lower outgoings now. There's always a balance to be struck in these things and it isn't always easy to find.

That is not what the OP asked and it is a sperate subject - contingency fund. Personally, I would recommend at least six months basic living costs.

If you are in an industry where work is sporadic, unreliable or insecure (actor, agency worker, contractor etc) then you may plan differently but that is not the case for the majority of us and the OP gave no indication that it applied to them.

For most, prioritising clearing the mortgage over everything else is an emotional decision rather than a financially astute one.

barnstar2077

I recently remortgaged and extended my term by about seventeen years until I am 67. I am now putting the difference into my pension. My mortgage is not very big though, so I could always pay it off at 58 when I take my pension if I want to.