Mortgage ... or pension?

Skinnylatte

Zero_Sum wrote: »

A lot of people opt for mortgage as there is a big psycological element to it.
But in many cases, there are usually better options than overpaying now that rates are low. Long term it doesnt always make sense to pay off mortgage early.

Why doesn't it make sense to pay off the mortgage earlier?

Zero_Sum

Skinnylatte wrote: »

Why doesn't it make sense to pay off the mortgage earlier?

As you said, being a 40% tax payer the returns are better on your pension.
The average return in a S&S ISA over say a 25 year period is much better than current mortgage rates.
Id say overpay to get your mortgage under 40% LTV, then invest future overpayments in other options. Theres even better cash options like putting them is regular savers then on maturity lock it away for 5 years. (Of course theres a risk of rates going up, but personally think theyll at the current level for a while yet)

Skinnylatte

Zero_Sum wrote: »

As you said, being a 40% tax payer the returns are better on your pension.
The average return in a S&S ISA over say a 25 year period is much better than current mortgage rates.
Id say overpay to get your mortgage under 40% LTV, then invest future overpayments in other options. Theres even better cash options like putting them is regular savers then on maturity lock it away for 5 years. (Of course theres a risk of rates going up, but personally think theyll at the current level for a while yet)

OK thank you :beer:

Magnus91

I think if you're in your forever home (or will only downsize in the future) then investing your money elsewhere makes sense if the returns are better.

But my extra money will be needed for a future house move and I can't say with certainty that that won't happen within the next 5 years, which is the minimum length of time generally recommended for investing in stocks.

However, I think if I was a higher rate taxpayer then I would consider at least investing the amount above the threshold into my pension. Unfortunately I'm not earning enough for that to be an issue

SonOf

Skinnylatte wrote: »

Why doesn't it make sense to pay off the mortgage earlier?

Higher rate taxpayers get 40% of their pension contribution paid for them in tax relief. Indeed, it could be more if they are getting a reduction/removal in child benefit or their personal allowance is being removed (pension contributions reduce your gross salary back and can qualify you for those things to be returned to you).

So, a £100 into the pension is only costing £60.
Whereas £100 into the mortgage is costing £100.

Pension investment returns on bog-standard middle of the road funds come in around 5-6% a year. Mortgage interest rates are currently lower than that by some way with most people.

Higher rate taxpayers overpaying their mortgage on a whim rather than a reason (as there can be reasons) are losing a lot of money.

Whiterose23

The general consensus seems to be to spread it out across mortgage, pension and savings. I think that's probably a good balance as it gives the emotional satisfaction of paying down the mortgage, plus the contentment of investing and growing your money.

Skinnylatte

Whiterose23 wrote: »

The general consensus seems to be to spread it out across mortgage, pension and savings. I think that's probably a good balance as it gives the emotional satisfaction of paying down the mortgage, plus the contentment of investing and growing your money.

I'm going to do just this

lassfarfromhome

I think you just have to work out what makes sense for you given your particular situation and priorities. I used to absolutely hate having a mortgage and paid it down very aggressively. Now, the monthly payments are really low and I have twice the outstanding debt in an ISA so I no longer give it a moment's thought. So, now, everything goes into a SIPP. I'd probably be further ahead if I had prioritised the SIPP earlier, but it felt right at the time.

Something to remember is that the earlier money is invested in the stock market (hopefully in a low cost index tracker) the longer it has to grow. There's an opportunity cost to paying down the mortgage. That's same money could have gone into the pension. If you delay putting an amount in the pension by a year, you a not missing out on the first year's growth, but on the final year's growth which should be much greater.

There's no right or wrong answer though