Curveballs and best laid plans....

michaels

hugheskevi wrote: »

Personally I view mortgage vs pension vs ISA as a balance to be struck between financial efficiency and financial resilience. Pensions come top for efficiency, but before age 55 are very poor for resilience (unless you value being able to claim more means-tested benefits in the event of trouble).

S+S ISAs are a good, flexible way to have resilience whilst sacrificing little or no efficiency. In the event of need they are there to draw on, and if the need doesn't arise they can be used to fund living costs to enable more to be directed into a pension later in life so you don't lose out on the efficiency of tax relief. Mortgage payments give limited financial resilience, but may be efficient if they enable a lower interest rate, eg, down to about 60% loan-to-value.

I found that very early in life, financial resilience came from insurances such as death, ill-health, redundancy, etc. As my ISAs grew in size, they became sufficiently large as to be able to fund several years of living costs if required, providing very good resilience to financial shocks.

Eventually ISAs grew beyond the size of my mortgage and other (efficient) debts. At the current time our household position is mortgage at £45K, 0% credit card balance at £50K, cash/savings at £52K and ISA balance at £166K. Making full ISA contribution for my wife and I each year is priority (hence why holding so much cash saving currently), with extra going to mortgage (pension is already adequate from previous additional contributions, so there are limited additional contributions to that now).

Putting all spare money into a mortgage can actually reduce resilience, which I think is best measured as the period for which you could fund normal living from existing resources if all income ceased immediately. You are more resilient with a larger mortgage but funds to make repayments than with a smaller mortgage but far less funds to meet repayments.

We have a large mortgage IO (although only about 40% ltv) that is effectively completely offset in savings accounts (on the turn we make a small profit). The beauty of this is we have a large pot to live off should the s h t f that could be replenished using tfls at 55 or downsizing, thus not needing other cash savings so all extra income can go into our pensions which is most tax efficient.