Overpay mortgage or save into LISA or Pension?

parsnip88

Alexland said:

Hard to comment without knowing your LTV, mortgage fix duration or if you intend to upgrade to a bigger property in future but generally it's a balance between paying off your mortgage while also accumulating via the most tax efficient Pension and/or S&S LISA wrapper while keeping some money accessible via ISAs, etc.

It's 87% LTV, 5 year fix. We dont intend to upgrade 

parsnip88

JustAnotherSaver said:

Jeez. I wish I was average. I must be a pauper on a combined £40k-£45k.

Sorry! Didn't mean to offend

parsnip88

In summary taking into account everyone's advice it seems it would be sensible to
potentially reduce my LTV in the short term by overpaying mortgage to take advantage of better mortgage offers after my 5 year fix is over.
invest in a s&s isa as it will be a better rate of interest than what my mortgage is and if needs be I can access the money for well anything life throws at me.
Out of our £60k combined I earn £20k as I only work 4 days so it might seem a good idea to pay in more to my pension so I pay less tax 

Sound sensible?

parsnip88

Another_Saver said:

parsnip88 said:

Hi everyone I am stuck as to which is the better option. To overpay my mortgage or invest in a LISA or contribute more to my pension.
I currently have a £184,000 mortgage at 2.23% over 30 years. I have zero debt and 6 month emergency fund saved up. I am 32 years old. 
I currently contribute 10% into my pension which is matched by my employer into a medium risk fund via Legal and General.
Our collective household income is £60k so fairly average but we can afford to pay into only one of the above.
So do I invest into a cash LISA, pay more into my pension or overpay the mortgage. 

Any perspective would be greatly appreciated.
Thankyou

National median household take home income is £30k so you're doing comfortably better than fairly average.
At 32 I think most people in the forum would agree that a higher risk fund, maybe even 100% equities would be a more appropriate choice for your pension as you have at least a quarter century to retirement.
If you're 6 month emergency fund is your total savings, my view would be to build up savings and investments you can access before retirement, such as starting a stocks & shares ISA, before you look at LISAs, SIPPs or additional pension contributions.

I do have the option of changing the risk to High on my pension plan...

parsnip88

El_Torro said:

Why do you want to pay into a cash LISA? You already own a property so the only real benefit in a LISA is to wait until you’re at least 60 before taking any money out of it. Why do you want to hold cash for 28 years? If you’re going to hold a LISA go with a Stocks & Shares one.

In your position I would probably invest in a Stocks & Shares ISA, it’s more flexible on when you can access your money than a LISA is. It depends on your situation though. You may want to put some in your pension if the 20% of your salary which is already going in there isn’t enough.

I would avoid mortgage overpayments, simply because you can get better returns investing. However it might make sense to overpay in the next few years to get your Loan to Value ratio down to get a better mortgage interest rate. If you already have at least 40% equity in your property you won’t be getting a better interest rate though.

thankyou, yes I'm considering investing more into my current pension scheme to as it could be more and as I don't earn a huge amount I could invest enough to not pay income tax

parsnip88

enthusiasticsaver said:

It depends what your financial objectives are.  Do you have children or will you be having them?  Are you intending to move and do you want to retire early or are you planning to work until normal retirement age? 

If you are not bothered about the psychological benefit of being mortgage free economically it makes more sense to invest.  At the present time though your mortgage is more than 3 times your income so if you plan on having children and your income may reduce or outgoings increase with childcare costs and it is not due to be repaid until the age of 62  then overpaying the mortgage may be more beneficial at this time.  If you already have children or don't plan on having them  and you are not bothered about still having a mortgage in your 60s then you could comfortably invest instead. 

Yes we intend to have children soon but our childcare costs will be minimal thanks to family and my working pattern. Dont intend to move or retire early ( I wish!). 

steampowered

parsnip88 said:

In summary taking into account everyone's advice it seems it would be sensible to
potentially reduce my LTV in the short term by overpaying mortgage to take advantage of better mortgage offers after my 5 year fix is over.
invest in a s&s isa as it will be a better rate of interest than what my mortgage is and if needs be I can access the money for well anything life throws at me.
Out of our £60k combined I earn £20k as I only work 4 days so it might seem a good idea to pay in more to my pension so I pay less tax 

It sounds like you have a good idea of what you are doing so it all sounds very sensible.

Mortgage rates drop a fair deal once you get below 85% LTV, and drop again once you get below 80%. After that point you start encountering diminishing returns. it might be worth planning to get down to 85% or even 80% LTV by the end of your 5 year fix. You might get there by a combination of mortgage repayments and slight house price increases without needing much in the way of overpayments.

If you are a basic rate tax payer there is a tax saving from boosting your pension contributions, but not as significant as if you were a higher rate tax payer. Personally I'd prefer the S&S ISA route in case the money is needed before retirement (particularly if you might have children) but that's your call. 

parsnip88

steampowered said:

parsnip88 said:

In summary taking into account everyone's advice it seems it would be sensible to
potentially reduce my LTV in the short term by overpaying mortgage to take advantage of better mortgage offers after my 5 year fix is over.
invest in a s&s isa as it will be a better rate of interest than what my mortgage is and if needs be I can access the money for well anything life throws at me.
Out of our £60k combined I earn £20k as I only work 4 days so it might seem a good idea to pay in more to my pension so I pay less tax 

It sounds like you have a good idea of what you are doing so it all sounds very sensible.

Mortgage rates drop a fair deal once you get below 85% LTV, and drop again once you get below 80%. After that point you start encountering diminishing returns. it might be worth planning to get down to 85% or even 80% LTV by the end of your 5 year fix. You might get there by a combination of mortgage repayments and slight house price increases without needing much in the way of overpayments.

If you are a basic rate tax payer there is a tax saving from boosting your pension contributions, but not as significant as if you were a higher rate tax payer. Personally I'd prefer the S&S ISA route in case the money is needed before retirement (particularly if you might have children) but that's your call. 

thankyou, I'll do a few sums to see if in 5 years what my LTV will be.

parsnip88

parsnip88 said:

steampowered said:

parsnip88 said:

In summary taking into account everyone's advice it seems it would be sensible to
potentially reduce my LTV in the short term by overpaying mortgage to take advantage of better mortgage offers after my 5 year fix is over.
invest in a s&s isa as it will be a better rate of interest than what my mortgage is and if needs be I can access the money for well anything life throws at me.
Out of our £60k combined I earn £20k as I only work 4 days so it might seem a good idea to pay in more to my pension so I pay less tax 

It sounds like you have a good idea of what you are doing so it all sounds very sensible.

Mortgage rates drop a fair deal once you get below 85% LTV, and drop again once you get below 80%. After that point you start encountering diminishing returns. it might be worth planning to get down to 85% or even 80% LTV by the end of your 5 year fix. You might get there by a combination of mortgage repayments and slight house price increases without needing much in the way of overpayments.

If you are a basic rate tax payer there is a tax saving from boosting your pension contributions, but not as significant as if you were a higher rate tax payer. Personally I'd prefer the S&S ISA route in case the money is needed before retirement (particularly if you might have children) but that's your call. 

thankyou, I'll do a few sums to see if in 5 years what my LTV will be.

in 5 years with no overpayments it will be down to 76.8% LTV so looks like overpaying will be a waste of time really consider I'm in a fix for 5 years. 

parsnip88

S&S ISA opinions... DIY or Ready made portfolios?
Moneybox or HL