Is it better to pay extra into pension or overpay mortgage?

michaels

Think is not paying your mortgage down and instead paying into an investment (pension in this case) is actually the definition of an endowment mortgage - remember them and the miss-selling scandal?!

Personally I do this but I understand I am taking investment risk.

jamesd

I remember it and how overblown it turned out to be.

Key to that was investing too little, much less than the capital repaying part of a repayment mortgage. Then not monitoring and adjusting based on how well things go.

It's a pretty different case when it comes to using overpayment money or if interest only, investing at least  as much as the capital repayment part would be.

I still have an interest only offset mortgage with around ten years left. Investments are around ten times the mortgage balance... I was investing far more than just repayment since the money is also for retirement.

CookieMonster

Thrugelmir said:

How secure are your respective employments?  Not just a question of saving mortgage interest. Also a question as to what impact a sudden financial shock would have. When markets have been buoyant for a period of time it does draw people in. 

This is the reason I focused on paying down my mortgage.
My job is aligned to the UK Automotive Industry which is highly sensitive to recessions.
Also I couldn't afford tie up too much money in a pension that I can't access until 55yo at the earliest. 
Savings and ISA are being used now after paying off the mortgage:
I'll increase the pension payments when the ISA/Savings can cover the time until 55yo.
Not as efficient as it could be, but a safe-ish option for me (i.e. planning for a worst-case scenario).

samhartwell

I think I will be prudent and do a bit of both for now and continue to monitor the situation! Thanks everyone

atush

Pension...

dunstonh

michaels said:

Think is not paying your mortgage down and instead paying into an investment (pension in this case) is actually the definition of an endowment mortgage - remember them and the miss-selling scandal?!

Personally I do this but I understand I am taking investment risk.

An endowment mortgage meant having an interest only mortgage and an endowment policy alongside it to repay the full balance of the mortgage (hopefully).
Endowment mortgages had generations of successful payouts far in excess of target but started to go wrong for a combination of events that created a perfect storm.    However, those events also made people more wealth than had the old ways remained.   Lower interest rates, credit boom & lower inflation meant that gross investment returns fell.  Endowments needed x% a year to hit target.   The x% would vary across plans. Some were low and ok.  Most were set on 70s and 80s returns.     

When interest rates fell, people should have been told to pay an extra £20 or so to reduce the shortfall. However, endowments lacked premium flexibility due to tax rules. So, they couldn't change the amount.   And most people just took advantage of the extra money they were saving on the mortgage to spend there and then.

The average endowment mortgage was around £25pm cheaper than a capital and repayment mortgage.  £25pm x 25 years = £7500.  So, even if it fell short, usually it was less than shortfall.  And £25pm in the 90s was often more important than a £5000 shortfall at the end.

Paying into a pension and getting higher rate relief and having a capital and repayment mortgage is not close to being the same as having an interest-only mortgage and a repayment vehicle for it as the mortgage will be cleared from income.  Not the pension.

zagfles

michaels said:

Think is not paying your mortgage down and instead paying into an investment (pension in this case) is actually the definition of an endowment mortgage - remember them and the miss-selling scandal?!

Personally I do this but I understand I am taking investment risk.

Except endowments had massive commission to whoever sold you it, something like the first 2 years' premiums!!