Overpay mortgage or pension?

mcyizml3

Hi I’m able to overpay my 2.35 percent mortgage or pay more into my pension. My pension is lower than I’d like but then the sooner my house is paid off the better. Any thoughts? 

MaxiRobriguez

This topic comes up a lot - do feel free to search previous threads.

The short of it is that paying into a pension is almost certainly more worthwhile to you as you get to avoid income tax (and potentially national insurance) on your contributions in. 

However the drawback is that money is locked away and so you need an alternative source of money to dip into if things get tight.

Some people also like the feeling of being mortgage free, and so choose to make mortgage overpayments even though they are fully aware that £ wise it would be better going into a pension.

bostonerimus

Why not split the money up and do both?

jimjames

mcyizml3 said:

the sooner my house is paid off the better. Any thoughts? 

I'm not sure why you think that's the case? It might be from an emotional viewpoint but from a financial perspective it's unlikely to be the case when pension or investments can grow at more than 2.35% especially with tax relief added.

ratechaser

MaxiRobriguez said:

This topic comes up a lot - do feel free to search previous threads.

The short of it is that paying into a pension is almost certainly more worthwhile to you as you get to avoid income tax (and potentially national insurance) on your contributions in. 

However the drawback is that money is locked away and so you need an alternative source of money to dip into if things get tight.

Some people also like the feeling of being mortgage free, and so choose to make mortgage overpayments even though they are fully aware that £ wise it would be better going into a pension.

That would be me. Heart won out over head, as it were, but my eyes were open at the same time.

OP - totally a personal decision, for me, the feeling of security of not owing anyone anything (and hopefully forever) outweighed the opportunity cost. Only you can decide if it's the same for you or if you want to take a more analytical approach...

MX5huggy

bostonerimus said:

Why not split the money up and do both?

Because it’s a sub optimal approach. In fact remortgage and pay even more into the pension, could be the best thing to do. 

Presuming it’s a repayment mortgage, consider the action needed if interest rates rise, from nothing it’s fixed till the end to sell a kidney to make it affordable.

mcyizml3

Hmmm I see so the growth in my pension and lack of tax on the payments will outweigh the savings on the 2.3 percent each year... 

MX5huggy

Yes, need more information to work it out but you can use the mortgage overpayment calculator on here vs Vanguard pension calculator to see the difference. Clearly there’s risk with investing but you could go for the safest investments and still beat paying off mortgage. You pay tax on the pension when it pays out but 25% is tax free. Then depending on your circumstances you might be paying less tax at that point. 

Albermarle

mcyizml3 said:

Hmmm I see so the growth in my pension and lack of tax on the payments should outweigh the savings on the 2.3 percent each year... 

Note the subtle word change in bold.
The decision also depends on the security of your employment . The more secure your job, the more the pendulum swings in favour of pension, and vice versa. 

Fernastian

Personally I'd overpay mortgage. Like someone else said, nice not to owe anyone anything, or less anyway.

Depends on your age maybe, if you are younger then pay off mortgage sooner and have more spare cash each month for pension?

Have you used the overpayment calculator on this site?

MaxiRobriguez

To balance out the two people who've said their preference to overpay.

My preference is to pay as little on the mortgage as possible in order to push as much into the pension as possible. My mortgage remaining has actually increased by about 50% (offset mortgage, cash has been moved out of the offset) in the last three years but my pension total in that time frame has quadrupled.

But, I am young, mobile, in relatively secure employment, have no other debt and if absolutely desperate to the point where couldn't put food on the table then could borrow from family.