Overpay mortgage or pension?

house_help

It can also depend on how long you will be in the house what next plans are. I have moved more recently to much more in pension having originally concentrating on OP mortgage.

Our first home was bought nearly 10 years ago and priority then was OP mortgage to reduce LTV and build equity to enable us to move up to bigger place. We moved after 6 years into current home which was +66% purchase price v first house but only +27% mortgage (when we bought the first one), mainly thanks to significant OP across those years. If the OP had gone in pension we may not have been able to afford the house or at least had a much larger mortgage paying high interest on much large sum.

Now we are in our long term home I am paying only small mortgage OP each month (only because the interest rate went down but I kept the std payment the same so small amount became and OP), but heavily putting cash in pension. For me the switch has come at the right time because salary now above the child benefit threshold and with 2 kids and putting enough in SIPP to bring me down to £50k I am getting 55% tax and child benefit charge relief on the 50 to 60k part.

george4064

Just a further point to add what’s already been posted, if you are at a particularly high LTV and/or are close to a new LTV ‘band’ then mortgage overpayments could move you into a better band which means you can move to a lower interest rate when you next come to remortgage.

Otherwise if you’re not sure, just do a bit of both.

Thrugelmir

Money contributed to the pension pot is inaccessible for a long time. Once committed there's no going back. 

foofi22

Thrugelmir said:

Money contributed to the pension pot is inaccessible for a long time. Once committed there's no going back. 

Equally, the money contributed to a mortgage is "inaccessible" (apart from the odd exception)

Alexland

Given most people get old putting money into a pension is just as necessary as paying down the mortgage if not more so because the pension money needs to be invested for as long as possible to even out market returns and get big enough to provide a meaningful substitute to earned income.
After making the best use of pensions if you still have spare money then investing in S&S via ISA(s) provides accessibility (although valuations can be volatile) and after a while the security of seeing ever more substantial dividend payments helps to cover the risk if running an otherwise unnecessary mortgage.

Mickey666

foofi22 said:

Thrugelmir said:

Money contributed to the pension pot is inaccessible for a long time. Once committed there's no going back. 

Equally, the money contributed to a mortgage is "inaccessible" (apart from the odd exception)

Why do you say that?  It's pretty easy to get a new mortgage when you own your house outright . . . . or at least it was when I did it.

Thrugelmir

foofi22 said:

Thrugelmir said:

Money contributed to the pension pot is inaccessible for a long time. Once committed there's no going back. 

Equally, the money contributed to a mortgage is "inaccessible" (apart from the odd exception)

Paying down the mortgage has a wide range of benefits and offers considerable flexibility. In the worst possible scenario such as relationship breakdown, mortgage overpayment wins hands down for the majority of people. 

bostonerimus

MX5huggy said:

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.

I always like to back a horse to "place" rather than backing it to win because of the greater risks involved. Paying off the mortgage might not be the best if stock prices continue to climb and interest rates stay low, but what if they don't, and there's always the rising value of houses to consider...but they might go down too. We are both using the conditional tense a lot. Going into retirement without a mortgage is certainly nice psychologically and it also takes a lot of pressure off your portfolio in retirement. Remortgaging is ok if it's to get a lower interest rate, but I would never do it to take money out of the property to invest. Leverage can increase gains, but it can also increase losses.

When I was happy with my pension and saving contributions I then started making extra mortgage payments as a diversifier and with the goal of being mortgage free before I retired. I achieved that and then had a great deal more to invest and an enormous amount of worry free financial freedom. I don't care if stocks go up or down because I don't have to generate money to pay the mortgage. Is that optimal financially, I don't know, but it is very nice from a quality of life perspective.

Ballard

I don’t think that it’s simply a case of which option gives the best long term wealth. To me the idea of paying off my mortgage and thereby reducing the effects of a change in circumstances (eg redundancy) meant that that was the way I went. In my case I was made redundant about 5 years after repaying the mortgage so whilst it wasn’t a pleasant time I knew that I always had somewhere to live. Realistically I’d have only had maybe £15k left anyway at that point but it was a comfort to have nothing. 

I’ve recently moved and have a new mortgage but I continue to pay 7.5% into my pension as my employer match up to that amount. I’ve retained a fair amount of cash as I have work to do on the new property but once I’ve sorted that out I will look at my options to overpay the mortgage and/or fund the pension. 

foofi22

Mickey666 said:

foofi22 said:

Thrugelmir said:

Money contributed to the pension pot is inaccessible for a long time. Once committed there's no going back. 

Equally, the money contributed to a mortgage is "inaccessible" (apart from the odd exception)

Why do you say that?  It's pretty easy to get a new mortgage when you own your house outright . . . . or at least it was when I did it.

In general, you can't pay towards your mortgage and a year or two later decide you want that money "back".

Not sure why someone actively overpaying their mortgage would then take out a new one once they own their house outright?!