Do I need financial advice?

DrPips

Hi all,
I know nobody will be able to give me specific advice, but just a brief description. I’m due to pay off a loan soon so will have a significant amount of extra money available each month. Is the accepted wisdom to just pay off as much extra on my mortgage as possible with this extra money, or would a combination of that and saving more be the best option?  

Would I benefit from seeing a financial advisor to discuss the options available, or is this something I could figure out for myself? I’m a maths teacher, so numbers aren’t a problem! 😂. If a financial advisor is the way to go, what kind should I be looking for and how much should I expect to pay?

Thanks in advance,
Dom

Albermarle

DrPips said:

Hi all,
I know nobody will be able to give me specific advice, but just a brief description. I’m due to pay off a loan soon so will have a significant amount of extra money available each month. Is the accepted wisdom to just pay off as much extra on my mortgage as possible with this extra money, or would a combination of that and saving more be the best option?  

Would I benefit from seeing a financial advisor to discuss the options available, or is this something I could figure out for myself? I’m a maths teacher, so numbers aren’t a problem! 😂. If a financial advisor is the way to go, what kind should I be looking for and how much should I expect to pay?

Thanks in advance,
Dom

Addressing the question in the first paragraph, mortgage vs savings/investments/pension is a regular question in this forum , so maybe worth spending some time scrolling through a few pages to find a similar one.
Often the decision is emotionally driven as people have a desire to get the mortgage off their backs . However often rationally it is not the best thing to do, but this depends a lot on your personal circumstances . If you can supply some figures, like the size of the mortgage , info on your current mortgage interest rates , job security, other savings/investments./pension and your age .
In this case you will get more targeted comments.

The second question is also discussed a lot on this forum and let us just say there are 'varied opinions '
It partly depends on the sums involved and if you know anything about investing or not .
A one off consultation could cost you a couple of Grand at least .

lr1277

My advice is as follows:
Do you have any other loans/debts outstanding? Is so, pay the off.

Then do you have short term/emergency savings? I would suggest 3-6 months worth of total expenses as your emergency savings goal. By total expenses think about how long you will not have an income and needing money to fix a boiler say, at the same time. Be pessimistic in your forecast for regaining an income.
After that I would look at medium term/long term savings. By medium term I mean money you will need in 5 years.
By long term I mean pensions. But as a teacher, I am hoping your pension is sorted.
Once you have decided on goals, you should find products to match your goals. 

In terms of both savings and investments, thinkof the following:
When will I need the money
How much am I prepared to lose before I get my money out.
HTH

Brie

And for variety on the opinions here's my take on it.....

I can't be asked to have a bank account with money in it not doing something so would always pay off any sort of debt first.  Highest interest (likely credit cards) to lowest (likely mortgage).  After that you can think about saving.  Most people's mortgages cost them hundreds per month if not thousands so the sooner that's out of the way the easier the saving will be.

My logic on this is that if you have no debt then you are less likely to need an emergency fund, particularly a large one.  This assumes that you may also have a line of credit (aka cards) available to tide you over.  

DireEmblem

Not enough information there for us to provide a 'view'.

My view would be:

1) Ensure you have approximately 6 months of easy access cash somewhere(emergency fund), ideally split across at least 2 accounts.  You never know if one of the big banks IT systems may go down just when you need access.

2) What LTV do you have on your mortgage/how long is left to pay it off.  For example, my mortgage interest rate is 1.14%, and I have 26 years left to pay.  Rather than overpay, I put the overpayments into a global equity fund, with a view it will stay there for at least 10-15 years.  Its never guaranteed, but I'm hoping for at least 5-6% average annual return on that(so you can see which of the two should be better for me long term).  If your mortgage term is shorter, or your interest rate much higher, then it may make more sense to work on reducing your LTV rate to less than 60%.

3) What is your risk appetite/timeframe.  If you do plan to 'invest', these are key questions.  Low risk/easy access to funds typically means investing in safer investments, which tend to have lower returns.  High Risk/longer term access generally means you can exposure yourself to more equity than cash/debt, which potentially means better returns long term.

4) Check out any benefits you may get from increasing your pension contributions.  Lets say you are a 20% tax payer, you could potentially get that back and a little bit more depending on the setup with your employer.  Then when you 'retire', you can take a 25% lump sum tax free, so in effect you are only paying 15% tax rather than 20% by setting part of your salary aside until you retire.

There is no 'one size fits all' to saving/investing, its very much personal.  Hopefully these questions help you decide what is best for you.

MX5huggy

You probably don’t need a financial advisor (actually an Independent FA, no one needs an FA they don’t have to work in your best interests where as a IFA does). They are only interested in people with significant sums to invest because their fees are not worth paying if you only have small amounts (less than £100k).

You should have some emergency savings (although I presume your job is secure so maybe less than others). 

Then:-

Simon is 45 and has at £150000 repayment mortgage at an interest rate 1.89% fixed for 5 years and then 10 years till it’s finished. He will then retire he has decided to pay off £500 per month extra till the balance is cleared.

Sinita is also 45 and has the same mortgage. She has decided to invest £500 per month (of net salary) in a SIPP she is a standard rate tax payer and is expecting an average return on her investments of 7% per annum. 

Will Simon or Sinita be on a beach in the Seychelles for their 60th birthday? Show your workings and remember 25% of a pension. Is tax free on withdrawal. 

Albermarle

Also remember that Sinata's pension contribution will have tax relief at 20% added to it .

MX5huggy

Albermarle said:

Also remember that Sinata's pension contribution will have tax relief at 20% added to it .

You’ve given the game away that was for the 5 mark of this 5 mark question. 

Albermarle

Sorry , but as the OP is a teacher and sitting on a nice DB scheme they will probably be blissfully ignorant of the tax rules around DC pensions, so I thought I would give a helping hand .

DrPips

Hi,

Thanks for all your responses, I really appreciate it.  To answer some of your questions:

I currently have about £9k in savings, a mixture of Premium Bonds and savings accounts. I don’t currently pay into an ISA as I’ve been paying off this loan.

Mortgage has 27 years left currently, with a LTV of less than 60%.  Balance of £175k.  Interest rate is 1.54% but I’m on a tracker so I can switch when I want to and could get a 0.94% 5 year fix with my current provider.  I’m on the tracker for precisely this reason. My other fixed term expired last year and I wanted to be able to switch when this loan was paid off.  I want to bring the mortgage term down to 15 years so that I can look to retire or at least significantly reduce work at 55ish.

I’m a teacher, so job security is pretty good, I also have life insurance which covers unemployment due to redundancy.

I don’t have any debt apart from one months balance of this loan and my mortgage.

The loan I’m paying off will net me an extra £850 a month.  If I were to use £400 of this to reduce my mortgage, this will bring it down to the desired 15 years.  The rest I could then use to invest as I wouldn’t want to start taking my pension until I’m 60 due to the significant reduction I’d incur if I started taking it at 55.

Does this all seems logical and sensible?

Thanks again.

billy2shots

Statistically, investing will financially be better (based on past performance which investing should never be based on!)

Psychologically , paying the mortgage off earlier wins.

You suggested a middle of the road 50/50 (ish) split. 

I see absolutely nothing wrong with that.