Mortgage Overpayment - Any Downsides to consider?

Pointers

steampowered said:

Pointers said:

Thanks. In recent years I have started putting the maximum £40k into my pension and last year I also put the full allowance into my S&S ISA (its doing really badly atm but hopefully will recover) and so I think I'm making the most of these. 

I plan to keep putting more into my pension but I do have concerns regarding putting so much in and then not being able to draw it out for another 15 years. I think the minimum pension age is 58? 

With property if I get into financial trouble I could sell the house and downgrade to something smaller and so it feels more flexible to me.   

If you are already putting £40k a year into your pension, you'll hit the lifetime allowance pretty quickly.

I assume you are also filling your £20k stocks & shares allowance.

After that, the next best option will be unwrapped stocks and shares in a regular stock account. There's nothing wrong with that, the returns are still good, you are just subject to tax on your capital gains and dividend income.

You could also look at SEIS/EIS or VCT investments which like pensions have very attractive tax relief, though those are higher risk.

Having money tied up in property (which can take months or in a bad market years to sell) does not offer you more protection than having money in investments (like stocks) which can be sold at any time.

Looking at the GOV.UK website lifetime allowance is £1.073m so i am still a long way away form this. I have paid money into my pension steadily but unless the stock market rallies pushing my pension up significantly then I likely won't reach this level for at least 10 years. 

Or perhaps I'm missing something here? 

Yes, I have started maximising the £20k that i put into my S&S ISA. Its worth less than I put in currently but I know I need to keep it long term to see the benefit. 

I know a little about VCTs but this feels like a big step so I'm unlikely to go down this route. 

Pointers

getmore4less said:

Pointers said:

steampowered said:

Most people are much better off increasing their pension contributions or making use of their stocks & shares ISA allowance before overpaying the mortgage. 

It is highly likely that the return you would get from a pension or stocks & shares investment would exceed the interest you would save by overpaying the mortgage. Especially when you look at the long term, and especially once you get below 70% LTV.

In addition, using your pension and S&S ISA allowances has tax benefits. Overpaying the mortgage has no tax benefits. This is particularly important for higher rate and additional rate taxpayers.

MSE doesn't really cover pensions and S&S ISAs because the site doesn't really cover investing. If you do have disposable income, it is really important to invest a few hours of your time into understanding the basics of investing as this is likely to make £hundreds of thousands difference to your lifetime wealth.

Thanks. In recent years I have started putting the maximum £40k into my pension and last year I also put the full allowance into my S&S ISA (its doing really badly atm but hopefully will recover) and so I think I'm making the most of these. 

I plan to keep putting more into my pension but I do have concerns regarding putting so much in and then not being able to draw it out for another 15 years. I think the minimum pension age is 58? 

With property if I get into financial trouble I could sell the house and downgrade to something smaller and so it feels more flexible to me.   

The better LTV is often overhyped at the lower end

Once you hit 75%(70% for some lenders) the marginal gain going to 60% it often tiny and it is a big 10%-15% gap to bridge.

4 Feb 2022 rates Barclays reward rates 60% 75% £999 fee
2y 1.35% 1.37%
5y 1.39% 1.41%

75% to 60% is saving of 0.02% 
2y to a 5y is 0.04% increase.

With those differentials where the fee based products are better(Barclays that £100k+ on the 5y)  a 2+3 cannot recover the extra fee over just taking the 5y. 



40%+ tax money pension as it gets that head start

For those going into 40% fixing lifestyle and directing all the 40% into pension can make a lot of sense.
if hitting the limits with 40%+ money then alternatives come into play

ISA is a use or lose but accessible, potentially  useful for the medium term might need money but if not it will be a tax free source of cash 

Mortgage,  rates are low, not saving much and not often easy to recover if needed some options give more flexibility but at a cost in most cases higher rates.
in a rising rate environment fix mortgage then  variable saving can overtake the mortgage rate.


With dual income there are other consideration on structuring the finances, 
eg. if you can meet costs with just one income and the jobs are not likely to be hit by the same issues then the accessible savings can be quite low as the risk of needing to access is reduced.
For the disaster of both jobs going 1-3 months of costs in near instant access with back up if jobs don't happen of 12months accessible like the ISA with the plan being its unlikely to be needed so plan longer term for that pot)  

We took the non optimal route of premium bonds for instant(few days) access savings.

Offsets are very flexible but not so easy to find a decent one these days that stacks up against a cheap as chips fix and alternative places for the money.

I think some lenders still allow overpayment pots to be used to effectively give a holiday on payments

Some good points made here. Yes, the difference in the interest rate between the different LTVs is very small. I wonder though if rates start to rise and if the economy starts to worsen whether this premium might grow in the future if banks become more cautious about lending. This is more of a general question.  

Pointers

dimbo61 said:

I have been overpaying our mortgages for the last 17 years when rates were 5/6% while also building up our pensions.
You can only pay a max of £40,000 a year and Max pension pot of £1,070,000 I Think ?
Reducing your mortgage debt may well get you a better deal in 12 months if you can hit 60%LTV
Have a look at the Barclays and other lenders Offset mortgages

I'll have another look into offset mortgages but as another poster mentioned they do seem to be harder to come by these days. 

Pointers

Thanks for all your responses. Some very useful ideas and suggestions here. 
I think I'll try to continue to much as I can into my pension in the near term and enjoy the tax benefits. DC pension with Aviva was rising quite nicely but has lost value in recent months and my Vanguard S&S has performed very badly in recent months but nothing else to do but to leave the money in there and wait.     

getmore4less

Pointers said:

getmore4less said:

Pointers said:

steampowered said:

Most people are much better off increasing their pension contributions or making use of their stocks & shares ISA allowance before overpaying the mortgage. 

It is highly likely that the return you would get from a pension or stocks & shares investment would exceed the interest you would save by overpaying the mortgage. Especially when you look at the long term, and especially once you get below 70% LTV.

In addition, using your pension and S&S ISA allowances has tax benefits. Overpaying the mortgage has no tax benefits. This is particularly important for higher rate and additional rate taxpayers.

MSE doesn't really cover pensions and S&S ISAs because the site doesn't really cover investing. If you do have disposable income, it is really important to invest a few hours of your time into understanding the basics of investing as this is likely to make £hundreds of thousands difference to your lifetime wealth.

Thanks. In recent years I have started putting the maximum £40k into my pension and last year I also put the full allowance into my S&S ISA (its doing really badly atm but hopefully will recover) and so I think I'm making the most of these. 

I plan to keep putting more into my pension but I do have concerns regarding putting so much in and then not being able to draw it out for another 15 years. I think the minimum pension age is 58? 

With property if I get into financial trouble I could sell the house and downgrade to something smaller and so it feels more flexible to me.   

The better LTV is often overhyped at the lower end

Once you hit 75%(70% for some lenders) the marginal gain going to 60% it often tiny and it is a big 10%-15% gap to bridge.

4 Feb 2022 rates Barclays reward rates 60% 75% £999 fee
2y 1.35% 1.37%
5y 1.39% 1.41%

75% to 60% is saving of 0.02% 
2y to a 5y is 0.04% increase.

With those differentials where the fee based products are better(Barclays that £100k+ on the 5y)  a 2+3 cannot recover the extra fee over just taking the 5y. 



40%+ tax money pension as it gets that head start

For those going into 40% fixing lifestyle and directing all the 40% into pension can make a lot of sense.
if hitting the limits with 40%+ money then alternatives come into play

ISA is a use or lose but accessible, potentially  useful for the medium term might need money but if not it will be a tax free source of cash 

Mortgage,  rates are low, not saving much and not often easy to recover if needed some options give more flexibility but at a cost in most cases higher rates.
in a rising rate environment fix mortgage then  variable saving can overtake the mortgage rate.


With dual income there are other consideration on structuring the finances, 
eg. if you can meet costs with just one income and the jobs are not likely to be hit by the same issues then the accessible savings can be quite low as the risk of needing to access is reduced.
For the disaster of both jobs going 1-3 months of costs in near instant access with back up if jobs don't happen of 12months accessible like the ISA with the plan being its unlikely to be needed so plan longer term for that pot)  

We took the non optimal route of premium bonds for instant(few days) access savings.

Offsets are very flexible but not so easy to find a decent one these days that stacks up against a cheap as chips fix and alternative places for the money.

I think some lenders still allow overpayment pots to be used to effectively give a holiday on payments

Some good points made here. Yes, the difference in the interest rate between the different LTVs is very small. I wonder though if rates start to rise and if the economy starts to worsen whether this premium might grow in the future if banks become more cautious about lending. This is more of a general question.  

They have been narrowing there is not a lot of risk difference for a lender.

Why did you go 2y and not 5y last  change.

What analysis did you do?

Pointers

getmore4less said:

Pointers said:

getmore4less said:

Pointers said:

steampowered said:

Most people are much better off increasing their pension contributions or making use of their stocks & shares ISA allowance before overpaying the mortgage. 

It is highly likely that the return you would get from a pension or stocks & shares investment would exceed the interest you would save by overpaying the mortgage. Especially when you look at the long term, and especially once you get below 70% LTV.

In addition, using your pension and S&S ISA allowances has tax benefits. Overpaying the mortgage has no tax benefits. This is particularly important for higher rate and additional rate taxpayers.

MSE doesn't really cover pensions and S&S ISAs because the site doesn't really cover investing. If you do have disposable income, it is really important to invest a few hours of your time into understanding the basics of investing as this is likely to make £hundreds of thousands difference to your lifetime wealth.

Thanks. In recent years I have started putting the maximum £40k into my pension and last year I also put the full allowance into my S&S ISA (its doing really badly atm but hopefully will recover) and so I think I'm making the most of these. 

I plan to keep putting more into my pension but I do have concerns regarding putting so much in and then not being able to draw it out for another 15 years. I think the minimum pension age is 58? 

With property if I get into financial trouble I could sell the house and downgrade to something smaller and so it feels more flexible to me.   

The better LTV is often overhyped at the lower end

Once you hit 75%(70% for some lenders) the marginal gain going to 60% it often tiny and it is a big 10%-15% gap to bridge.

4 Feb 2022 rates Barclays reward rates 60% 75% £999 fee
2y 1.35% 1.37%
5y 1.39% 1.41%

75% to 60% is saving of 0.02% 
2y to a 5y is 0.04% increase.

With those differentials where the fee based products are better(Barclays that £100k+ on the 5y)  a 2+3 cannot recover the extra fee over just taking the 5y. 



40%+ tax money pension as it gets that head start

For those going into 40% fixing lifestyle and directing all the 40% into pension can make a lot of sense.
if hitting the limits with 40%+ money then alternatives come into play

ISA is a use or lose but accessible, potentially  useful for the medium term might need money but if not it will be a tax free source of cash 

Mortgage,  rates are low, not saving much and not often easy to recover if needed some options give more flexibility but at a cost in most cases higher rates.
in a rising rate environment fix mortgage then  variable saving can overtake the mortgage rate.


With dual income there are other consideration on structuring the finances, 
eg. if you can meet costs with just one income and the jobs are not likely to be hit by the same issues then the accessible savings can be quite low as the risk of needing to access is reduced.
For the disaster of both jobs going 1-3 months of costs in near instant access with back up if jobs don't happen of 12months accessible like the ISA with the plan being its unlikely to be needed so plan longer term for that pot)  

We took the non optimal route of premium bonds for instant(few days) access savings.

Offsets are very flexible but not so easy to find a decent one these days that stacks up against a cheap as chips fix and alternative places for the money.

I think some lenders still allow overpayment pots to be used to effectively give a holiday on payments

Some good points made here. Yes, the difference in the interest rate between the different LTVs is very small. I wonder though if rates start to rise and if the economy starts to worsen whether this premium might grow in the future if banks become more cautious about lending. This is more of a general question.  

They have been narrowing there is not a lot of risk difference for a lender.

Why did you go 2y and not 5y last  change.

What analysis did you do?

Went for two year as there quite big saving on the interest rate (0.3%) and wanted the flexibility to switch lenders at the end of the two years and/or make overpayments of greater than 10%. We were buying the house and were advised to go wit Barclays as they could complete most quickly rather than because they had the best terms. They did complete everything quickly so no complaints there.