To overpay mortgage or to increase savings?

B0bbyEwing

MisterMotivated said:

This is often an option with overpayments; you can either ask them to keep your payments the same and reduce the term, or ask them to recalculate/reduce your monthly payments so that the mortgage still ends on the originally agreed date

Thank you. I wasn't aware of this.

jimjames said:

It's really down to personal preference but likely to be financially better to pay into the LISA/SIPP as you get tax relief as well as the potential for the investments compounding over the long term. I did that rather than overpay but S&S ISA not SIPP and ended up with a portfolio that was many times bigger than the mortgage balance so could have cleared it if I wanted. It's been a good few years since 2009 but the mortgage balance would have just about cleared by now with overpayments.  Instead I have built up a portfolio that is all tax free.

Thanks. Out of interest, to what situation would you say your opening line applies? I ask this because you mention tax relief & that's a red flag to me.
For example, reading around the forum, people often straight away talk about high rate tax payers & the investing benefit those people have.
Unfortunately that's not me so anything to do with high rate tax paying & the perks those guys have is instantly irrelevant. 

So I don't know if you're speaking from a HR viewpoint or a BR viewpoint which then becomes even moreso for a HR person?

Just trying to understand whether what you said applies to my situation or not that's all.

Bigwheels1111 said:

I overpaid and overpaid and overpaid.
My parents said if I overpaid by £3k a year they would match it.
No tax implications as £3k is allowed per year as inheritance.
11y 4 months to clear mine, what a great feeling.
After renting the house out for 9 years, and quick refurb.
Sold for 4 times what I paid.
Debt free, well set up for the future.

That's great for you but unfortunately doesn't help me. I don't have anyone giving me a no questions asked £3k per year.

I congratulate you for what you did but your example is a world away from mine and so does not help me.

TheAble said:

It's a personal thing but the decision is a lot more involved than just an interest rate or expected stock market return comparison.
On the one hand, do you want to be retiring 2% debt early when prevailing inflation is pushing double digits? But on the other hand, if you put it into the stock market instead, only for the market to crash 50% and interest rates subsequently go up several % and you get laid off from your job, then that's a problem too. So there's a balance to be struck.
For myself I don't overpay but I can see the appeal from the point of view of reducing risk.

Thanks for the response. This is actually the answer that I was expecting. Not that I think it's the right or wrong answer, just it's what I expected, in that the bit I've marked in bold being the point.

If only it was simple eh?

Expotter said:

Ultimately I guess it depends on how much you value certainty, there are risks either way. 20+ years is a long time and a lot can happen in that time, there's no way of knowing whether tax rules around pensions will be the same as now or what will interest rates be in the future. You won't be able to access any money from pensions for a good while either in case you needed it.

The accessing thing isn't an issue as once it goes in to a locked in wrapper I forget about it anyway. I also have cash that can be accessed so I make plans for "in case I need it". Of course there may be something that comes up even beyond this where I'll get caught out but you can only plan for so much.

Expotter said:

You could ask yourself what's more important to you, owning your home or retiring early? To me personally, it was the certainty that whatever happened I wasn't going to end up homeless, so first I concentrated on repaying the mortgage as soon as possible and then I started putting everything else on pensions. Still managed to stop working at 56, so it can be done either way or with a combined approach, which might be the most sensible option.

Retiring before I'm 70, preferably no later than 65. If I let the mortgage run its course, I'm due to own my house by the time I'm 60.

Regards stopping working at 56. Congratulations. I was going to ask approx. what you were on although on second thought it's a little pointless as I don't know when we're talking. You could be 57 now or 97. You could've been earning £20k which sounds not a lot but in todays money it could be £100k. Extremes just to make a point.
I would imagine that you earned not too badly to allow you to do that. I know of a few who've retired around that age & they all earned very well. Have never known anyone on a wage on a par with mine retiring that early though, nowhere near.
Not that I'm grumbling. It is what it is. It'd be nice to retire so early but there'd have to be some huge stroke of luck my way.

Bigwheels1111

grumiofoundation said:

RobfromCornwall said:

Having done zero research, but based on my own experience with a Nationwide mortgage, here are my thoughts:
- 2.14% mortgage interest is higher than easy access accounts and many longer term fixes
- My personal aim is to always be as debt free as possible
- You can (probably) overpay 10% of your initial mortgage loan without ERC 
- My approach would therefore be to overpay as much as is affordable (up to 10% of initial loan) - do this either in monthly instalments or in lump sums (the fewer and the earlier the better)
- Tell Nationwide to reduce the mortgage term and not the monthly repayments

Again, your personal circumstances will dictate what is right for you.  Don't just listen to some bloke on the internet. 

You really have done no research! 

1 year fixes are >2.8% and 2 year >3% 

https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/

You have missed one as well.

Union Bank of India (UK) Ltd

1 year fixed rate bond 3.2%
https://www.unionbankofindiauk.co.uk/personal-banking/interest-rates

jimjames

Even with basic rate tax relief your payments into SIPP get boosted by 20%. That's an instant gain compared to paying off the mortgage with that money without even looking at growth over the years

MX5huggy

You mention SIPP and that’s a good plan but not your work place pension. Most (maybe all) have options for additional contributions tell us who your pension is with (maybe it’s public sector) and there could be better options than a SIPP, particularly if they offer Salary Sacrifice. 

Here’s a video around mortgages and how to get a good deal. https://youtu.be/qgAkqOeGkiQ

The values are a bit bigger but the principles apply. 

I’m not repaying my mortgage any faster than it’s standard repayments. I took a 10 year fix 3 years ago just as it looked like interest rates were starting to rise the actual rate was 0.1% less than the previous 5years all with Nationwide. Of course rates dived again (COVID) but it’s starting to look like a deal again now. 

I’m a BR tax payer but because of using Salary Sacrifice I save 41% that’s 20% 12% NI (now 13.25% and 9 % student loan) on my (well employers contributions) so in last 4 years I’ve added £19k to my pension that is showing a small growth of £2k ish. But if I had taken the salary instead I would have just had £11200 in my pocket and could have chosen to pay that off the mortgage. 

My LTV is low, inflation is now burning up the value of the mortgage and in 7 years time despite still having 10 years to run on the mortgage the outstanding balance will be less than a years total salary for both of us. 

Mortgage vs Pension comes down to for me paying off the mortgage guarantees I’ll have to work till 65 ish, paying into pension gives me a shot at 55 to 60. (I’m 43 so there’s a lot of variables). 

george4064

It's pretty much down to your tolerance to risk and how much you value (simply put) financial security.

Part of that tolerance to risk should be linked with your LTV, which you don't actually mention? Someone with a 60% LTV can afford to take more risk than someone with a 90% LTV, for example.

You can do one or the other, or you could do a mix of all the options (overpay a bit, invest a bit and save a bit).

Most extreme option would be to take out an interest only mortgage and invest regularly with the aim of paying that mortgage off at the end, which gives you more flexibility and ofcourse you can still make up to 10% overpayments which effectively means you make it into a repayment mortgage if you want to by making overpayments. Have you considered that option?

B0bbyEwing

MX5huggy said:

You mention SIPP and that’s a good plan but not your work place pension. Most (maybe all) have options for additional contributions tell us who your pension is with (maybe it’s public sector) and there could be better options than a SIPP, particularly if they offer Salary Sacrifice. 

Apologies.

The reason I don't mention workplace pension is because I forget it. Not in the literal sense of forgetting I have one but I make the conscious decision to forget about it so to speak and rely on myself only in terms of my SIPP & S+S Lifetime ISA. Come retirement, the workplace pension will be a bonus. 

Perhaps not a smart outlook but when reading online people seem to talk about workplace pensions as though well I have a workplace pension so that's the pension box ticked, when it may not be the best.
Also, I wonder how they're invested. I suspect middle-of-the-park at its most adventurous or even just very safe because the government are not going to want this scheme to get bad press because then they look bad for rolling it out. So for those who are older than me, it may not be such a bad thing as they wont necessarily want a risky outlook. For people in their 20s and 30s, maybe playing safe is not so great as your outlook, or certainly not if it is your only outlook - which is why I have a SIPP & a Lifetime ISA where I'm the one who chooses how risky or not the approach is.

So while I was happy with the workplace pension rollout, I didn't want it to be my only approach as I suspected it was more cautious than I wanted to be at this stage in life.

"Most (maybe all) have options for additional contributions" - I do have the option for additional contributions, but again they will be invested as I suspect, cautiously. 
Not only that, my employer made a big song & dance over having to pay in to this workplace pension in the first place. So it comes as no surprise that they pay in the minimum 3%. I've had word from a very connected individual, which confirms longstanding suspicion, that my employer instructs payroll to deduct pay segments from workers. We're paid in 15min blocks. Some will get docked 15mins, some 30mins, some 45mins at random, some an hour. Many people don't check their payslip. They just open it and look at what goes in to the bank. Over a 60-65 hour week they don't really notice if 1 hour goes missing. 

I personally do notice, to the 15min. I've challenged them so many times. If anyone raises the question then they may get that money back. I tend to, but so many don't because they don't bother to check. Over 100 employees thereabouts, think about how much money the employer is saving. 
What is the point in me mentioning this? Well the point is that this employer will do nothing to benefit the employee unless they can benefit themselves without any negative impact on themselves. 

As a result, when I asked about salary sacrifice, I was told no. 

So that's a long winded way of explaining why I never mentioned the workplace pension

B0bbyEwing

george4064 said:

Part of that tolerance to risk should be linked with your LTV, which you don't actually mention? 

Because I'm not quite sure to be honest.

I did a quick calculation on the Nationwide site to see what my monthly payment would be on a 5yr fixed if I was to do it today (well, yesterday) and they asked about my house value. 
I didn't understand why it mattered. To be extreme, what if I bought it for 100k, put down 10k, borrowed 90k but now it's worth 1million? What does it matter, as my mortgage would've been 90k? 
Obviously I just don't really understand how the system works.

So we bought the house at 157k.
We borrowed 102k
Our balance is as you can see on page 1 basically 80k.
No idea what the house is worth now. Zoopla says 230k thereabouts but I take that with a pinch of salt. 

Last time we came to renew, which was the first time we've renewed, I went through an IFA. I'd prefer to cut costs and do it myself but not overly sure what I'm doing and don't want to mess up.

Albermarle

B0bbyEwing said:

MX5huggy said:

You mention SIPP and that’s a good plan but not your work place pension. Most (maybe all) have options for additional contributions tell us who your pension is with (maybe it’s public sector) and there could be better options than a SIPP, particularly if they offer Salary Sacrifice. 

Apologies.

The reason I don't mention workplace pension is because I forget it. Not in the literal sense of forgetting I have one but I make the conscious decision to forget about it so to speak and rely on myself only in terms of my SIPP & S+S Lifetime ISA. Come retirement, the workplace pension will be a bonus. 

Perhaps not a smart outlook but when reading online people seem to talk about workplace pensions as though well I have a workplace pension so that's the pension box ticked, when it may not be the best.
Also, I wonder how they're invested. I suspect middle-of-the-park at its most adventurous or even just very safe because the government are not going to want this scheme to get bad press because then they look bad for rolling it out. So for those who are older than me, it may not be such a bad thing as they wont necessarily want a risky outlook. For people in their 20s and 30s, maybe playing safe is not so great as your outlook, or certainly not if it is your only outlook - which is why I have a SIPP & a Lifetime ISA where I'm the one who chooses how risky or not the approach is.

So while I was happy with the workplace pension rollout, I didn't want it to be my only approach as I suspected it was more cautious than I wanted to be at this stage in life.

"Most (maybe all) have options for additional contributions" - I do have the option for additional contributions, but again they will be invested as I suspect, cautiously. 
Not only that, my employer made a big song & dance over having to pay in to this workplace pension in the first place. So it comes as no surprise that they pay in the minimum 3%. I've had word from a very connected individual, which confirms longstanding suspicion, that my employer instructs payroll to deduct pay segments from workers. We're paid in 15min blocks. Some will get docked 15mins, some 30mins, some 45mins at random, some an hour. Many people don't check their payslip. They just open it and look at what goes in to the bank. Over a 60-65 hour week they don't really notice if 1 hour goes missing. 

I personally do notice, to the 15min. I've challenged them so many times. If anyone raises the question then they may get that money back. I tend to, but so many don't because they don't bother to check. Over 100 employees thereabouts, think about how much money the employer is saving. 
What is the point in me mentioning this? Well the point is that this employer will do nothing to benefit the employee unless they can benefit themselves without any negative impact on themselves. 

As a result, when I asked about salary sacrifice, I was told no. 

So that's a long winded way of explaining why I never mentioned the workplace pension

Regarding your workplace pension, for most people this is the backbone of their retirement plans, not something in the background. You seem to think that where your money is invested in your workplace pension is out of your control, when it almost certainly is not . You should normally have online direct access to your workplace pension, where you can see exactly how it is invested, and what the alternative choices are. As you say it may be a good idea to change how it is invested to suit you.
As mentioned by MX5Huggy, it can be advantageous to add extra contributions to your workplace pension by increased monthly contributions rather than starting up a new SIPP etc
So I think you need to spend some time looking into your workplace pension, despite the fact you do not like your employer.

george4064

B0bbyEwing said:

george4064 said:

Part of that tolerance to risk should be linked with your LTV, which you don't actually mention? 

Because I'm not quite sure to be honest.

I did a quick calculation on the Nationwide site to see what my monthly payment would be on a 5yr fixed if I was to do it today (well, yesterday) and they asked about my house value. 
I didn't understand why it mattered. To be extreme, what if I bought it for 100k, put down 10k, borrowed 90k but now it's worth 1million? What does it matter, as my mortgage would've been 90k? 
Obviously I just don't really understand how the system works.

So we bought the house at 157k.
We borrowed 102k
Our balance is as you can see on page 1 basically 80k.
No idea what the house is worth now. Zoopla says 230k thereabouts but I take that with a pinch of salt. 

Last time we came to renew, which was the first time we've renewed, I went through an IFA. I'd prefer to cut costs and do it myself but not overly sure what I'm doing and don't want to mess up.

A property worth approx 230k with a 80k mortgage equates to a LTV ratio of c. 35%. The best rates are unlocked at 40% LTV so there isn't a better LTV band you can move to (as you're in the best one) where you can get a better rate.

To answer your question:

Scenario 1. 100k house with 90k mortgage = 90% LTV. Very risky from bank's point of view and the borrower should look to reduce that LTV over time as soon as possible. As a result, someone in this situation can't afford to take as much risk as they're highly mortgaged on their property.

Scenario 2. 1m house with 90k mortgage = 9% LTV. Very comfortable situation, bank will offer you their lowest rates (relative to higher LTVs) and borrower can afford to take a lot of risk as their home is as close to mortgage free without actually being mortgage free.

B0bbyEwing

Albermarle said:

Regarding your workplace pension, for most people this is the backbone of their retirement plans, not something in the background. You seem to think that where your money is invested in your workplace pension is out of your control, when it almost certainly is not . You should normally have online direct access to your workplace pension, where you can see exactly how it is invested, and what the alternative choices are. As you say it may be a good idea to change how it is invested to suit you.

As mentioned by MX5Huggy, it can be advantageous to add extra contributions to your workplace pension by increased monthly contributions rather than starting up a new SIPP etc
So I think you need to spend some time looking into your workplace pension, despite the fact you do not like your employer.

I think if you look in to it you'll find that not all workplace pension providers provide what you call alternative choices. 

I personally have experienced 3 different providers and they all offer something different. One offered you additional payments in the form of a percentage but that was all for example. You couldn't say that I want it invested more or less risky. Another provider would allow that change in risk but didn't provide the option to add additional contributions in percentage form, but you could do it in flat fee form.
So no, they don't all offer alternative choices where approach to risk is concerned. Some are invested as the provider decides and you can't change that.

In my situation at least, there is no rather than starting up a new SIPP. It's already been started. I simply add money to it or not.

My situation is my 5% goes to my workplace pension. Employer pays 3%.

Now let's say on top of this I can afford to put an extra £250/month towards retirement. This is my situation:
* I can either put that £250 in to my workplace pension, invested however it is invested (safe I imagine - the provider isn't very clear) and my employer keeps paying that same 3% they were paying before I even thought about £250.
* Or I can put it in to the SIPP I have, invested at a more adventurous angle based on my age and attitude. 

I have spent plenty of time looking in to my workplace pension before I opened my SIPP. I initially did contribute more before deciding to put that extra in a SIPP instead for reasons mentioned. As far as the workplace pension goes, I have a number of options:
* pay in as I am doing. Anything above 5% going to the SIPP
* stop paying in to the SIPP and put that same £250 (or % equivalent) to the workplace pension, albeit in a less risky approach
* stop paying altogether
* If I want to change HOW the workplace pension is invested at all then I need to quit my job & go elsewhere, assuming elsewhere uses a different provider.