Has the time come to prioritise the mortgage over the pension?

saucer

Hi everyone,

In previous threads I have advocated investing in pensions rather than paying off the mortgage.  This has been a no brainer for me when interest rates have been low and there are all the tax advantages from SIPPs and AVCs. 

Our situation is that we have an offset mortgage of 135k at BoE +0.49%.  That deal was extended a few years ago and is available long after we will pay it off.  Our plan is to retire within 5 years, from public sector roles, and pay off the mortgage in full at that point.  Our jobs are secure and lump sums will cover the mortgage debt.  No other debt and we have 50k in private pensions even if we stop contributing now. 

The dilemma is whether to gamble that BoE interest rates will peak at around 5% and continue to pay into my other half's AVC that will be available as part of a TFLS.  Alternatively we could fix the mortgage now and suck up 3.5% for 5 years. 

Putting it in the spreadsheet and comparying worse case scenarios of high interest rates and low, or negative, performance of the AVC suggest that the mortgage fix is a better option if interest rates go beyond 5-6% and the AVC is flat or negative.  I know nobody knows but I imagine that there is an upper limit on how high interest rates are likely to go in what is likely to be a recession.  I'm thinking that a fix is undoubtedly a safer bet but thought I would ask you what you think and if I am forgetting anything.

El_Torro

In your situation I'd probably go for the 3.5% fix for 5 years. Might not be the best decision with hindsight, though at least you'll know what your mortgage payments are for those 5 years.

saucer

El_Torro said:

In your situation I'd probably go for the 3.5% fix for 5 years. Might not be the best decision with hindsight, though at least you'll know what your mortgage payments are for those 5 years.

Thank you.  That's the way I am leaning.

pensionpawn

saucer said:

Hi everyone,

In previous threads I have advocated investing in pensions rather than paying off the mortgage.  This has been a no brainer for me when interest rates have been low and there are all the tax advantages from SIPPs and AVCs. 

Our situation is that we have an offset mortgage of 135k at BoE +0.49%.  That deal was extended a few years ago and is available long after we will pay it off.  Our plan is to retire within 5 years, from public sector roles, and pay off the mortgage in full at that point.  Our jobs are secure and lump sums will cover the mortgage debt.  No other debt and we have 50k in private pensions even if we stop contributing now. 

The dilemma is whether to gamble that BoE interest rates will peak at around 5% and continue to pay into my other half's AVC that will be available as part of a TFLS.  Alternatively we could fix the mortgage now and suck up 3.5% for 5 years. 

Putting it in the spreadsheet and comparying worse case scenarios of high interest rates and low, or negative, performance of the AVC suggest that the mortgage fix is a better option if interest rates go beyond 5-6% and the AVC is flat or negative.  I know nobody knows but I imagine that there is an upper limit on how high interest rates are likely to go in what is likely to be a recession.  I'm thinking that a fix is undoubtedly a safer bet but thought I would ask you what you think and if I am forgetting anything.

Interest rates can go much, much higher as those who can remember the late 1970's to the early 1990's will testify! 3.5% is still historically quite low and as you already have the lump sums to clear your mortgage balance personally I would continue to favour pension contributions. I fixed for 5 years last summer at 1.24%. I should have bought a lotto ticket too!

MallyGirl

I'd fix. I was lucky that I took a 5 year fix last year at 1.16% which should see me to retirement. The balance can then be paid off with lump sum if we don't like the SVR at that time. My first mortgage in 1991 was at 14% - not something you forget.

saucer

pensionpawn said:

Interest rates can go much, much higher as those who can remember the late 1970's to the early 1990's will testify! 3.5% is still historically quite low and as you already have the lump sums to clear your mortgage balance personally I would continue to favour pension contributions. I fixed for 5 years last summer at 1.24%. I should have bought a lotto ticket too!

Thanks, but as you say interest rates could go higher and I could end up with a very tough few years before the lump sums, especially with everything else inflating. 

pensionpawn

saucer said:

pensionpawn said:

Interest rates can go much, much higher as those who can remember the late 1970's to the early 1990's will testify! 3.5% is still historically quite low and as you already have the lump sums to clear your mortgage balance personally I would continue to favour pension contributions. I fixed for 5 years last summer at 1.24%. I should have bought a lotto ticket too!

Thanks, but as you say interest rates could go higher and I could end up with a very tough few years before the lump sums, especially with everything else inflating. 

The way I read your post is that you can retire (will be 55+) at the end of a new 5 year fixed mortgage and are certain that your TFLS at that point will be sufficient to clear your mortgage balance?

saucer

pensionpawn said:

saucer said:

pensionpawn said:

Interest rates can go much, much higher as those who can remember the late 1970's to the early 1990's will testify! 3.5% is still historically quite low and as you already have the lump sums to clear your mortgage balance personally I would continue to favour pension contributions. I fixed for 5 years last summer at 1.24%. I should have bought a lotto ticket too!

Thanks, but as you say interest rates could go higher and I could end up with a very tough few years before the lump sums, especially with everything else inflating. 

The way I read your post is that you can retire (will be 55+) at the end of a new 5 year fixed mortgage and are certain that your TFLS at that point will be sufficient to clear your mortgage balance?

You have it right but I thought you were saying stick with the pension and ride out the interest rate rises. The alternative is to take the 3.5 fix and effectively stop further contributions to the pension. 

pensionpawn

saucer said:

pensionpawn said:

saucer said:

pensionpawn said:

Interest rates can go much, much higher as those who can remember the late 1970's to the early 1990's will testify! 3.5% is still historically quite low and as you already have the lump sums to clear your mortgage balance personally I would continue to favour pension contributions. I fixed for 5 years last summer at 1.24%. I should have bought a lotto ticket too!

Thanks, but as you say interest rates could go higher and I could end up with a very tough few years before the lump sums, especially with everything else inflating. 

The way I read your post is that you can retire (will be 55+) at the end of a new 5 year fixed mortgage and are certain that your TFLS at that point will be sufficient to clear your mortgage balance?

You have it right but I thought you were saying stick with the pension and ride out the interest rate rises. The alternative is to take the 3.5 fix and effectively stop further contributions to the pension. 

Not automatically, however it does depend how interest rates compare with growth rates in 5 years. Maybe an additional 2 / 3 year fix would still prove fiscally sound? So does fixing at 3.5% for 5 years prevent you from maintaining / increasing your pension contributions? Either way I personally would still fix as chances are investments will be in a healthier state after 5 years (if they're not it means that planet Earth is doomed!) and hence your TFLS will be healthier. Of course there is the priceless piece of mind that you no longer have a mortgage, and for a lot of people that can actually improve their health, mental and physical. Of course there are other (non pension related) initiatives that you could apply your spare cash to in order to prepare the ground for minimal outgoings in retirement. New windows, solar panels (& battery), new gas boiler..... All of these will at worst negate the current runaway energy price rises and you may even see your bills reduce! Of course the RoI for these sort of 'investiments' are at an all time minimum at the moment.

saucer

pensionpawn said:

saucer said:

pensionpawn said:

saucer said:

pensionpawn said:

Interest rates can go much, much higher as those who can remember the late 1970's to the early 1990's will testify! 3.5% is still historically quite low and as you already have the lump sums to clear your mortgage balance personally I would continue to favour pension contributions. I fixed for 5 years last summer at 1.24%. I should have bought a lotto ticket too!

Thanks, but as you say interest rates could go higher and I could end up with a very tough few years before the lump sums, especially with everything else inflating. 

The way I read your post is that you can retire (will be 55+) at the end of a new 5 year fixed mortgage and are certain that your TFLS at that point will be sufficient to clear your mortgage balance?

You have it right but I thought you were saying stick with the pension and ride out the interest rate rises. The alternative is to take the 3.5 fix and effectively stop further contributions to the pension. 

  So does fixing at 3.5% for 5 years prevent you from maintaining / increasing your pension contributions?

Thank you for your thoughts.  That's the issue.  The £950 or so pcm that would need to go to paying off the mortgage is currently going to my wife's LGPS AVC where it is grossed up to £1200 and should be payable tax free when she retires in 2.5 years.  I will be going a year or so later, all things being equal.  Having said that as interest rates climb there will be less available to put in the AVC, as we will have to use it to pay interest, so that route becomes less attractive while carrying all the risk, albeit missing out on a real perk of the LGPS pension AVC.   

OldBeanz

If she is retiring on 2.5 years, she is getting an uplift of 25% in her income (£8 becomes £10). I cannot see how that is not the best option even sitting in cash, assuming she is not overshooting her max TFLS. I may be missing something.