Mortgage or Pension

LegacyMum

Hi MSE friends,

I was hoping to get your considered advice, thoughts, comments, great MSEness on my situation. Do I continue to pay into my pension or start to pay off more of the mortgage. You all helped me so much back in 2021 with my Mum's inheritence, thank you. I put £60k into my pension over last 3 yrs. I'm now nervous about my mortgage, I don't intend to move for at least 10yrs, it's only a 2 bedroom house (in London). I intend to work for another 6-10 years but not full time. I currently earn £70k. I know I'm very lucky, and work hard, but still have a big mortgage.

-Single Mum (1 child age 13)
-I'm 56 my pension is £370k.
-I have a property that is Interest Only mortgage with 7 years left at 1.44% rate - current rate runs out March 2027. 
-Mortgage is £287k Property worth £900k


Do I continute to put the maximum I can into my pension, to get the tax free beneift, and use the tax free element to pay the mortgage when I draw down my pension - what do I need to consider at that point? Or do I split what I pay pension/mortgage so I can reduce my mortgage? My income will reduce in the next 4-5 years and I'll need to remortgage and will need 4 x my salary.

Are there any tricks when extending a mortgage, as I only have 7 years left, (but still a big mortgage) I'll need to extend I'm sure. 

All comments/advice welcome, thanks MSE friends. 

thegentleway

Tax free element: may need to consider there is currently a limit at a bit above £250k for tax free portion. I don’t think you’ll reach this paying £20k a year into your pension though.

What is your plan to pay off mortgage? 

Albermarle

Whilst you enjoy a low interest rate on the mortgage, it makes financial sense not to pay it off and keep that lovely pension tax relief at 40% rolling in.
You will be able to take the tax free 25% ( and some taxable if necessary) at any time to help pay off the mortgage if necessary
When your income reduces and you only get 20% tax relief, then it could be a time to change strategy and maybe just add the minimum to make sure you get employer contributions and then start to concentrate more on the mortgage.

How the pension is invested is important. You want it to grow obviously, but you do not want to see a big dip just before you want to cash some of it in.

Qyburn

LegacyMum said:

-I have a property that is Interest Only mortgage with 7 years left at 1.44% rate - current rate runs out March 2027. 

It wouldn't make sense paying off the mortgage while the rate is so low, if you wanted to plan for it you could build up cash savings earning 5% or more, for three years, ready to make a payment when the rate ends.

Did you have a plan for paying off the capital at the end of the mortgage? I thought lenders wanted to know before offering interest only, but maybe not if yours was pre-credit crunch.

Could you look at remortgaging when the rate ends, before your earnings reduce? Maybe onto a repayment mortgage.

El_Torro

You have a big mortgage and not a lot of working time left to pay it off. Using your pension to pay off the mortgage (especially the 25% tax free element) is a valid strategy, but I'm not sure this will be enough for you. At least not for the whole mortgage.

Expecting growth in shares to do the heavy lifting may be a bit naive in your situation. You only have about 10 years left after all. If you had 20 or 30 years left then this would be a different story. 

I don't mean to sound overly negative, though you do need to be realistic about what you can afford to pay off. Have you considered moving to a cheaper property? Probably somewhere further out of London. 

The closer you come to the end of the mortgage the more you'll have to think about holding some cash in your pension, to avoid your investments dropping just before you need them.

LegacyMum

These are all really helpful, thank you. Yes I think I will need to move to reduce the mortgage or pay off. I have no other investments to speak of. 

Hoenir

The mortgage needs to be addressed. In 2027 you are likely to be paying a far higher interest rate. Are you utilising your annual ISA allowance. You can earn a higher rate of interest than you are paying at zero risk . Then use the funds to pay your mortgage down in a few years time. 

Angelica123

I think you really need to consider what you are going to do once your interest free only mortgage period ends. You have mentioned extending the mortgage but that may not be an option available to you given your age. Other options include equity release or downsizing. 

I think the other thing to consider is that you may need to work longer than you anticipate if you want to be comfortable in retirement.

xylophone

You still have the buy to let?

Have you obtained a state pension forecast?

https://www.gov.uk/check-state-pension

LegacyMum

Thanks all, very helpful. I split with my partner, he now has the buy to let flat, which was my vehicle to pay off the mortgage. I will receive the full state pension. 

kimwp

Given that you'll be able to draw from your pension when your mortgage is up for renewal, and your mortgage interest rate is currently so low, it makes sense to save, to pay into the mortgage later, the options being:
1. Savings account - no exposure to volatility of the stock market, but no benefit of income tax relief
2. Stock market - don't pay income tax, but value could go down significantly. Can you put it effectively into a savings account inside your pension? Bonds maybe?

I vaguely remember that drawdown can affect how much you can then pay into your pension.

It's not the question you asked, but I think you need to consider how much you need in retirement and for your mortgage/moving, you might need to consider continuing to work full time a bit longer.