Mortgage or Pension

Albermarle

kimwp said:

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 not to pay off the mortgage, 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.

I think you missed a word ( in bold) 

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?

You are right that in this situation the pension pot should not be invested too aggressively.
A savings account inside a pension is possible but only offered by niche providers. The usual route is to invest in a STMMF ( short term money market fund) that offers interest at the Bof E rate and is pretty secure. However personally I would not put the whole pension into that,with still probably at least 7 years before it will be possibly partly cashed in to help pay off the mortgage. It could be combined with a standard low cost multi asset fund containing equities and bonds. Then reviewed at some point.

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

Once you take any taxable income from a DC pension, you are limited to adding £10K max per tax year in future, including tax relief and employer contributions. 

kimwp

Good spot, thanks @Albermarle

sighup

Hard choices aren't they?

Just in case you haven't tried yet, why not check eligibility now for a replacement mortgage product right now? If you find you are only offered a repayment mortgage because you no longer have a suitable capital repayment vehicle, this will clarify mortgage options.

Potential mortgage costs
If you haven't already crunched some mortgage numbers to compare repayment/interest only costs on a like-for-like value/interest rate/duration, here's an example using https://www.moneyhelper.org.uk/en/homes/buying-a-home/mortgage-calculator for a balance of £278k, 7 year duration:

Interest rate = 5.25% (default)
Repayment = £3,961.97/month
Interest only =£1,216.25/month

The variables are largely irrelevant, the point being that a repayment mortgage by definition will cost more each month because capital and interest are being repaid, but by using representative values for your particular circumstance, you can get a feel for what a repayment mortgage would look like right now, and when the time comes to remortgage. The scale of repayment costs may make it easier to decide on what needs to happen and when?

Reducing mortgage by moving?
My personal view is the 'sensible' thing to do would be to move to a less expensive property, thereby reducing/eliminating the mortgage. But, where one chooses to live is an emotional decision as much as it's practical, so I do appreciate it's a very difficult option to consider. 

If you really don't want to move at the moment, could this be an option when your child is 18 and may leaves home for further education? If you can bring yourself to move sometime before the mortgage balance is due, you will have more options for your retirement planning, and perhaps be less stressed about what the future holds?

Impact on retirement
If you use your pension's 25% tax free cash to reduce the balance of your mortgage, this will affect your options for taking a blend of tax free cash and taxable cash from your pension in conjunction with other tax free savings in an ISA.  So, as a rhetorical question, if you fast forward to retirement... would you rather live in your current home and have less income for travel/whatever, at the very time you will have more time on your hands to do these things, or compromise on property/location in return for a more financially comfortable retirement?

In summary:

• Making a significant dent in your mortgage by moving to a less expensive property is the most straightforward approach, but also the hardest
• By understanding remortgage costs, and in particular if you would still qualify for an interest only mortgage, this might well clarify which options are most realistic for your circumstances sooner rather than later
• Consider the impact on your quality of life when retired, if you sink your tax free cash into your property, this will reduce your disposable income and/or lead to a higher effective rate of income tax

They're all kind of least worst options, but in particular, I think by crunching some mortgage numbers now to get a feel for how your mortgage payments will look - depending on the interest-only/repayment options open to you, this may help bring some clarity on what needs to be the general direction of travel. 

silvercue

As you can see there is plenty of advice.  And in terms of tax v interest, the pension is attractive.

However, I was in a similar position and I hated the debt.   If I lost my job or something, I would have problems.   Also, if you are interest only...you need to look at that.   

So, I paid off my mortgage and then used all that monthly saved money to increase my pension contributions.  That gave me peace of mind as I have no debt and my pension is still benefitting, just later.  And I would never do it a different way, but that is just me.

LegacyMum

really helpful advice on the mortgage and what others have done, thank you. Thanks also for asking questions of me, as well as kindly framing some answers, no magic bullet sadly (MSE is good, but not THAT good) but all really helpful input. More is welcome as so much insight and knowlege here. Huge thanks again. 

LegacyMum

sighup said:

Hard choices aren't they?

Just in case you haven't tried yet, why not check eligibility now for a replacement mortgage product right now? If you find you are only offered a repayment mortgage because you no longer have a suitable capital repayment vehicle, this will clarify mortgage options.

Potential mortgage costs
If you haven't already crunched some mortgage numbers to compare repayment/interest only costs on a like-for-like value/interest rate/duration, here's an example using https://www.moneyhelper.org.uk/en/homes/buying-a-home/mortgage-calculator for a balance of £278k, 7 year duration:

Interest rate = 5.25% (default)
Repayment = £3,961.97/month
Interest only =£1,216.25/month

The variables are largely irrelevant, the point being that a repayment mortgage by definition will cost more each month because capital and interest are being repaid, but by using representative values for your particular circumstance, you can get a feel for what a repayment mortgage would look like right now, and when the time comes to remortgage. The scale of repayment costs may make it easier to decide on what needs to happen and when?

Reducing mortgage by moving?
My personal view is the 'sensible' thing to do would be to move to a less expensive property, thereby reducing/eliminating the mortgage. But, where one chooses to live is an emotional decision as much as it's practical, so I do appreciate it's a very difficult option to consider. 

If you really don't want to move at the moment, could this be an option when your child is 18 and may leaves home for further education? If you can bring yourself to move sometime before the mortgage balance is due, you will have more options for your retirement planning, and perhaps be less stressed about what the future holds?

Impact on retirement
If you use your pension's 25% tax free cash to reduce the balance of your mortgage, this will affect your options for taking a blend of tax free cash and taxable cash from your pension in conjunction with other tax free savings in an ISA.  So, as a rhetorical question, if you fast forward to retirement... would you rather live in your current home and have less income for travel/whatever, at the very time you will have more time on your hands to do these things, or compromise on property/location in return for a more financially comfortable retirement?

In summary:

• Making a significant dent in your mortgage by moving to a less expensive property is the most straightforward approach, but also the hardest
• By understanding remortgage costs, and in particular if you would still qualify for an interest only mortgage, this might well clarify which options are most realistic for your circumstances sooner rather than later
• Consider the impact on your quality of life when retired, if you sink your tax free cash into your property, this will reduce your disposable income and/or lead to a higher effective rate of income tax

They're all kind of least worst options, but in particular, I think by crunching some mortgage numbers now to get a feel for how your mortgage payments will look - depending on the interest-only/repayment options open to you, this may help bring some clarity on what needs to be the general direction of travel. 

Huge thanks for this reality check, kind and really helpful advice!

Gary1984

My advice is don't worry about the mortgage. It's a big number but your payments are still low and fixed for 3 years (<400 per month for a house in London?).

In reality you won't make much of a dent to the mortgage over the next 3 years. If you can pay off £5k a year that only reduces your 2027 mortgage payments by 5%.  Any spare funds are better going into the pension to get the 40% relief or a high interest savings account to give you an emergency buffer or some flexibility at remortgage time to help with the higher interest payments.  

The mortgage will get repaid when you stop working and move house, leaving you with enough money to buy a £600k property somewhere else mortgage free. You'll also have your pension still in tact. If you really need to you can use some of the tax free cash to pay your monthly mortgage payments when they go up and you reduce your hours. 

I'd say you're in a good position. Just carry on paying the minimum required to the mortgage safe in the knowledge you have a 900k asset to one day pay it off.