Mortgage Overpayment vs Pension

JusinScot

hi, 

I was hoping someone can check the math for me. I am retiring in 16 years and there are 14 years left on the mortgage. I have an £500 gross pay to either pay into the mortgage or the pension. 

Lets work with 15 years
Pension:
so £500pm month into a pension at 6% comes out to £145,409.36

Mortgage:
£500-40% = £300 into the mortgage.
Overpayment saving: (in interest alone) £17,550

Debt cleared: 3 years and 3 months earlier

I have 3 years left on my 10 year fix at 2.24, so I'm not sure what the new rate will be.

I'm not sure which is "better"? Is there a way to express this as pension=£145k vs Mortgage=£N?

thank you

Hoenir

How secure is your job? As people get older many become expendable. That job for life vanishes. 

Where does the 6% on the pension originate from? 

EthicsGradient

3 years at 2.24% is good, for a mortgage; it's unlikely you'll do better than that with any new mortgage before then, and it's probably lower than you'll get for savings in that time too. So it's better than the 'no risk' savings rate, and while comparing a 'no risk' and 'riskier' option that would, on average, most likely return more is subjective, you'd probably say that for 3 years, you'd do better paying into the pension (your 3rd option would be to save the 500/month in regular savers (which can get a guaranteed 7% or so for a year if you have a current account with them, or 6% if not)/fixed term accounts  to have a lump sum to partly pay off the mortgage after 3 years).

If paying more into your pension keeps you below the higher rate threshold that you'd otherwise exceed, or attracts more contributions from your employer, then definitely go for the pension, but I suspect you've already checked that.

MEM62

Over the time period you have suggested investing in your pension is going to beat paying your mortgage every time and prioritising pension over mortgage is a absolute no-brainer if you are a 40% tax payer.  Remember, the money going into your pension is pre-tax and will compound.  The money you use to pay off your mortgage is post-tax.  

boingy

You need to add a third option - save the money in a regular saver account until your mortgage fix ends then, based on the new rate, choose whether to pay off the mortgage or put it into your pension (and get your tax back on it).

The best 12 month regular savers are paying 7% at present.

MX5huggy

Pension beats mortgage in nearly all circumstances, in fact you should probably swap to an interest only mortgage but that might be a risk too far for you. He goes at a million miles per hour but this video covers in well. Apart from his prediction on Life Time Allowance which was abolished by Hunt. https://youtu.be/MWadHLKMgB4

george4064

MX5huggy said:

Pension beats mortgage in nearly all circumstances, in fact you should probably swap to an interest only mortgage but that might be a risk too far for you. He goes at a million miles per hour but this video covers in well. Apart from his prediction on Life Time Allowance which was abolished by Hunt. https://youtu.be/MWadHLKMgB4

A potential danger is if the pension age increases further and you end up not being to access your pension when you want to pay off your mortgage.

A more diversified mix of pensions and ISA to repay mortgage is a more prudent approach, and combined returns should still beat the mortgage rate over the period.

TheBanker

I wouldn't see it as either/or.

I've got a mortgage which is currently at 1.6% so no point making overpayments now. I've increased my pension contriutions following a pay rise (salary sacrifice and higher rate taxpayer so a bit of a no-brainer). I'm also paying into regular savers (trying to keep the interest within my PSA) and a cash ISA each month.

When my fixed rate mortgage ends, I'll re-evaluate based on the rates available then. I may use some of my cash to pay it off, and I may reduce my pension contributions slightly if the new mortgage repayments are a lot higher.

I'd suggest you do something similar - split your money between pension and cash savings (the best split will depend on your tax position, and also whether you have other cash savings to call on in an emergancy). Then re-evaluate the position when the mortgage fixed rate ends.