Overpay now or later?

Buritonian

I can now access my 25% tax free sum from my pension.

I started the mortgage late so we have 10yrs to go £300k to pay off still

Which is the smartest of these two moves:

1. take my 25% now - value £30k and use it to overpay the mortgage now
2. Wait circa 5yrs, when the 25% tax free sum will be bigger (circa £50k) and use it to over pay then?

I'm going aggresive with workplace pension right now due to employer matching my contributions.

My question here is really isolated to the impact each will have on the mortgage (reduced interest and shortened term). So in short… £30k now or £50k later.

Currently on 4.09% mortgage rate

Exodi

Buritonian

My question here is really isolated to the impact each will have on the mortgage (reduced interest and shortened term). So in short… £30k now or £50k later.

Would you consider a third option of neither?

From a strictly financial perspective, I personally think it rarely makes sense to overpay your mortgage. Now before you think I've lost the plot, hear me out.

Presumably the money in your pension is invested, hopefully having and continuing to provide good returns.

Overpaying your mortgage is a calculation that the rate you will pay on the mortgage debt will be higher than the returns you will make on your investments over the term of the mortgage. Personally, as I would hope my mortgage rate might average ~3% over its term, and my investments might average ~7% over their term, it would not make financial sense in my mind to cash in my investments to overpay my mortgage. You could think of it as forfeiting £200 in returns to save £100 in interest.

I'd also consider that mortgages are frozen in time. What I mean is the monthly payment is effectively reducing in real terms every year, while (you'd hope) your income would be increasing - this means overtime the burden from the mortgage decreases as a percentage of your income.

Of course, I don't have a crystal ball and no-one knows what future investment returns will be.

So aside from the strictly financial perspective, the benefits of overpaying the mortgage come from risk (you achieve a guaranteed saving in interest, compared to a potential benefit from returns) and emotions. Many people say their reasons for overpaying their mortgages are for the feelings of 'security' or 'freedom'. They often cite the example of the comfort knowing if they lost their jobs, they wouldn't be homeless. Personally I don't fully subscribe to this rationale, as in the situation of losing your job, you could subsidise all of your living expenses by selling off investments if required. In fact you could argue using your disposable cash to pay off the mortgage is riskier, as you can't easily take the cash back out of a house to meet all your other expenses.

Personally I've never been a big fan of the idea of taking the TFLS to pay off the mortgage, but I appreciate it's an extremely common thing to do.

Buritonian

You have a good point - particularly when the outstanding debt is roughly equal to the money we have invested - I'm risk averse so its always nice if money can be accessed too.

I think it comes down to my age and job security tbh. I mustn't make assumptions about what I can earn as time goes by. I do have a reasonable £20k safety fund (in an ISA) to see me through any unforeseen chapters, and my wife earns too, though not a lot. So we think we can keep up payments for 5-6months.

Which, whilst considering your POV, leaves me one argument not to follow your advice… emotions (by which I really mean a sense of control). I can choose to invest or not, and adjust what i invest to suit my situation, ranging from withdrawing funds from investments, to increasing what i put into them.

We are in our forever home. We bought it to see out our days here. We love it. We want it in the bag so to speak. Life can throw what it likes at us but we don't want to leave this place.

So, assuming I can't be swayed (though you do have me thinking hard) - would an over payment of £30k now, be shrewder than £50k in 5-6yrs time?

Exodi

Buritonian

So, assuming I can't be swayed (though you do have me thinking hard) - would an over payment of £30k now, be shrewder than £50k in 5-6yrs time?

It's not my intention to sway you or convince you either way - anecdotally I feel I see more people choosing to overpay their mortgage than investing the money in lieu and I appreciate that Maths isn't everything.

As to the specific question (£30k now vs £50k in 5-6 years), that equates to an annual rate of ~10% - more than I would reasonably rely on getting anywhere else. Based on that, £50k in 5-6 years looks to be much better than £30k now. Assuming your current mortgage rate, you'd have paid ~£7.5k in interest on the £30k over the 5-6 years.

Brie

My question for you is what type of pension is it? A personal pension or a work pension? If the latter is it a defined benefit or defined contribution scheme. And presumably one that you are no longer an active member. If it's a DB pension then you can't take the TFLS without putting the pension in to payment and presumably you don't want to do that. If it's the work scheme you are currently contributing to it's unlikely (guessing 0% chance) of you being able to take the TFLS and stay an active member.

My other concern would be along the same lines as Exodi in that a pension is meant to be there when you retire. If you "spend" it now or in 5 years (even for a good reason) what will you be living on when you retire? It's great that you have a marvellous home but if you are going to need to live in one room as that's all you can afford to heat then it's a bit miserable.

Buritonian

It's a workplace pension (defined contribution). I will check with them on the implications of taking TFLS and more. I would hope I can remain an active member thereafter.

I'm not so fearful about retirement being bleak. State pension (for a couple) plus a modest drawing from a modest pension, (which will be our focus after our big withdrawal in 2032 for 7yrs), shouldn't be so terrible if the home is owned outright.

If I drag out my mortgage until 67 I think those last 5-7 years will be very stressful. Foolish perhaps, but I would feel pride and relief from fishing the mortgage. SO seems quite polarised through my eyes.

Coming back to whether my strategy holds water or not… It seems I need to confirm what my pension provider (L&G) make of it. If I can't leverage the pension for all its worth, I don't think paying off quickly is realistic anyway.

Really appreciate the replies. Need this sounding board !