Is now a bad time to overpay?

Dithering_Dad

jamesd wrote: »

If you really want to make money, though, go with a pension mortgage. You get tax relief on the money going in and use the 25% tax free sum to clear the mortgage, and are left with the remaining 75% as pension money. You do have to pay in about twice as much as the difference between interest only and repayment for this to work so it's not for everyone, mostly of interest to those who have a personal pension and particularly if they are higher rate tax payers, who really do well from this.

This will work, right up to the point when the government decide that you can no longer remove 25% from your pension tax free. They have already changed the rules so that instead of getting the 25% when you're 50 you now have to wait until 55 before you can get hold of the money (and pay off your mortgage).

The other obvious negatives to using your pension in this way are that you're reducing your old age pension and could end up spending your "golden years" in poverty. Plus you can only take the 25% once. If you take it at age 55 instead of age 65 when you retire, then you have lost 10 years of growth potential. Again, a great way of spending your golden years in poverty.

jamesd

Dithering Dad, yes, there's always the chance of the government breaking things. Not too many 25 year olds with 25 year mortgages to be hurt by the change from 50 to 55 years, though, I hope. Also no sign of this in the plans that have been announced covering up to 2050 but you're right that the government is at liberty to rewrite the rules whenever it chooses.

Perhaps you missed the bit about contributing the difference between interest only and repayment amounts to the pension and assumed it was funding repayment out of an existing pension with no extra money added?

This does not reduce the pension. It substantially increases it. The pension retains the 3/4 of the benefit that is not used for paying off the mortgage and a large chunk of that is the tax relief on the difference between interest only and repayment mortgage amounts.

The lump sum from the non-mortgage contributions is reduced but that's recoverable if the mortgage is paid off early enough by commencing taking pension benefits early and using that income to fund another pension intended for the final retirement age (and incidentially getting a second chunk of tax rebates due to this recycling).

You're right about losing ten years of growth potential on the lump sum at the end, but you've gained 25 years of growth that you wouldn't have had with a repayment mortgage. The non-lump sum part also keeps its growth potential.

I suppose I could always work through an example with a higher rate tax payer and 200k mortgage to show how the numbers work out with and without a pension mortgage... maybe over the long weekend because it's something that we haven't really covered much here and it is the most efficient way to pay a mortgage. I suppose I should put it in a new topic also, if I do I'll link to it from here.

Capricorn_One

Dithering_Dad wrote: »

I bought a ZX9R last month

I've got a ZX Spectrum.

vwcampervan72

Ive got a Harley and a mortgage lol

Wyndham

setmefree2 wrote: »

The Mortgage vs ISA dilema is not just a staright comparison of rates as an ISA will deliver tax gains forever. So an ISA pot of say £70k will produce a tax free income of say £3500 in old age, equivalent to £4666 worth of pension (as this is taxable.) So the earlier you start your ISA saving the bigger your tax free stream of income will be in old age.

There are many who argue that attention should be paid to ISA's so you don't find yourself with excess money that you can't protect from future tax.

This is different if it's an offset mortgage though? Mine is, and everything I can is going into the attached savings pot, so I can get it out if I need to. But in the meantime, it's tax free saving with the advantage that it reduces my mortgage payments each month, so I can see that and know I'm doing some good. I'd rather get rid of my mortgage as quickly as I can then look at ISAs etc. as I think there are substantial benefits in doing so (including peace of mind when I get there).

It's personal choice at the end of the day. What works for one won't work for another. I'm basically a saver rather than a spender, so I'm happy to see the difference the savings make each month and that keeps me motivated to keep adding to it. If I were a spender I think the thought of the pot would be too much and it might go.