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    • albert101
    • By albert101 13th May 18, 6:01 PM
    • 20Posts
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    albert101
    Pay off mortgage & invest instead?
    • #1
    • 13th May 18, 6:01 PM
    Pay off mortgage & invest instead? 13th May 18 at 6:01 PM
    Dear everyone,

    I'm after a bit of advice please.

    I am 46. We own 94% of our house. It is potentially a 'forever house' big enough for what we need, nice area etc. We still owe about 50k on the mortgage, which costs us c3% pa, and c 600 per month.

    I have a reasonable pension pot. I have around 200k in various ISAs etc. I came into some money recently, and wary of toppy markets, stuck 50k into Premium Bonds.

    Would it be better do you think to use the Premium Bonds to pay off the mortgage, and give myself roughly 600 per month to drip feed into the stock market, using pound cost averaging to weather storms etc.

    I have to say I sleep better at night having money around and it could be that the 50k might come in useful down the road should misfortune strike - I can't after all eat my house, and should misfortune strike (job loss) I might not easily be able to raise cash against it.

    I appreciate this is not an easy question to answer, but I guess if you were me, what would you do?

    Many thanks,

    Albert

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    Last edited by MSE Andrea; 17-05-2018 at 10:08 AM.
Page 1
    • albert101
    • By albert101 13th May 18, 6:09 PM
    • 20 Posts
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    albert101
    • #2
    • 13th May 18, 6:09 PM
    • #2
    • 13th May 18, 6:09 PM
    PS - we have no other debt apart from the mortgage
    • justme111
    • By justme111 13th May 18, 6:16 PM
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    justme111
    • #3
    • 13th May 18, 6:16 PM
    • #3
    • 13th May 18, 6:16 PM
    Is this your only noninvested money? Do you have any other assets apart from house ? What rate of tax do yu pay ? is your house worth 1 million then ? how long till you intend to retire?
    It does not make sense to me having a loan for which yu are charged 3% out of your taxed income while having money bringing virtually nothing and reducing in value. But judgi g but what ou said you are comfortable enough to be able to afford losing money in return for piece of mind so whatever makes you happy..
    • albert101
    • By albert101 13th May 18, 6:24 PM
    • 20 Posts
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    albert101
    • #4
    • 13th May 18, 6:24 PM
    • #4
    • 13th May 18, 6:24 PM
    Thanks Justme - Assets: 200k in ISAs, cars worth 15k or so (own them outright)

    House worth 850k or so (so we own 800k of it). I pay 40% tax. I earn around 70k pa before tax.

    Retirement - don't know - due to changes in my industry I suspect I may have to retire in around 10 years or so, but ideally I'd keep going to my 60s.
    • jimjames
    • By jimjames 13th May 18, 6:28 PM
    • 12,708 Posts
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    jimjames
    • #5
    • 13th May 18, 6:28 PM
    • #5
    • 13th May 18, 6:28 PM
    Based on stock markets increasing over time it seems a bit strange to start from zero rather than putting the lump sum straight into a S&S ISA. Obviously you're limited to 20k each but that would take 40k of it and you could use the remainder to pay off mortgage.
    Remember the saying: if it looks too good to be true it almost certainly is.
    • justme111
    • By justme111 13th May 18, 6:34 PM
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    justme111
    • #6
    • 13th May 18, 6:34 PM
    • #6
    • 13th May 18, 6:34 PM
    so that is the only liquid money you have then ?
    I would leave leave one third in cash in bonds , pay one third towards mortgage and buy gold ( physical ( with another third.
    Any children ? wife's pension?
    have you planned your retirement?
    • kidmugsy
    • By kidmugsy 13th May 18, 6:38 PM
    • 11,371 Posts
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    kidmugsy
    • #7
    • 13th May 18, 6:38 PM
    • #7
    • 13th May 18, 6:38 PM
    I pay 40% tax.
    Originally posted by albert101
    Well stop it immediately. Contribute enough to a pension to avoid 40% tax. Use money from your ISAs if you must.

    In fact why not swap your mortgage to an offset mortgage? Then your emergency money can sit in the account associated with the mortgage, thus reducing the monthly mortgage repayment. You can divert your new surplus monthly cash into pension contributions.

    If you are a worrier about job loss consider income protection insurance.
    http://monevator.com/do-you-need-income-protection-insurance/

    Do the sums: the money you can save by eliminating/reducing monthly mortgage payments, plus the money you can make by shifting capital from ISAs into pensions, will far more than pay for your income protection. You'll feel better off on several dimensions at once. Hurray!
    Free the dunston one next time too.
    • eskbanker
    • By eskbanker 13th May 18, 6:43 PM
    • 7,860 Posts
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    eskbanker
    • #8
    • 13th May 18, 6:43 PM
    • #8
    • 13th May 18, 6:43 PM
    We still owe about 50k on the mortgage, which costs us c3% pa, and c 600 per month.
    Originally posted by albert101
    Somebody's calculator must be broken then - 3% pa on a 50K mortgage would be 1500, or 125 per month! Which of those three figures you've quoted is the wrong one?

    Edit: bowlhead99 points out below that most of that monthly cost is likely to be capital repayment rather than interest!
    Last edited by eskbanker; 13-05-2018 at 7:52 PM. Reason: Plausible explanation of apparent inconsistency....
    • atush
    • By atush 13th May 18, 6:48 PM
    • 16,999 Posts
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    atush
    • #9
    • 13th May 18, 6:48 PM
    • #9
    • 13th May 18, 6:48 PM
    if 50K in cash is all you have, then to use all of it to pay off the mtg is a bad idea.

    but also, paying all that HRT is a bad idea.

    So use some of it (35-40K?) to pay down mtg and use freed up money to pay more into pension.
    • bowlhead99
    • By bowlhead99 13th May 18, 7:30 PM
    • 8,171 Posts
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    bowlhead99
    We still owe about 50k on the mortgage, which costs us c3% pa, and c 600 per month.
    Originally posted by albert101
    Somebody's calculator must be broken then - 3% pa on a 50K mortgage would be 1500, or 125 per month! Which of those three figures you've quoted is the wrong one?
    Originally posted by eskbanker
    They might quite easily be the 'right' ones.

    If you agree a 100k mortgage at 3% over 18 years, it costs a bit over 7200/yr or 600/mo; which is still the same monthly outgoing when you get down to your last 8 years and owe 50k. Likewise if you just took out an 8 year mortgage for 50k. It will cost you 600pm of cashflow.

    So while the interest cost saved by clearing the mortgage is only an initial 150pm of real 'expense' (as 450pm was paying off the capital portion of the debt), the cash freed up to make investments in something other than the property if the mortgage were paid off is 600pm.

    The OP wasn't clear in either of his posts whether the 200k in various ISAs included in his list of assets was in Cash ISAs or S&S ISAs which obviously changes the risk profile significantly depending on the answer.

    If they are all in S&S and the premium bonds are his family's only 'near cash' assets then I would agree with his cautious approach not to dump all his premium bonds into paying down mortgage or buying pension, because he's right that in an emergency you can't always remortgage your house or raise new credit, especially if the emergency is that you are jobless. However, the 50k of Premium bonds is around about an entire year's net salary (from a 70k gross) which is quite a lot swilling around as a slush fund 'just in case'.

    If the 200k ISAs are cash ISAs (at almost 3x his gross annual salary) then holding PBs is hypercautious and it makes sense to grab 40% tax relief on whatever amount of his salary is not already being contributed to pension, by making further pension contributions to reduce him down to the basic rate tax bracket if possible, this year and next and perhaps future years too.

    If the 200k ISAs are actually investment ISAs and there's very little cash sitting around other than the PBs, then it might be more sensible to consider only using up half the PBs and retaining the rest as a reasonable 25k 'emergency fund' (although better interest rates than PBs can be found with various banks and building societies, for smaller amounts of money). The half of the PBs that is to be used up could still most efficiently be used on pension contributions as the deferral or avoidance of 40% tax is very nice; though if he was particularly cautious he could perhaps spend part of the PBs on clearing a bit of the mortgage given that the 3% is at least a higher return he was getting from holding PBs.

    But IMHO if the 200k ISAs are investment ISAs, and the home is already a forever home without needing hundreds of thousands to be spent on it in the forseeable future, and there are no major life plans for the 200k other than retirement at age 60+, it would seem to be sensible to sell out of some of the ISAs to fund the grabbing of even more of this pension contribution 40% tax relief. So whether the 200k ISAs are S&S or cash, you probably don't need to spend them all before your personal pension contribution access age, so they can be utilised to help increase pension contributions over the coming years up to the max amount that benefits from higher rate tax relief.
    Last edited by bowlhead99; 13-05-2018 at 7:33 PM.
    • albert101
    • By albert101 13th May 18, 7:50 PM
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    • 3 Thanks
    albert101
    Thanks to all for your very useful replies.

    Yes my mortgage is a repayment mortgage, so repay the principle plus the interest of c 1500 pa = 7200 pa or so. It has 8 years or so to go. I can overpay without penalty, and in theory can get it all back should I want it.

    However, as Mr Lewis has cautioned in his advice in this area, the small print is tricky, as the bank can and will review withdrawals one's circumstances and can say no - which they might reasonably do if I had a lost a job etc. (Banks lend you an umbrella when the sun is shining and remove it when it starts raining, as the saying goes)

    Yes, the 200k is in S&S.

    Between us we have around 300k in pension pot at present = probably not enough, I know... Currently putting 10k pa into it.
    • Fatbritabroad
    • By Fatbritabroad 13th May 18, 7:56 PM
    • 408 Posts
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    Fatbritabroad
    Id use the money to increase your pension pot tbh. You can always use the tax tree lump sum to clear the mortgage
    • albert101
    • By albert101 13th May 18, 7:59 PM
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    • 3 Thanks
    albert101
    Id use the money to increase your pension pot tbh. You can always use the tax tree lump sum to clear the mortgage
    Originally posted by Fatbritabroad
    Thanks - but luckily/unluckily the mortgage will be just gone when I'm 55...

    I forgot to add, yes 2 teenage kids, and like most people wonder where on earth they're going to live, so it would be nice to be able to help them out when the time comes in this area...
    • bowlhead99
    • By bowlhead99 13th May 18, 8:14 PM
    • 8,171 Posts
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    bowlhead99
    Thanks to all for your very useful replies.

    Yes my mortgage is a repayment mortgage, so repay the principle plus the interest of c 1500 pa = 7200 pa or so. It has 8 years or so to go. I can overpay without penalty, and in theory can get it all back should I want it.
    Originally posted by albert101
    As your T&Cs say you can (in theory) get it all back if you want it you would probably at least find you could reduce your 600pm outgoing to 0 if you were in a pinch and had made voluntary overpayments in the past. Though it's perhaps not perfect, if for example you later swap deals onto a different rate or with a different bank, that option might not be available. So, don't pay off what you're not comfortable paying off, even if the rate (3%) is tempting compared to what you're expecting to be earning on the PBs.

    I would probably look to pay off 'a bit' to save you the hassle of looking around for a better rate than the PBs are offering on a sum of money as large as 50k. For the first 20k or so between you, it is relatively easy for a couple to get PB-beating instant access rates on their cash with high interest current accounts, regular saver accounts etc but it gets progressively tougher the more you have and many people will not have the appetite to do it on larger sums. If you only had 25-30k of cash instead of the 50k, you'd have a decent emergency buffer and not too much trouble getting decent rates.

    Yes, the 200k is in S&S.

    Between us we have around 300k in pension pot at present = probably not enough, I know... Currently putting 10k pa into it.
    If you're putting 10k in it (not sure if that's just your gross contribution or employer too) out of your 70kish salary then you have 15k or so extra you could be contributing and getting higher rate tax relief before your adjusted gross salary drops to under 46k and you're only paying basic rate on it. I would take 15k a year out of the S&S ISAs to fund that, because 40% tax relief and paying your marginal rate in retirement (after a tax free lump sum) is a better deal than just using the ISA and not paying tax in retirment.

    Unless you expect to be a higher rate taxpayer in retirement it might be worth you/spouse also doing further pension contributions at lower tax relief rate too - as getting 20% tax relief now, getting a tax free lump sum out of it, and paying 20% tax on the rest in retirement, is still a net gain. But obviously locking the money away til yor late 50s is more restrictive than having free access to the ISAs whenever you like, so don't go OTT.

    If you don't want to move a huge proportion of your entire ISA stash into pension, then don't 'waste' contributions to pensions at 20% tax relief rate, because then you'll be less able to afford those important contributions at 40% tax relief rate year after year.

    If we're talking about moving money from S&S ISAs to Pensions to grab the tax relief, it doesn't particularly need to be a concern that you perceive the markets to be high or low at the moment because if they are high, the ISAs funding the pension will be at a nice big value making the contributions easier to afford.
    • kidmugsy
    • By kidmugsy 13th May 18, 9:36 PM
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    kidmugsy
    Thanks - but luckily/unluckily the mortgage will be just gone when I'm 55....
    Originally posted by albert101
    Then extend it if you can. If you plan to take your TFLS at 60, extend it to 60. We paid ours off with a TFLS which meant extending the original mortgage by 6 or 7 years. It was dead easy.
    Free the dunston one next time too.
    • albert101
    • By albert101 13th May 18, 10:00 PM
    • 20 Posts
    • 3 Thanks
    albert101
    Thanks Bowlhead - very useful information. Yes I have done 7k of overpayments into the mg.

    Pension payments make a lot of sense, but they do lock money away, in my case, for 9 years.

    I am cautious - I was stony broke in living memory and know what it's like to not have money when you need it - and thus am willing to pay a bit for that caution.

    As someone once said, we have to live life in the present, but only really understand it in retrospect - and like many investors, I would love access to a crystal ball.
    • atush
    • By atush 14th May 18, 7:11 PM
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    atush
    You dont need to worry about locking the money away if you hace 250K in cash and S&S isas about.

    Pay more into pension. pay the mtg off with your S&S isa pile or your TFLS when you retire. I didnt know you still were paying HRT on 15K/
    • gatters
    • By gatters 15th May 18, 3:21 AM
    • 18 Posts
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    gatters
    A 3% mortgage rate with such a low LTV also seems pretty high.
    • atush
    • By atush 15th May 18, 12:32 PM
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    atush
    Yes, what are the costs of refinancing?
    • movilogo
    • By movilogo 15th May 18, 3:32 PM
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    movilogo
    You can either
    A. Pay your mortgage off i.e. save 600/months as a result
    B. Don't pay off mortgage but invest somewhere else where you can get a better return.

    If A > B, then pay off mortgage
    If B > A, then invest where you get better return and carry on mortgage
    Happiness is buying an item and then not checking its price after a month to discover it was reduced further.
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