Overpay mortgage or pension
Comments
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pollyanna24 wrote: »Didn’t know which board to put this in; pensions, mortgages etc, so have put it here.
Is it worth overpaying my mortgage or putting the extra money into my pension?
I’m talking £500 a month for about 8 months of the year, £4,000 a year.
For me I would stick it in a S&S ISA to invest.
If you give the money to the mortgage bank, you cant get it back, not that you want to... but in case of emergency that money is locked away.
in a S&S ISA, you have a good chance of it massively outperforming the interest rate your mortgage, so if you let it sit in there for say 5-10 years, you can then most likely overpay a much larger sum if needed.
Right now my wife and I are investing £500 a month into a S&S ISA and the intention is after another 8 years we have projected to have the mortgage balance in this fund (assuming 5% growth each year).
Whilst we don't know what the market will do tomorrow, the money in the S&S ISA is easily made liquid if really needed and we remain cautiously optimistic.
After 8 years we plan to see where we are and then decide if we want top pay off the balance, or let it keep growing.0 -
Is investing into pension and/or S&S ISA still the best course of action if you want to move house again?
Would like to move into a bigger property so thought in my case overpaying mortgage would be a good idea to increase the equity we have to put towards the next house0 -
Not in a pension as its locked away until 57 or so..
In a S&S ISA you can make it liquid cash in a few days, but using it as a vehicle to save for under say 5 years may not be the safest as it should be used for longer term plans.0 -
chelseablue wrote: »Is investing into pension and/or S&S ISA still the best course of action if you want to move house again?
Would like to move into a bigger property so thought in my case overpaying mortgage would be a good idea to increase the equity we have to put towards the next house
You can use savings, such as those in an ISA, to increase your deposit and reduce the amount of mortgage you get. You tell your mortgage provider how much the new property is and what you want to borrow, and whether the difference comes from equity in your current home or savings makes no difference. So if the savings are making more interest in the ISA than you are saving on the mortgage it would make more sense to save outside of the mortgage until you buy.Don't listen to me, I'm no expert!0 -
You can use savings, such as those in an ISA, to increase your deposit and reduce the amount of mortgage you get. You tell your mortgage provider how much the new property is and what you want to borrow, and whether the difference comes from equity in your current home or savings makes no difference. So if the savings are making more interest in the ISA than you are saving on the mortgage it would make more sense to save outside of the mortgage until you buy.
Thank you
Our mortgage rate is 1.79% fixed until 2023
I have a savings account that pays 5% but can only pay in up to £250 a month.
I also have a S&S ISA that has increased 10% in the last year0 -
I would personally concentrate on the mortgage first, as that will give more open options. You either pay it off and have more money to then deal with the pension, or you perhaps move house.
I currently pay a little into AVC's but I don't have a mortgage to pay it into instead. I'm not even sure I'm doing the right thing, as I don't know if I can release the cash sum from my AVC's whenever I decide or if I have to wait till I'm 67 or 68 or whatever my retirement age becomes. Hoping for early retirement, I'm wondering if I'd be better just saving the money in the bank.
Very hard to tell though?0 -
I'd overpay the mortgage. Who's to say I'll still be around for retirement!
Unless you are seriously ill the odds are overwhelming that you will be around for retirement. 83% of 30-year-old men (the age at which most people contemplate being homeowners) and 88% of women will live to their State Pension Age. However bear in mind that these statistics are for a population which includes people who are terminally ill, have genetic conditions, or other factors likely to lead to early death. So if you know you are not terminally ill, genetically unfortunate or an inner-city gangbanger, then you can assume your chances are actually well above 90-95%.
*edit* And if you don't make it to retirement age due to a terminal or serious illness, you will be able to access the pension before 55. If you go under a bus, then the pension has turned out to be an even better option because the full value, including tax relief, will be available to your heirs tax-free (on death before age 75) which they can use to pay off the mortgage or for any other living costs. If you had overpaid the mortgage instead your heirs would not have had the benefit of free money from the government. You may also have increased their IHT bill if applicable.
Most of the advice in this thread is shockingly bad. The repeated claim that you can pay off your mortgage first and then make pension contributions ignores the facts that
a) by the time this happens you will have much less time to benefit from compounded investment gains
b) over the last decade the Government has increasingly restricted the amount you can put into pensions, and by the time you have overpaid the mortgage you may have missed out entirely. The Government has already had one go at abolishing tax-relieved pensions (under George Osborne) and it won't be the last.
The claim that overpaying the mortgage somehow protects the house is also wrong. If I overpay my mortgage for many years, then lose my job, run out of money and default on the normal payments, then I am in default and liable to repossession. Overpaying has achieved nothing except to reduce the payments I've defaulted on - default is still default. The lender might give me some more grace for having made overpayments in the past but legally is not obliged to.
What would actually protect the house if the possibility of not being able to make repayments in the future is a real concern* is Zola's suggestion of a stocks & shares ISA (although only if the OP is under 55 and cannot access the pension). You would lose the potential benefit of tax relief on entry, but not the benefit of compounded investment gains. S&S ISAs are a valuable tool for retirement planning, just not always the best option.
To repeat what I said last time around, if you put all your money in a house and then go bankrupt, you have lost everything. If you have put some of your money in a pension before bankruptcy was anticipated, it's protected from the bankruptcy trustees (except in limited circumstances).
(*By "real concern" I mean, if your area of expertise is highly specialised / dependent on a limited number of employers and you have genuine reason to fear long-term unemployment. General anxiety cannot be cured by financial products.)
This question comes up often on the Pensions board. Numerous people have said "I wish I'd put more into my pension while I could and not fixated on the mortgage". Literally nobody has ever said "I wish I'd overpaid the mortgage instead of locking up my money in pensions".0 -
Malthusian wrote: »Unless you are seriously ill the odds are overwhelming that you will be around for retirement. 83% of 30-year-old men (the age at which most people contemplate being homeowners) and 88% of women will live to their State Pension Age. However bear in mind that these statistics are for a population which includes people who are terminally ill, have genetic conditions, or other factors likely to lead to early death. So if you know you are not terminally ill, genetically unfortunate or an inner-city gangbanger, then you can assume your chances are actually well above 90-95%.
*edit* And if you don't make it to retirement age due to a terminal or serious illness, you will be able to access the pension before 55. If you go under a bus, then the pension has turned out to be an even better option because the full value, including tax relief, will be available to your heirs tax-free (on death before age 75) which they can use to pay off the mortgage or for any other living costs. If you had overpaid the mortgage instead your heirs would not have had the benefit of free money from the government. You may also have increased their IHT bill if applicable.
Most of the advice in this thread is shockingly bad. The repeated claim that you can pay off your mortgage first and then make pension contributions ignores the facts that
a) by the time this happens you will have much less time to benefit from compounded investment gains
b) over the last decade the Government has increasingly restricted the amount you can put into pensions, and by the time you have overpaid the mortgage you may have missed out entirely. The Government has already had one go at abolishing tax-relieved pensions (under George Osborne) and it won't be the last.
The claim that overpaying the mortgage somehow protects the house is also wrong. If I overpay my mortgage for many years, then lose my job, run out of money and default on the normal payments, then I am in default and liable to repossession. Overpaying has achieved nothing except to reduce the payments I've defaulted on - default is still default. The lender might give me some more grace for having made overpayments in the past but legally is not obliged to.
What would actually protect the house if the possibility of not being able to make repayments in the future is a real concern* is Zola's suggestion of a stocks & shares ISA (although only if the OP is under 55 and cannot access the pension). You would lose the potential benefit of tax relief on entry, but not the benefit of compounded investment gains. S&S ISAs are a valuable tool for retirement planning, just not always the best option.
To repeat what I said last time around, if you put all your money in a house and then go bankrupt, you have lost everything. If you have put some of your money in a pension before bankruptcy was anticipated, it's protected from the bankruptcy trustees (except in limited circumstances).
(*By "real concern" I mean, if your area of expertise is highly specialised / dependent on a limited number of employers and you have genuine reason to fear long-term unemployment. General anxiety cannot be cured by financial products.)
This question comes up often on the Pensions board. Numerous people have said "I wish I'd put more into my pension while I could and not fixated on the mortgage". Literally nobody has ever said "I wish I'd overpaid the mortgage instead of locking up my money in pensions".
That's a different insight, thank you. I suppose I could split the spare money so I've not got all eggs in one basket?
For example £500 to S&S ISA and £500 overpaying the mortgage0 -
There's so many ways to look at it. Purely financially, money in a pension is much better than overpaying a mortgage. That can't be said loudly enough because the belief that being mortgage free is best has become so ingrained in many it has resulted in people being less well off than they could have been and paying a fortune more in tax.
However the younger you are the more of a dilemma it is. Paying into a DC pension early gives you the most time to benefit from compounding interest, which makes a big difference on the value of your pot when you're older. However you are locking money away for longer that you might need in the short and medium-term. So it's a balance. The problem is not enough people are balanced though snd don't prioritise pensions enough or are aware of the benefits. This is particularly important if you're a higher rate tax payer, on the border of losing child benefit, if your employer offers matching contributions or salary sacrifice (save NI as well as tax), etc.Don't listen to me, I'm no expert!0 -
OldMusicGuy wrote: »Similar to Kynthia is what I would do. Pay maximum into pension to get tax relief and employer's contribution and then think about overpaying mortgage. Malthusian's posts are largely correct, except IMO with regard to
Have to disagree with this. I wouldn't put all my hard earned into a pension pot that may not even exist for me in the future. I may not get to the point at which I can withdraw, not to mention pension companies changing terms or going 'bang' completely.
Overpay into bricks and mortar - the only sure way of keeping your money reasonably safe. There will be future market crashes, but the prices always recover and then increase higher.
I'm getting to the point where my overpayment is infringment of the 10% of final balance per year. When it gets to that point my overpayments will be going into a high interest savings account and will be used to pay off the remaining mortgage balance as soon as my mortgage drops out of the deal.0
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