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  • FIRST POST
    • pollyanna24
    • By pollyanna24 1st Mar 18, 11:06 PM
    • 3,798Posts
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    pollyanna24
    Overpay mortgage or pension
    • #1
    • 1st Mar 18, 11:06 PM
    Overpay mortgage or pension 1st Mar 18 at 11:06 PM
    Didnít 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?

    Iím talking £500 a month for about 8 months of the year, £4,000 a year.
    Pink Sproglettes born 2008 and 2010
    House Worth (approx) - £400,000
    Mortgages (3rd Nov 2017) - £180,813.85
    Equity - £219,186.15
Page 1
    • Mr_Singleton
    • By Mr_Singleton 2nd Mar 18, 6:06 AM
    • 824 Posts
    • 1,654 Thanks
    Mr_Singleton
    • #2
    • 2nd Mar 18, 6:06 AM
    • #2
    • 2nd Mar 18, 6:06 AM
    I'd do the mortgage but depends on how old you are and the state of your mortgage.
    • Seanymph
    • By Seanymph 2nd Mar 18, 8:35 AM
    • 2,669 Posts
    • 17,986 Thanks
    Seanymph
    • #3
    • 2nd Mar 18, 8:35 AM
    • #3
    • 2nd Mar 18, 8:35 AM
    This is a long debated choice!

    For me it came down to the immediacy of it - if I paid off the mortgage (and saved the interest) it gave me more disposable income to make choices about.

    If you are happy to lock the money away - then pension.

    Why not do a bit of each? Increase your pension payments, but still down pay the mortgage?
    • pollypenny
    • By pollypenny 2nd Mar 18, 8:49 AM
    • 23,921 Posts
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    pollypenny
    • #4
    • 2nd Mar 18, 8:49 AM
    • #4
    • 2nd Mar 18, 8:49 AM
    Difficult one. I!!!8217;m a financial worrier so I!!!8217;d probably go for the mortgage. However, extras on the pension is probably the better long-term bet.

    Having struggled with the 15% interest rates in the 90s, we were able to keep the mortgage payments at the same level when rates came down a bit.

    On union advice, I also paid AVCs to boost my pension. This was the wrong choice, though, should have bought extra years.
    Member #14 of SKI-ers club

    Words, words, they're all we have to go by!.

    (Pity they are mangled by this autocorrect!)
    • ukjoel
    • By ukjoel 2nd Mar 18, 9:15 AM
    • 1,408 Posts
    • 1,269 Thanks
    ukjoel
    • #5
    • 2nd Mar 18, 9:15 AM
    • #5
    • 2nd Mar 18, 9:15 AM
    Need more information..
    If you overpay your pension are you a 20% or 40% taxpayer?
    At 40% you will save lots lots more.
    Are you paying by salary sacrifice, if so are your company giving you the full NI benefit to you?

    Whats the rate of interest on the mortgage?
    How comfortable are you with the amount?
    Do you have income protection if you lost your job
    Do you have a financial safety net?

    How old are you? Will you be taking the pension in 3 years or 30 years?

    All things you need to consider.
    • Trentenders
    • By Trentenders 2nd Mar 18, 9:23 AM
    • 1,150 Posts
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    Trentenders
    • #6
    • 2nd Mar 18, 9:23 AM
    • #6
    • 2nd Mar 18, 9:23 AM
    The gut feel of most people on a money saving website will be to pay the mortgage. The most sensible thing to do is likely to up your pension contributions.

    Few questions:

    • How old are you?
    • What tax bracket are you in?
    • Do you have emergency savings (cash or liquid assets)?
    • What is your mortgage rate?
    • How healthy is your pension, what other investments do you have, etc.?
    As a third option, if the mortgage rate isn't too high and you can save at a higher rate (current accounts, regular savings, etc.), then that would be a better option financially. A stocks & shares ISA would also likely be better for you over the long term.

    I'd suggest taking a look around the Pensions Board for similar discussions.
    Last edited by Trentenders; 02-03-2018 at 9:24 AM. Reason: Crossed with above post (lost internet connection for 10 mins)
    • Keep pedalling
    • By Keep pedalling 2nd Mar 18, 9:57 AM
    • 4,995 Posts
    • 5,557 Thanks
    Keep pedalling
    • #7
    • 2nd Mar 18, 9:57 AM
    • #7
    • 2nd Mar 18, 9:57 AM
    You should definitely post this over on the pensions board, lots of experts there, but as the above posts, you need to provide more info.
    • Happier Me
    • By Happier Me 3rd Mar 18, 4:53 PM
    • 425 Posts
    • 923 Thanks
    Happier Me
    • #8
    • 3rd Mar 18, 4:53 PM
    • #8
    • 3rd Mar 18, 4:53 PM
    Since turning 40 my focus has very much turned to funding our retirement, despite being committed to being mortgage free. I know our 'number' - the amount of income we want each year in retirement and I know the age at which we want to retire. I also know what we have in retirement savings and the gaps we have to address.

    I still want to be mortgage free but I don't overpay at the expense of my pension savings. It's about finding a balance that's right for you. And if I paid 40% tax I would definitely favour pension savings!

    As others have said, visit the pensions board. Have a read of the numbers thread as a starting point Many of us chase mortgage freedom but what we ultimately want is financial independence...and you can't achieve that purely by overpaying your mortgage.
    • tfn105
    • By tfn105 7th May 18, 6:10 PM
    • 4 Posts
    • 0 Thanks
    tfn105
    • #9
    • 7th May 18, 6:10 PM
    • #9
    • 7th May 18, 6:10 PM
    This is a long debated choice!

    For me it came down to the immediacy of it - if I paid off the mortgage (and saved the interest) it gave me more disposable income to make choices about.

    If you are happy to lock the money away - then pension.

    Why not do a bit of each? Increase your pension payments, but still down pay the mortgage?
    Originally posted by Seanymph
    I do a bit of everything
    - overpay the mortgage a bit
    - salary sacrifice a bit extra into my pension (42% tax+NIC relief hard to look over)
    - pay a bit into a stocks & shares ISA

    I am also lucky that I have a regular cash ISA with some money in it. Although rates are poor, it is my emergency money.

    I would find it difficult to pull any one lever the whole way. All of the above items are worthwhile in the long run.
    • Fireflyaway
    • By Fireflyaway 7th May 18, 7:00 PM
    • 1,736 Posts
    • 1,885 Thanks
    Fireflyaway
    I'd pay the mortgage. Not only are you likely to save more in interest than you would gain interest in savings, it's security. Should something unplanned happen, your home is safe once it's paid for. Once you are mortgage free with no house payments, you will be in a good position to pay even more into your pension or savings. Your home is an investment too. It's likely to increase in value and the option is there to downsize if you need in future.
    Last edited by Fireflyaway; 07-05-2018 at 7:02 PM. Reason: T
    • dawyldthing
    • By dawyldthing 8th May 18, 11:43 AM
    • 2,896 Posts
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    dawyldthing
    Another for paying the mortgage off. Once it's paid its yours. Pensions ok but look at what we put in compared to what we get pout - it's not a lot. Mine predicts if I carry on as I do now I'll get a grand a year - won't even cover the council tax
    My targets to end 2018:
    1) To get down to 11 st 7lbs then treat to a safari. At start 17 stone 7 lbs *61lbs lost* *30lbs to go*
    1st started SW16st13lbs tues11/7/17 - 38 weeks -53lbs
    2nd -> target 11 st 7lbs
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    • andydownes123
    • By andydownes123 8th May 18, 12:00 PM
    • 208 Posts
    • 288 Thanks
    andydownes123
    Remember to check how much you can overpay per month if you are in a deal. If you're not in a deal - get in one now!! Some great rates out there, all better then base rate.

    Natwest - you can only payback 10% of remaining balance per year without charges.
    • Malthusian
    • By Malthusian 8th May 18, 3:20 PM
    • 4,104 Posts
    • 6,425 Thanks
    Malthusian
    I'd pay the mortgage. Not only are you likely to save more in interest than you would gain interest in savings, it's security. Should something unplanned happen, your home is safe once it's paid for.
    Originally posted by Fireflyaway
    No, it's completely the opposite. If disaster strikes the pension is protected from bankruptcy. The house is not.

    Once you are mortgage free with no house payments, you will be in a good position to pay even more into your pension or savings.
    No, they will be in a much worse position as they will be closer to retirement and won't have as much time to benefit from compound investment growth. The direction of travel has also been to make paying into a pension increasingly restrictive and less attractive (while preserving money already paid in). Hypothetically, the OP might pay off their mortgage and then find that tax-relieved pension contributions have been abolished, and they've missed the boat. That's what George Osborne wanted, and he's unlikely to be the last.

    Your home is an investment too. It's likely to increase in value and the option is there to downsize if you need in future.
    Downsizing is very popular as an excuse for not paying into pensions and very unpopular as a way of actually releasing capital. If you downsize, you often don't release nearly as much money as you think, and a lot of it is swallowed up by stamp duty and other moving costs. By contrast, if you have money in your pension, it costs nothing to access it. (Ignoring exceptions such as the cost of advice for safeguarded rights.)

    The OP should post in the Pensions forum, which will also require more information, but the consensus will almost certainly be to put the money in a pension. Pension contributions get tax relief - mortgage payments don't. Pension contributions are invested in assets which typically deliver higher returns than mortgage repayment.

    Much of the information in this thread is highly misleading and displays a clear lack of knowledge about pensions (I don't mean to pick on Fireflyaway in particular).
    • andydownes123
    • By andydownes123 8th May 18, 3:41 PM
    • 208 Posts
    • 288 Thanks
    andydownes123
    Downsizing is very popular as an excuse for not paying into pensions and very unpopular as a way of actually releasing capital.
    Originally posted by Malthusian
    Yep and when you finally get to retirement, many can't face selling the family home to release funds, just because they chose not to invest in a pension. My friends are experiencing this right now...they don't want to give up their cottage in the country, although the plan was to in the past sell it, cash in and move in a small bungalow in town. When you finally get to 70+, you'll probably feel the same. Not many would have the energy or the will to uproot at that age.
    • Malthusian
    • By Malthusian 8th May 18, 4:51 PM
    • 4,104 Posts
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    Malthusian
    Indeed. People don't realise that to release enough money to make a difference to your lifestyle, you generally have to put up with a pokier house or a poorer area. Losing a spare bedroom or two doesn't cut it. Bricks are not expensive and a 2 bedroom house just isn't that much cheaper than an equally nice 4 bedroom house.

    So it's not really income in retirement, it's sacrificing one part of your lifestyle - the building in which you spend most of your life - in order to improve another. Unless you've planned it properly, it's in the same category as "I'm going to fund my retirement by downstomaching and eating two meals a day instead of three."

    By contrast, when you access your pension, you're not sacrificing anything, every penny goes on improving your lifestyle in retirement.

    Of course if you live in London and want to return to the bosom of your family in North Wales then it's a different matter, but people who were previously happy to live in London who want to move to North Wales are the exception.
    • onomatopoeia99
    • By onomatopoeia99 8th May 18, 8:47 PM
    • 4,184 Posts
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    onomatopoeia99
    No, they will be in a much worse position as they will be closer to retirement and won't have as much time to benefit from compound investment growth.
    Originally posted by Malthusian
    Though if investments always outperform mortgage interest over the long term (say, a mortgage term of twenty five years or more), one would think the high street banks would be queueing up to sell us interest only mortgages with an investment backed repayment vehicle, and there would never be shortfalls on endownment mortgages. But that's not the case.

    Private pensions are vulnerable to government policy. See my uncle who retired just after Gordon Brown mounted his raid on dividends, the value of the annuity that he was compelled by law to buy with his pot at that time was slashed from the projection six months earlier, they had to cut back their retirement plans a lot due to the loss of expected income.

    Pension freedom was a big step in making private pensions more attractive, but please don't make out make out the case as being quite so cut and dried. You are assuming that investments will always outperform savings over the long term and that government policy on what one can do with the pension pot of a private pension will never go back to the nannying "you must buy an annuity" of yore.
    INTP, nerd, libertarian and scifi geek.
    Home is where my books are.
    • Tabbytabitha
    • By Tabbytabitha 8th May 18, 9:39 PM
    • 2,214 Posts
    • 3,727 Thanks
    Tabbytabitha
    Indeed. People don't realise that to release enough money to make a difference to your lifestyle, you generally have to put up with a pokier house or a poorer area. Losing a spare bedroom or two doesn't cut it. Bricks are not expensive and a 2 bedroom house just isn't that much cheaper than an equally nice 4 bedroom house.

    So it's not really income in retirement, it's sacrificing one part of your lifestyle - the building in which you spend most of your life - in order to improve another. Unless you've planned it properly, it's in the same category as "I'm going to fund my retirement by downstomaching and eating two meals a day instead of three."

    By contrast, when you access your pension, you're not sacrificing anything, every penny goes on improving your lifestyle in retirement.

    Of course if you live in London and want to return to the bosom of your family in North Wales then it's a different matter, but people who were previously happy to live in London who want to move to North Wales are the exception.
    Originally posted by Malthusian
    I'm not sure where you live that a 2 bed house isn't much cheaper than a 4 bed but it certainly isn't the SE! In addition, downsizing means lower utility bills and council tax, less cleaning and (usually) gardening - all of which are desirable when you're older.

    I can't speak about the pros and cons of the 2 options but there are far more advantages to downsizing than you seem to think.
    • Kynthia
    • By Kynthia 9th May 18, 1:31 AM
    • 5,128 Posts
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    Kynthia
    Most people will have their pension contribution topped up by 20% tax relief (or save paying 20% tax on their contribution if paying from gross incone). So even before including investment growth in excess of inflation, that's a much higher rate of return than interest being charged on mortgages.

    It's a complex argument as the younger you are the more you will benefit from the compounding of investment returns, but the longer you'll be locking money away. I'd always contribute enough pension to get my employers maximum contribution, then look at getting my mortgage LTV to below 60% for the better interest rates. Then I'd look at doung a combination of the two as I hope to buy a better property in a few years, but that isn't on everyone's agenda.

    The nearer retirement age you are the better the pension return is. The mortgage can then be repaid from the pension income (or automatic lump sum) once it's claimed.
    Last edited by Kynthia; 09-05-2018 at 8:01 AM.
    Don't listen to me, I'm no expert!
    • Malthusian
    • By Malthusian 9th May 18, 10:21 AM
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    Malthusian
    Though if investments always outperform mortgage interest over the long term (say, a mortgage term of twenty five years or more), one would think the high street banks would be queueing up to sell us interest only mortgages with an investment backed repayment vehicle, and there would never be shortfalls on endownment mortgages. But that's not the case.
    Originally posted by onomatopoeia99
    Because of the risk that when interest rates fall, people don't put the money they're saving on mortgage interest into the repayment vehicle, but spend it instead. Which is what caused endowment shortfalls.

    As it turned out that people couldn't be trusted to put enough money into their repayment vehicles, regulation killed off the market.

    Private pensions are vulnerable to government policy. See my uncle who retired just after Gordon Brown mounted his raid on dividends, the value of the annuity that he was compelled by law to buy with his pot at that time was slashed from the projection six months earlier, they had to cut back their retirement plans a lot due to the loss of expected income.
    Projections are useless and mean nothing.

    For the last twenty years government policy has been to make money already in pensions more attractive (the dividend tax raid was an exception, and as George Osborne has now abolished the dividend tax credit, it's ever more academic). At the same time they have made it more difficult to get new money into a pension, which is one of many reasons why suggesting delaying pension contributions until you have paid off the mortgage is terrible advice.

    Pension freedom was a big step in making private pensions more attractive, but please don't make out make out the case as being quite so cut and dried. You are assuming that investments will always outperform savings over the long term
    What does that mean? Savings are investments. Pensions and savings can be invested in the same things, so it makes no sense to say that one will or won't outperform the other.

    and that government policy on what one can do with the pension pot of a private pension will never go back to the nannying "you must buy an annuity" of yore.
    And you're asssuming the government will never make a house less attractive as an investment - say, by restricting primary residence relief, or increasing stamp duty, or Corbyn's idea of a windows tax?
    • Malthusian
    • By Malthusian 9th May 18, 10:34 AM
    • 4,104 Posts
    • 6,425 Thanks
    Malthusian
    I'm not sure where you live that a 2 bed house isn't much cheaper than a 4 bed but it certainly isn't the SE! In addition, downsizing means lower utility bills and council tax, less cleaning and (usually) gardening - all of which are desirable when you're older.
    Originally posted by Tabbytabitha
    Most people want to do more gardening in retirement, not less . Your points are all valid, but Andydownes' argument comes into play here - the age at which you want to do less gardening (late 70s / 80s for someone in good health) is the age at which the upheaval of moving in the first place becomes increasingly less desirable.

    Where I live, downsizing from 4 bedrooms to 2 would release at most about £150,000 without moving to a cheaper area. However £25,000 of that disappears in stamp duty, then by the time you've deducted solicitor's fees, moving fees and the cost of kitting out the new house, you're probably looking at £120,000 at most, and that's assuming not much in the way of new furniture. (Bearing in mind that I'm at an age where the new place might require adaptations.) How long will £120,000 last me - is the upheaval worth it for the sake of, let's say an extra £4,800 a year?

    And if I want to replace my 4 bed house with a bungalow, I can forget about releasing capital.

    Of course in the South East the gap is higher - but so are living costs.
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