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  • FIRST POST
    • pollyanna24
    • By pollyanna24 1st Mar 18, 11:06 PM
    • 3,915Posts
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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 2
    • OldMusicGuy
    • By OldMusicGuy 9th May 18, 12:18 PM
    • 639 Posts
    • 1,383 Thanks
    OldMusicGuy
    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 downsizing.

    We have always planned to use our property as an asset that can release capital in retirement. And the plan has worked very well. We stretched ourselves 20 years ago and bought a house that was probably bigger than we needed (5 bedroom as opposed to 4 bedroom) but that has worked out really well. We always planned to relocate from the very expensive area in the SE in which we live to a cheaper area in the South West. We will be able to move from a 5 bedroom house to a 3/4 bedroom detached house and release a lot of capital. This will also reduce the running costs of the house by about 25% I reckon.

    We will renovate the next place we buy and kit this out as a 20 plus year retirement home for the two of us (our son is just about to move out). We will move to an area that more suits our lifestyle as a retired couple (we live in a suburban area in the SE) and it will be a renovation/improvement project for both of us, as we both enjoy DIY. The next planned move after that will be when we are in our 80s to a flat. That will release a bit of capital but we should have less need for that at that stage. That will leave the flat to be sold to fund care home fees if needed.

    I've always viewed property as an asset to be used in retirement planning. If you plan ahead, downsizing definitely can pay dividends. I have seen too many relatives of friends and family get stuck in houses that are too big for them as they get older, which can hasten the move into care.
    Last edited by OldMusicGuy; 09-05-2018 at 12:21 PM.
    • Rikaroo
    • By Rikaroo 13th Sep 18, 3:08 PM
    • 13 Posts
    • 2 Thanks
    Rikaroo
    I'm all for pensions with the 20% rebate, plus another 20% if you're in the higher tax band (I'm not but the wife is)
    Regarding the property and the daft amount of costs lost to downsizing, couldn't you use equity release or some such scheme? I understand you'd not have the house to pass on once you're pushing up daisies but you could pass on your SIPP pension instead.
    • Malthusian
    • By Malthusian 13th Sep 18, 5:32 PM
    • 4,971 Posts
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    Malthusian
    Regarding the property and the daft amount of costs lost to downsizing, couldn't you use equity release or some such scheme?
    The costs of equity release are even dafter than downsizing.

    Stamp duty could be abolished and interest rates on equity release could be slashed in half, and both would still be a more expensive way to access money in retirement than withdrawing from a pension fund, which is free.
    • Cash-Cows
    • By Cash-Cows 14th Sep 18, 2:44 PM
    • 222 Posts
    • 164 Thanks
    Cash-Cows
    There's always a danger of being asset rich and cash poor if too much reliance on property for retirement plans.
    • shiny76
    • By shiny76 14th Sep 18, 2:56 PM
    • 467 Posts
    • 500 Thanks
    shiny76
    I'd overpay the mortgage. Who's to say I'll still be around for retirement!
    • badmemory
    • By badmemory 14th Sep 18, 10:10 PM
    • 2,265 Posts
    • 3,290 Thanks
    badmemory
    Surely this is largely age dependant. If you are under 40 then toss a coin but I would go for the pension. If you are over 50 then I would go for the mortgage especially if there is any chance of redundancy. It is amazing how much difference having paid off your mortgage makes to your attitude to an impending redundancy. The threat in 1998 caused a few OMG what will I do (I was over 50 so it didn't look good, ageism was alive and well) in 2003 after the mortgage was gone "bring it on" was more the description. It didn't actually happen to them until 2016 by which time I had been retired 4 years.


    So even rethinking & with the advantage of hindsight I still believe I did the right thing.
    • bownyboy
    • By bownyboy 14th Sep 18, 10:27 PM
    • 321 Posts
    • 378 Thanks
    bownyboy
    When we took a mortgage out in 2009 we stared overpaying in 2011 for 3 years. Initially it was great seeing the end date massively reduce every time an over payment was made.

    However, as I began to educate myself more on personal fiance, I realised that (for us) paying off a low interest mortgage was not the best move.

    So, we instead paid more into pensions and Stocks & Shares ISAs as our objective is to FI/RE.

    The reason being, once you've paid off the mortgage the money is gone. You can't access it again (unless you remortgage).

    We'd rather take the money we were overpaying and invest in Vanguard Funds which over time we know out perform the 2.19% of the mortgage.

    4 years later we could pay off the mortgage if we wanted, but I much prefer having cash / investments to hand that we can utilise for whatever we want.
    early retirement wannabe
    • Fireflyaway
    • By Fireflyaway 15th Sep 18, 8:38 AM
    • 2,077 Posts
    • 2,398 Thanks
    Fireflyaway
    I'd vote mortgage. You are safeguarding your home and with no mortgage payment will have more to save. Have you used the mortgage overpayment calculator? It shows how much interest you can save by paying more On the mortgage.
    • kinger101
    • By kinger101 15th Sep 18, 2:33 PM
    • 4,491 Posts
    • 6,230 Thanks
    kinger101
    I'd vote mortgage. You are safeguarding your home and with no mortgage payment will have more to save. Have you used the mortgage overpayment calculator? It shows how much interest you can save by paying more On the mortgage.
    Originally posted by Fireflyaway
    Not great advice. It's possible even with with regular savings accounts to get a higher interest rates than the one being paid on a mortgage. As a starting point, one would deposit money in one of these then make a lump-sum payment every year.

    But OP's original question related to pension v mortgage. We can't time the market, but historically, stocks and shares have outperformed cash over the long term. And even for basic-rate taxpayers, there are tax advantages too (possible NI reduction, 25% tax-free)

    3-6 months income in cash for rainy day, then rest into pension would be my advice.
    • Marvel1
    • By Marvel1 15th Sep 18, 3:14 PM
    • 3,690 Posts
    • 4,074 Thanks
    Marvel1
    Me personally the mortgage, that way the sooner paid the better it's mine and one less thing to worry about it in case of job loss.
    • dawyldthing
    • By dawyldthing 16th Sep 18, 12:01 PM
    • 3,196 Posts
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    dawyldthing
    I know I said it before but I second the one above. I’m 8 weeks pregnant. In the next month or 2 I’ll lose most of my wage as I won’t be able to do the main part of my job. My outgoings now is less than £300 a month thanks to knuckling down and paying the mortgage. I’d be panicking now if I hadn’t and had another £300 a month plus to find
    roll on end of April 2019 *20 done* = *20 to go*
    • Zola.
    • By Zola. 17th Sep 18, 11:33 AM
    • 1,347 Posts
    • 573 Thanks
    Zola.
    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.
    Originally posted by pollyanna24

    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.
    • chelseablue
    • By chelseablue 17th Sep 18, 12:40 PM
    • 2,650 Posts
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    chelseablue
    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
    Mortgage starting balance £231,000
    Mortgage after Year 1 £225,000
    Mortgage after Year 2 £218,000
    • Zola.
    • By Zola. 17th Sep 18, 12:57 PM
    • 1,347 Posts
    • 573 Thanks
    Zola.
    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.
    • Kynthia
    • By Kynthia 17th Sep 18, 1:51 PM
    • 5,383 Posts
    • 7,528 Thanks
    Kynthia
    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
    Originally posted by chelseablue
    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!
    • chelseablue
    • By chelseablue 17th Sep 18, 2:10 PM
    • 2,650 Posts
    • 3,075 Thanks
    chelseablue
    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.
    Originally posted by Kynthia
    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 year
    Mortgage starting balance £231,000
    Mortgage after Year 1 £225,000
    Mortgage after Year 2 £218,000
    • vegasvisitor
    • By vegasvisitor 18th Sep 18, 6:21 AM
    • 2,175 Posts
    • 1,420 Thanks
    vegasvisitor
    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?
    • Malthusian
    • By Malthusian 18th Sep 18, 10:44 AM
    • 4,971 Posts
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    Malthusian
    I'd overpay the mortgage. Who's to say I'll still be around for retirement!
    Originally posted by shiny76
    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".
    Last edited by Malthusian; 18-09-2018 at 10:49 AM.
    • chelseablue
    • By chelseablue 18th Sep 18, 10:53 AM
    • 2,650 Posts
    • 3,075 Thanks
    chelseablue
    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".
    Originally posted by Malthusian
    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 mortgage
    Mortgage starting balance £231,000
    Mortgage after Year 1 £225,000
    Mortgage after Year 2 £218,000
    • Kynthia
    • By Kynthia 18th Sep 18, 12:27 PM
    • 5,383 Posts
    • 7,528 Thanks
    Kynthia
    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.
    Last edited by Kynthia; 18-09-2018 at 12:30 PM.
    Don't listen to me, I'm no expert!
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