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  • FIRST POST
    • pinklady21
    • By pinklady21 11th May 18, 5:56 PM
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    pinklady21
    Pension contributions as repayment vehicle for mortgage. Feasible?
    • #1
    • 11th May 18, 5:56 PM
    Pension contributions as repayment vehicle for mortgage. Feasible? 11th May 18 at 5:56 PM
    Hello
    Looking for a repayment vehicle for my mortgage.

    Currently owe around 160k on interest only.
    I could overpay around 500 - 600 per month and have it paid off by the time I reach 65, which is my expected retirement age in 15 years time.

    I am trying to work out whether I am better overpaying on my interest only mortgage, or whether I should put that 500 - 600 into an AVC with my employer's pension scheme, with a view to using that cash to repay the capital on the mortgage.

    I am a higher rate tax payer, and already paying in about 22% of salary in combined employer and employee contributions.

    Looking for pros and cons of overpayments on mortgage vs additional payments into pension.
    If I overpay then I will benefit from (non) compounding of the interest, on the other hand, if I use pension contributions, then there is a tax advantage.

    Can anyone help me to work out which is the right thing for me to do?
    Thank you!
    Last edited by pinklady21; 12-05-2018 at 2:25 PM.
Page 1
    • Noobie2011
    • By Noobie2011 11th May 18, 6:11 PM
    • 215 Posts
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    Noobie2011
    • #2
    • 11th May 18, 6:11 PM
    • #2
    • 11th May 18, 6:11 PM
    We were always planning on overpaying on lur mortgage to reduce the term and save on interest as opposed to pension contributions however with the savings in interest on the mortgage being less than the tax/ni saving and interest growth on our pension we are now deciding against it.

    I think which would save you more money is an easy calculation but the other thing to look at is how easy you may want access to the money. If paid into your mortgage then easier to get access to as opposed to it being locked away in a pension
    • Cottage Economy
    • By Cottage Economy 11th May 18, 6:21 PM
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    Cottage Economy
    • #3
    • 11th May 18, 6:21 PM
    • #3
    • 11th May 18, 6:21 PM
    One thing you might want to factor into your plans is mortgage amortisation.

    You would save the most interest in the first half of your mortgage term, as providers front-load it. The second half of your term you pay more capital than interest.

    Personally I'd only do it in the first half of the term.
    Last edited by Cottage Economy; 11-05-2018 at 6:24 PM.
    'Save 12k in 2018' 2,500/6,000 (42%)


    "...success in personal finance isn't about mastering the technicalities. It is about mastering yourself."
    • greatkingrat
    • By greatkingrat 11th May 18, 6:33 PM
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    greatkingrat
    • #4
    • 11th May 18, 6:33 PM
    • #4
    • 11th May 18, 6:33 PM
    The problem is the tax. If you accumulate a pot of 160k when you are 65, you are not going to be able to access it all at once in order to pay off the mortgage without getting a large tax bill.
    • Dox
    • By Dox 11th May 18, 6:35 PM
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    Dox
    • #5
    • 11th May 18, 6:35 PM
    • #5
    • 11th May 18, 6:35 PM
    There's an inescapable emotional (i.e. not wholly rational!) element to paying off your mortgage. The feelgood factor often outweighs any other consideration.... I think the happy news is that neither route would definitely be 'wrong' - both are effectively ensuring you have extra cash in later life.
    • dunstonh
    • By dunstonh 11th May 18, 7:12 PM
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    dunstonh
    • #6
    • 11th May 18, 7:12 PM
    • #6
    • 11th May 18, 7:12 PM
    Looking for pros and cons of overpayments on mortgage vs additional payments into pension.
    shortfall risk & investment risk - e.g. if you pay contributions on the basis of a 5% target growth rate and you average say 4% then you will fall short
    legislative risk - Governments like playing with tax wrappers. Rules today may not be the rules of tomorrow.
    tax - The conventional method for pension mortgages is to get the 25% to cover the mortgage. Not the 75%. If you draw the 75% then the tax could be heavy.

    I am a higher rate tax payer, and already paying in about 22% of salary in combined employer and employee contributions.
    As a higher rate taxpayer, the financials of overpaying a mortgage are very poor compared to paying into a pension. Your mortgage interest rate is probably around half the returns you are getting on the pension. And you are effectively getting 40% of free money on the pension. So, overpaying shouldnt be a priority from a financial point of view. Paying into the pension should be.

    If I overpay then I will benefit from (non) compounding of the interest, on the other hand, if I use pension contributions, then there is a tax advantage.
    And pension returns are likely double the mortgage interest in the current environment.

    Obviously, you need to do something to clear the mortgage in the timescale. have you worked out the cost to do that?
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • atush
    • By atush 11th May 18, 10:05 PM
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    atush
    • #7
    • 11th May 18, 10:05 PM
    • #7
    • 11th May 18, 10:05 PM
    as a HRTaxpayer I would pay 100% of all of your Annual allowance that isnt covered by the 22% paid now. You can pay 40K pa, plus you can claw back unused alowance fromt he past 3 years. Only you can owrk this out, so do and tell us.

    Then once you give the rest of the details we need, such as your mtg interest rate, we can give further opinion.


    As said, you can only count on 25% of your pension pot fro the mtg, as that is all that is tax free. Plus you really should have emrgency cash.

    Have you considered downsizing and a smaller mtg now?
    • SuzieSue
    • By SuzieSue 11th May 18, 10:06 PM
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    SuzieSue
    • #8
    • 11th May 18, 10:06 PM
    • #8
    • 11th May 18, 10:06 PM
    s



    As a higher rate taxpayer, the financials of overpaying a mortgage are very poor compared to paying into a pension. Your mortgage interest rate is probably around half the returns you are getting on the pension. And you are effectively getting 40% of free money on the pension. So, overpaying shouldnt be a priority from a financial point of view. Paying into the pension should be.

    Originally posted by dunstonh
    Yes, as long as the additional contributions would still get higher rate relief as the OP is already paying a lot in to their pension.
    • bostonerimus
    • By bostonerimus 11th May 18, 10:22 PM
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    bostonerimus
    • #9
    • 11th May 18, 10:22 PM
    • #9
    • 11th May 18, 10:22 PM
    Do you feel lucky?

    I hate interest only mortgages as you are always left having to pay off the principal at the end. If you have enough in your 25% tax free pension lump sum and or ISAs that you can use that's great. But this is a bill you know you'll have and what happens if it comes due during a market crash. So if you are going to invest to pay off the mortgage rather than making payments against principal do it in something that's fairly low risk.
    Misanthrope in search of similar for mutual loathing
    • kidmugsy
    • By kidmugsy 11th May 18, 10:31 PM
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    kidmugsy
    OP: is your current occupational pension a DB scheme? If so, is it one where you expect to be able to withdraw much of the AVC money tax-free?
    Free the dunston one next time too.
    • Thrugelmir
    • By Thrugelmir 11th May 18, 11:18 PM
    • 58,454 Posts
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    Thrugelmir
    Currently owe around 160k on interest only.
    I could overpay around 500 - 600 per month and have it paid off by the time I reach 65, which is my expected retirement age in 15 years time.
    Originally posted by pinklady21
    Worth modelling some "What If" scenario's. Anything could happen in the next 15. We are not even 10 years forward from the near collapse of the entire UK banking system. While times may feel normal they most certainly aren't.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • Bimbly
    • By Bimbly 12th May 18, 9:21 AM
    • 48 Posts
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    Bimbly
    I'm doing something similar. I actually increased my mortage to do some home improvements (it's really made a difference, it was the right thing). I'd always wanted to pay off my mortgage by 60 so I could retire then if I wanted.

    I worked it out and it was do-able by over paying. Except I wouldn't have much retirement income by 60 (one pension at 4.5k) unless my side business takes off. Which was fine, I could work on my business. But the tax relief on pension contributions kept nagging at me. If I worked to pay off the mortage quicker, I couldn't put extra into my pension.

    So I did the sums. Putting the extra into the pension instead allows me to pay off the mortage and have retirement income. Because of salary sacrifice, for every 68 I don't get in take home pay, I have 100 in the pension (basic rate tax payer, getting tax & NI relief because of SS). Then I can take 25% tax free on retiring. I also get my personal tax free allowance each year and won't pay NI as a pensioner (currently). That's a huge tax advantage. I would take out the money across five years to pay off the mortage making sure I didn't go into the higher tax bracket.

    This is a DC pension in addition to two work DB pensions and would be taken to fund the gap between 60 and 65.

    That's actually paying off by 65, but knowing I have the money by 60 which feels the same to me.

    Unlike you, I'm not going the interest free mortgage route. I have a repayment mortgage and, although I extended the term to age 75, I'm still paying it off gradually. I'm not sure it would be a good idea to go interest free as that is putting all my eggs in the pension basket. Also, what happens if I want to move?

    So that's my thinking. It's looking good at the moment, but with all things like this, it's worth keeping an eye on as conditions may change.
    Last edited by Bimbly; 12-05-2018 at 9:26 AM.
    • greenglide
    • By greenglide 12th May 18, 9:27 AM
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    greenglide
    interest free mortgage route.
    Please can I have an interest free mortgage?

    Pretty please!!!!
    • Bimbly
    • By Bimbly 12th May 18, 10:07 AM
    • 48 Posts
    • 41 Thanks
    Bimbly
    Please can I have an interest free mortgage?

    Pretty please!!!!
    Originally posted by greenglide

    Must not have had enough tea this morning. I, of course, meant interest only ...
    • MK62
    • By MK62 12th May 18, 12:14 PM
    • 74 Posts
    • 48 Thanks
    MK62
    Hello

    I am trying to work out whether I am better overpaying on my interest only mortgage, or whether I should put that 500 - 600 into an AVC with my employer's pension scheme, with a view to using that cash to repay the capital on the mortgage.
    Originally posted by pinklady21
    The problem is that there is no way to work it out - you can only "guess" based on your view of what the markets/economy/interest rates etc will be over the next 15-20 years (which nobody knows).

    The gamble is deciding whether AVCs+tax relief+investment growth will return more than mortgage overpayments+interest over the period.
    Unfortunately, neither I, nor anyone else, can give you a definitive answer to that....

    On the face of it, the tax relief on pension AVCs does look attractive but then that might not count for much if the markets return very little over the next 20 years.
    As a previous poster alluded, economically speaking we are in unknown territory at the moment - it's anyone's guess what will happen over the next 20 years.
    • MK62
    • By MK62 12th May 18, 1:20 PM
    • 74 Posts
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    MK62
    BTW, if it was me in your shoes, I think I might take the risk and go with pension contributions and that juicy tax relief.
    That's not me saying you should do that of course....my circumstances are likely to be different to yours, and I may (or may not ) have a higher risk tolerance......
    • badmemory
    • By badmemory 12th May 18, 1:28 PM
    • 1,606 Posts
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    badmemory
    Does it have to be either one or the other. Why not both?
    • bostonerimus
    • By bostonerimus 12th May 18, 1:44 PM
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    bostonerimus
    BTW, if it was me in your shoes, I think I might take the risk and go with pension contributions and that juicy tax relief.
    That's not me saying you should do that of course....my circumstances are likely to be different to yours, and I may (or may not ) have a higher risk tolerance......
    Originally posted by MK62
    The tax advantages and the 25% tax free lump sum make the pension route attractive. But if that route is taken I think the asset allocation should be conservative so there's little to no chance that you'll lose money as you know that the mortgage reckoning is sure to come. Of course you could split the difference and use some money to make extra payments and some to put into the pension.
    Misanthrope in search of similar for mutual loathing
    • Thrugelmir
    • By Thrugelmir 12th May 18, 1:52 PM
    • 58,454 Posts
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    Thrugelmir
    That's not me saying you should do that of course....my circumstances are likely to be different to yours, and I may (or may not ) have a higher risk tolerance......
    Originally posted by MK62
    For many it's the security of their employment in their latter years that's the determing factor. Losing your job when you are over 50. Can have a life changing impact on ones finances.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • dunstonh
    • By dunstonh 12th May 18, 1:52 PM
    • 92,584 Posts
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    dunstonh
    The tax advantages and the 25% tax free lump sum make the pension route attractive. But if that route is taken I think the asset allocation should be conservative so there's little to no chance that you'll lose money as you know that the mortgage reckoning is sure to come. Of course you could split the difference and use some money to make extra payments and some to put into the pension.
    Originally posted by bostonerimus
    Or alternatively, use a sensible asset allocation (which may be upto medium risk) but use a low target growth rate.

    If we look back at endowments, which is what the OP is proposing in a roundabout way, its not that the underperformed. Many have done very well for the risk level they took. The problem was they were mostly invested at cautious to medium risk with inappropriate target growth rates for that level. i.e. they have achieved 5-7% p.a. returns over the term but the contribution rate was set on the basis of them needing 8-13% p.a. to hit target.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
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