To pay off my mortgage or save for pension ?

Just to say as well that having paid off the mortgage, it freed up the possibility to put money into other savings and investments. Those savings and investments have performed better than my pension, which having just checked today is a fair amount less than it was in value in 2022, which is when I started putting money into guaranteed income bonds and ISAs etc. I am not drawing my pension yet, so the value could increase, but it must first make up what has been lost.

Ideally I think it’s good to have several pots, but I would make the same decision today as I did back then to pay off my mortgage.

Overpaid our mortgage until it was paid off. No regrets, so glad we did it.

Once you have a decent % of home equity, then your emphasis should be your pension because the government want you to save for your old age and will give you tax breaks. Pension is your priority so you have years to compound. Inflation will automatically reduce the value of your mortgage.

This. The tax implications are massively significant. If you’re a higher rate tax payer there is far more incentive to pay into your pension.

The risk with aggressively overpaying your mortgage is that you end up property rich but pension poor. You can’t live in your flat and sell chunks of it to fund retirement.

It doesn’t have to be all or nothing. You don’t have to choose one or the other.

1. Prioritise getting something meaningful into your pension. Aim for 10-15% of your income. If that feels too much right now start lower but start consistently.
2. Then overpay the mortgage with surplus income in good months, which keeps things flexible.

Every £100 you put into your SIPP only costs you:

£80 if you’re a basic-rate taxpayer
£60 if you’re higher-rate (after reclaiming)

That’s an instant, guaranteed return your mortgage overpayments simply can’t match.

Overpaying saves you interest at roughly your mortgage rate (say 4–6%). That’s solid — but it’s post-tax and usually lower than long-term pension growth plus tax relief.

You’re in a better position than a lot of people and you still have enough time to maximise your pension.

What we are discussing is a specific PP's decision to pay off the mortgage rather than maintain a mortgage + make a leveraged gain on the house + have the money free to invest elsewhere. So in the real world she did have money to invest elsewhere. You told her her post made no mathematical sense when in fact it did make sense (although was perhaps not phrased perfectly).

You mentioned the capital repayment but then treated the whole sum (capital + interest) as being lost.

You are right of course that someone might quite reasonably choose to pay off a mortgage for reasons of security, even if it doesn't make the best sense financially.

Leaving this now as we are not getting anywhere.

@BirdytheHero I did not ignore the part capital repayments I said specifically in first 5 years you would repay approx 25K of the capital, 125K made up of 50k deposit 50k rise in house price 25k repayment of capital therefore increasing equity but you still made 63k in payments 25k produced equity 38k being interest

In the real world the people do not have 200k to do something else with as the vast majority of people with 200k spare would have either borrowed less or brought a bigger house,
if they genuinely had 200k and chose to invest it in stock market rather than taking a smaller mortgage and use the interest to pay off mortgage getting 8% on stock market which maybe taxable if not in ISA to offset 5% interest rate there is a net gain depending on tax of 3% you may be lucky and the stock market has a good year like last year when it gained 20% but the longterm average over decades is 8% and obviously the 200k (-ongoing repayments) in stockmarket would generate more growth than the couple drip feeding the cost of repaymments into stock market
none of the above count for the peace of mind knowing your house is not vulnerable if you lose your job or get sick you wouldn't need term life insurance for the mortgage ( though if you are young and healthy this is normally not very much at all)
you get the same thing on things like location location location someone has max budget of 300K ( probably 30k deposit 270K mortgage ) if you get the house for 275k, they will not have 25k floating around; the 10% deposit would be 27.5K with slightly smaller mortgage as the lender will not give them a 270 mortgage on 275k house if they had saved the 30K they would have 2.5k spare for decorating etc it looks like you have saved 25k but it is not really available to spend

Does it have to be a binary choice? . I would probably put the majority of my free cash into pension savings but also just chip away a little bit at the mortgage too because it is quite emotionally satisfying.

Whenever there is a " loose change" amount in my accounts I ping that into the mortgage as an overpayment and it's just a little satisfying way to chip away it a bit more

This.

Pension is savings/future planning but mortgage is debt - clearing it offers an important security if you’re single and self employed.

I would try to do a bit of both, but prioritise overpaying mortgage when you have extra cash.

@Cottagecheeseisnotcheese You've missed the opportunity cost, which is the key thing- the person with a £200k mortgage has £200k to do other things with, things which are likely to do better than the interest cost on the mortgage. (Unless you're just arguing that it's better to have £250k than £50k, in which case no argument from me 😂)

Less importantly (in the first years of a mortgage) you're treating the mortgage payments as simply gone whereas in fact they will be partially a repayment of capital.

Pension contributions are tax free savings and it’s probably are more sensible option. You can then pay off the mortgage with any lump sums

say 2 people buy identical 250K houses one deposits 50K and has a mortgage for 200k (£1050 a month for 25 years)
the other person owns it outright so now has no mortgage payment
5 years later both houses worth 300K
the person with mortgage has paid off about 25,000 off mortgage in this time so now in theory has a 300k house with 175k outstanding and 125K equity their 50K deposit has given them 125K of course minus 5 years repayments of 63K so a balance of 62k so net increase is 12k on their 50k deposit in 5 years which equates to 24% over 5 years ( 50,000 invested at 4.5% would have had same gain)
however their neighbours have a similar increase of 50K in house value and of course no monthly payments so a saving of 63k even if not invested they now have 363K so if they wanted to move to a 500K house they have 363K deposit and would need a small mortgage of 137K ( however 63K invested would be more like 68 just in a 3.5% bank savings account and 77k if invested in stocks and shares type ISA)
the neighbours would now have a 125K deposit and need a 375K mortgage to move to 500K house
while notionally you can say the initial investment of 50K deposit by original couple is now worth 125K a leveraged gain of 150% but this gain is offset by payments etc

while the gain of couple B is 50K on their house, a 20% gain
couple B have a much healthier financial situation overall as for overall personal finances you have to factor in money saved from not having a mortgage payment and the fact that it will gain interest too

but looking at net worth altogether couple B being mortgage free are saving and investing and growing money in a more sustainable way

leveraged gain works in business so you can borrow to expand and invest at a greater rate for better long term yields than waiting until you can cash flow everything but in terms of house buying for a single family home as opposed to a string of rental properties is not really the answer

it is a completely different question that if you have £1000 a month spare are you better investing it or overpaying mortgage ... you are better investing it mathematically so the couple with mortgage there is no really advantage in paying mortgage off with extra savings but for the couple with the paid off house there is absolutely no point in getting a mortgage uness they want to upsize and now having a 300k house ( even if they didn't save a penny of what would be a mortgage payment) they have a 300K deposit for 500k house the couple with current mortgage have a 125k deposit once you have a LTV of less than 50% you can get very good mortgage deals so even if both couples need a mortgage for 500K house the couple with 300K deposit will get a better rate albeit probably 0.5-1%

It doesn’t need to be one or the other, Dh and I are self employed and we did both. Half of any money went on over paying the mortgage and the other half went into the pension. If an extra lump sum came in through work, that went into the pension because of the tax benefits.

still doen't work mathematically

So long as you continue with your mortgage repayments, you'll be mortgage free before you retire.

So to me, the best choice is a pension, one that is medium to higher risk, so more equities, you've enough time to ride out dips and troughs, sure there is risk but there is in anything, you might have poor health... anything can happen but the chances are they wont, so having a bit more than the SP is a good idea.

If you pay off Mortgage early, you wont have enough time to build a good pension, even with higher payments in, unless you re talking very large repayments ie 10s of 1000's

I think she's talking about leveraged gains.

@TheHedgehogCannotBeBotheredAtAll that makes no mathematical sense at all

It is roughly similar - either paying off a debt which costs the interest rate or paying to pension which adds interest rate. The difference changes over time based on the rates and state incentives (tax free, ...).

You can spend time or money to model and optimise.
You can understand what the most useful bonus is (tax free?) and make sure to use it at least a bit.
You can choose based on what will make you most happy.

I would probably prioritise the mortgage now - if you are single and don't care about leaving inheritance, you will always have the option to consume the value, maybe there will be some decent reverse mortgage/equity release while living there product available later, so the money will serve you twice this way.

Don't underestimate the impact of compound intetest. Paying off a mortgage is rarely the best choice long term. If you think you might need the money in 5 to 10 years for an upsize I would be investing it in a stocks and shares ISA. If a higher rate tax payer and you don't need to upsize a pension makes more sense.

I was mortgage free at 33. It was a bad plan. If I could have my time again I’d do my pension. Moneysavingexpert has a mortgage overpayment calculator that you might find interesting. An additional dimension is that when you pay off your mortgage you are then only getting appreciation on the asset, not a month by month predictable increase in your potential deposit for the next place or future investment. While you have a mortgage, the capital value is constantly going up, increasing your buying power for the next place, as you are saving into it every month. When you stop making those payments, the investment value only grows by the rate of increase of house prices for your type of house in your area. This is why we actually managed to reduce our property buying power by paying off our mortgage early and I no longer think it is a good idea. We have a mortgage again now (I’m 38) which really makes us pay attention to keeping our income high enough to pay it (which as a freelancer makes me think more about getting more clients etc instead of coasting).

As you're 39, a LISA is definitely worth considering as part of your pension planning. Current rules are you need to have opened it before you're 40 and you can pay in £4000/yr and the govt tops up 25% and you can take it tax free at 60 (or to buy your first home bur not relevant to you).
When I was selfemployed I used my allowance each year and its invested into stocks and shares so has performed very well and my £30k is now worth £70k

Pension growth is easier the earlier you start, so getting some in there as early as possible makes sense, as you also get the tax back from the government which tops it up.

You haven't mentioned the numbers as that will make a difference, but when me and DP (so I appreciate a different position from you in terms of we had 2 incomes to service said mortgage which gave a little more security) were looking at how to deal with a set of pay rises that gave us an extra 500 a month between us, we did 100 on the mortgage and 200 each into pensions monthly. Our mortgage interest rate was very low at the time which may also factor.

I'd (personal opinion, everyone's risk appetite is different) look to be mortgage free by 50/55 so using overpayments if necessary but not if you are already on that forecast, and putting the rest into pension. This will allow the pension the most time to grow, whereas the mortgage has a bit more of a finite end.

as a free lancer I would veer towards the 6 month end of 3-6 months expenses as you have no sick pay, work out how much money each month you can save (assuming you are debt free apart from a mortgage) then decide do you need to save for a new to you car in the next 2-3 years how much you shuld put in a pension
as you are 39, you have 16 years untill 55 140,000 mortgage over 16 years rounghly £1000 a month but over 10 years would increase to 1350 a month

if you invested 150 a month ( increasing by 2% inflation per year) for next 16 years compound at 8% you would contribute 36,000 but it would be worth £76000 continue another 10 years contributions total 64K pot 209K
contributing 250 a month would give contributions of 58,000 and a pot of 119,000 after 16 years but 26 years would mean contributions of 104K and a pot of 333K

if you take your house payment of 1000 you will have 10 years to invest it ( ages 55-65) you will contribute 120k and it will be worth 180K in 10 years at 8%

you need to decide with both your financial head combined with values your health and other goals to decide what is the best strategy for you to maximise returns and fulfill your dreams

your chances of dying before pension age are small do not let anecdotes weigh more than real data you know your family medical history

It depends on your income. Anything over 50k you can spare should go into your pension as you’ll get higher rate tax relief of 40%.

I would split difference. Put some money into pension each month - treat it like a bill and use rest to overpay.