To over pay mortgage rather than pay in to pension

[Jroseforever]

Thoughts?

Every month I overpay mortgage by 20%

Any bonus or windfall... I put straight in to mortgage.

I am late thirties and hoping to have paid off within 10 years, which is realistic. It’s a lovely property in very sought after area of SE England, valued at £600k.

But my pension... since stopping working (to retrain) I don’t pay in to and have never really prioritised.

Total fund of about £60k but not growing obviously.

Would really appreciate thoughts.

Thanks.

Another one saying you get more potential for growth in your pension if you contribute early. The tax breaks and employer contributions are especially valuable.
I speak as someone who will (hopefully) benefit from a public sector pension the contributions I make are mandatory fixed at 13.5%

@BumblebeeBum

Honeylulu - I hope you have the wrong end of the stick as that is terrible advice from a financial adviser! Yes it’s not as simple as ‘debt = bad’ but actively taking on debt when you don’t need to is not sound financial advice

Oh dear! Maybe just as well I didn't listen to him. 😂 He charges 6% of all my investments too (St James Place). He really did say it though; he was talking about a high earner with barely any pension who could easily service the debt I suppose.

Pressed too soon you can also make smaller overpayment to the mortgage. Handy calculator on the MSE website to check the effect of an overpayment.

Me and my DH have just created lots of detailed spreadsheets to decide where to put our excess money. We decided based on our calculations that

1. we should pay into our employer pensions up to our employers amount they will match.

2. anything above that we would split equally between a private pension SIP and invest in stocks and shares ISA. The reason we are splitting is because the pension we can’t access if we need to but the S&S we can, so long term and medium term savings.

Paying down the mortgage would be action 3. However we personally have an offset mortgage and savings will equal debt next year so as the goal is so close we are continuing to put the money on the mortgage until next year. But only because we can see the end in sight and we are young (early thirties).

In your case I would pick pension over mortgage. Have you considered remortgaging to a better deal with a better loan to value.

You should pay into a pension first. The nore time there is for compounding the better your pot will be.
Money is cheap to borrow at the moment there is little reason to overpay a mortgage.

Right now it's a very good time to have a mortgage because the interest rates are so low. So reducing your mortgage isn't necessarily the best use of your money. It feels good emotionally to pay off debt, but if you crunch the numbers then you probably have better options. (Incidentally, please shop around and remortgage to make sure you're on the lowest possible interest rate, if you haven't already).

If you put money into a pension scheme then you are essentially betting on the stock market doing ok. Over a long period of time this is normally a good plan. My impression (clearly no expert) is that right now things are pretty crap, but hopefully likely to improve as the stock market recovers from covid... so potentially this is a good time to be putting money in. (Although nobody has a crystal ball!).

TL, DR : In your position I would put money into pension instead of mortgage.

Forgot to add. Pension is better than mortgage overpayments.

However pension isn’t actually that great. When we ran the numbers stocks and shares significantly outperformed the pension when dividends are reinvested.

People who are saying their house value outperforms their pension. The OP would have that anyway. The OP will still benefit from increase in house prices whether they put money into mortgage or pension.

Pay off the mortgage, (this is from someone on a pension) I didn't save when I was young, 3 kids, 2 big mortgages, unreliable Husband. A paid for roof over your head gives you security, if you loose you job, you have options. You can sell, buy smaller or move to cheaper area, I have done both.is money cheap to borrow at the moment, there is not much to spend it on, and the financial situation of the country as well as indivuals is very uncertain.

I"d put some in a pension as the whole basis of pensions seems to be the more you put in earlier the better. I'd over pay my mortgage too but only if i had money after paying a sensible amount into mortgage /savings.

I'd also add that having all your wealth tied up in one house is very difficult if you get ill and need to access it quickly.

I would put more into the pension to be honest because that way you benefit from compound returns. A rule of thumb is to contribute the % of your salary which is half the age you were when you started contributing e.g. if you were 30 then 15%. My pension scheme has a calculator on it which you can adjust to show when you will run out of money depending how much of it you draw down per year - it’s worth seeing if you can find a tool like that and how much more you need to put in to achieve your desired standard of living in retirement.

Not servicing a pension when you have the means to do so is madness.

Plenty of OAPs sitting in valuable houses that they can’t afford to heat because they’re mortgage-free but have no income.

A mortgage doesn’t cost you a huge amount in terms of interest, but there are huge advantages towards using your money in a tax efficient way to contribute towards a pension.

Get a proper financial advisor and put a financial plan together. Its probably better to go for the pension but you need someone to go through every element of your finances.

It depends ... do you or DH receive employer pension contributions? Are you or DH a higher rate tax payer? If so, then paying into pension probably makes more sense - once you have enough of a savings cushion.

Fwiw, I paid my mortgage off at a similar age to yourself, as I was a lower rate taxpayer with no pension contributions but had a decent savings cushion. Since being a higher rate tax payer any surplus now goes into pensions and savings.

Definitely speak to a financial adviser but I’d say start putting money into your pension. It’s never a good idea to rely on one source of income, but spread your options. That’s also why lots of people bought property on a buy to let basis a few years ago when the prices were lower.

You don’t say if you’re married or living with someone but if you meet someone, you might find that you move house and end up owning your next home jointly and so your ‘share’ of the value will change.

Also, house values can crash at the wrong time. My friend bought her ‘forever’ home in the country with beautiful views over fields and the sea in the distance. Unfortunately, the local farmer built two massive 100ft long metal barns to house cattle indoors, so there’s the noise and smell plus it’s ruined her beautiful view and damaged her hedge and wall during construction. She wants to move but the value of her house has decreased significantly so she’s stuck there and miserable too.

If you are training/studying and no salary at the moment the most tax relief you can get is on £2880 ( I think , check Government website). I would start a Lifetime ISA (LISA) if longer term training ( this allows upto £4000 a year invested and the Government adds another 25 %) This can be accessed when 60 without penalty.This would allow you to invest £6880 a year with Government topping it up by 25%. If earning then using tax relief and employers contribution especially if higher rate tax payer would be a very efficient in way to save. Get Financial advice.

I'd do a mix. Why not halve what you overpay to the mortgage and put that in a pension. Best of both worlds then. PPs are right, if you can't sell when you need to/property values collapse, what will you live on in old age?

The issue with this is that you are missing out on tax relief and also (potentially) employer contributions?

I am focusing on my mortgage as I live in London, where property prices are high. I suspect I will eventually sell and use some of the money towards my retirement. I do have a pension through work but it’s very small.

Isn't a basic question, what will you do for income in your retirement if you don't have a decent pension?

Its all very well having a lovely, valuable mortgage free property when you're 70 but what will you do to generate income? You would have to sell up / do equity release.

Pension - there are tax advantages to paying into a pension. You are paying tax on the money you use to overpay our mortgage.

Plus, mortgages are very cheap at the moment, as long as you have a good loan to value ratio of 60% you will be on the best deal, at not much more than 1%.

You could also look at saving that money every month and investing in either another property, you need to look into as not as tax efficient these days or another investment vehicle. Whilst mortgages rates are low, you have a very cheap why as accessing money to invest elsewhere, either in your pension or in a business, or someone you know etc.

but if you pay into your pension it's tax free! I think this is a terrible idea tbh

Mortgage rates are at an all-time low so unless you're trapped on a higher rate of interest I'd suggest it makes more sense at your age to put your money into a pension. The government will make a contribution via pension relief. It's also a good idea if you can to put as much as possible into your pension now so that it has the longest possible time to mature. You have to be 55 before you can access it and 20 years should enable it to grow. Look at self-invested pension plans (SIPPs). If you want to retire at 60 on the equivalent of £25,000 a year you're looking at needing a pension fund around £600,000 so you've got a way to go. Too many people are planning on trading down to a smaller house on retirement but don't realise that desirable smaller houses come at a premium, because they're sought-after.

Id do 50/50 into pension and mortgage the sooner the mortgage is paid off the less interest to pay BUT i would want to be growing my pension whilst i still could

Total,y depends on your personal circumstances

For me, mortgage is priority.

You definitely need to start contributing to a pension asap. The earlier you start the less you need to contribute to get a good pension when you retire.

A good rule of thumb is to contribute a % of your salary equal to half your age when you start contributing. So at 30 15% and at 40 20%.

You should also have an emergency fund saved somewhere accessible. Pensions and money overpaid on your mortgage isn't much good if you lose your job and need to pay the council tax.

I would work out what you can afford and concentrate on the pension and emergency savings for now. When you have an emergency fund you can then split between the pension and the mortgage.