Please help! Pension or mortgage, very confused

[Twoshoesnewshoes]

I know this is very similar to a recent thread, but I got very confused by that one, too!
please help me calculate the difference in these two scenarios, both over a ten year span.
a) I downsize house now, will have a mortgage for two years, then 8 years of saving £2k a months in s&s isa.
house worth £425k + assumed increase of 6 percent?
b) I upsize now, so increase mortgage by £100k, pay £2k a month on mortgage for 10 years on £285k mortgage. I think I will pay off around £165k?
house worth £700k + assumed 6 percent? Minus the remaining £120k mortgage.

don’t know if that makes sense….
thank you!

Hmmmm online calculator suggests I’ll have paid off £120k after 10 years in scenario b

Where does the pension come into it? You don’t mention it in either scenario? Do you need to upsize?

Oh sorry, the isa would be for pension savings.
no don’t need to upsize.

Have you got a work pension or a SIPP?

NHS pension, DP has company pension

Why are you putting pension savings in an ISA?

Why are you using an ISA for pension savings?

Edited as not enought time to correct post for clarity

I think the flexibility would be useful, but can be persuaded otherwise!

I'd open a proper pension, if you choose the pension option, and not an ISA. You don't want to run the risk that you raid the pot. A proper pension scheme will also have default fund options that will set an appropriate risk level, so you won't need to manage the investments. Whereas if you go with an ISA you would need to do more thinking about investments yourself - do you have the knowledge to do that? I dabble with investments with my ISA savings but wouldn't want to risk it for my pension.

My DP would have some knowledge/interest in the investment side of it.
im trying to work out the difference in isa savings vs property value gains, but im in a muddle!

I think pension wise it is likely to depend, you might be eating a lot of your available annual allowance with the inflationary uplifts on your NHS pension so you need to check that out carefully because you don't want to breach contribution limits.

Also worth considering if you'll pay less tax on the pension when you get it out than when you put it in (if you are a higher rate tax payer but will be basic rate at pension age, for example).

I wouldn't be paying into a pension purely to stop yourself raiding the pot, unless you have form for that.

You can also only put £20k per person per year into an ISA so it depends if your DP could put some in as well?

If you downsize, would you have the ability to downsize again? If not, then the value of the house is presumably irrelevant.

So in one instance you'd have £24k per year saved, so £192k plus growth.

You can work out growth using a spreadsheet as follows (columns on first row then formulas in the same order)

Starting balance, additions in year, growth rate, growth in year, closing balance

Starting balance: first row = 0, second row = previous row's closing balance

Additions in year = whatever you're planning to add

Growth rate = whatever you decide would be a reasonable growth rate based on where you invest in either % format or as a decimal of one (so e.g. 5% = 0.05)

Growth in year: this depends if you'll be adding all 24k at the beginning of the year or monthly. If all at the beginning then you need a formula of = (starting balance+ additions in year)*growth rate

If it will be monthly then do = (starting balance + (additions in year/2))*growth rate

The end balance is then the starting balance + additions in the year + the growth

You can then repeat that for every year and work out what you'll have in different scenarios.

Then you can do a similar thing where you calculate your mortgage. You need to know how much you have on your mortgage and how much you are paying off each month and your interest rate. You can then calculate the interest you're being charged each year, the amount in cash you'll have paid them and the excess is what's coming off the mortgage each year.

So if it's a £285k mortgage at say 4.5%:

Year one: starting balance = 285k, interest in month 1 = 285k * 0.045/12 (simplified but it will do the job) = 1.06k interest in month one. So you'll have paid just under 1k off the mortgage in month one. Then repeat for month two with the new closing balance and so on and so forth.

So then after 10 years, you'll presumably have paid off a little bit more than £120k. And you'll have £165k or so left on the mortgage. So you'd have £535k of equity in the house, plus any growth. But you'd presumably need to buy the downsizing sized house of £425k so then you'd have £110k of equity to release, or a bit more if you get decent growth in the house price value (i.e if they went up 20% you'd have a house work £840k so equity of £675k and need to buy a house worth £510k so £165k.

I think the likelihood will be that you'll see greater growth on an S and S ISA than you will in housing but no one can be certain and you'll need to sit there and play with the figures as the mortgage side is massively impacted by interest rates, the equity is massively impacted by house price growth and the S and A ISA by the growth on that.

I think the pp have probably covered a lot of this tbh and i am getting out there first that I am absolutely not an expert in this area, but I had a play and created these attached (pics seem to be loading).

The table will give you a number, but the key is really the notes picture. The notes pull out some of the reasons why its not a simple answer and I definitely wouldnt be making any decision based on the sweeping asumptions used for the numbers in the table, as it could be costly. Personnally if I didnt want to make a potentially very expense mistake I would get advice from someone who can walk through your current financal position, considering your longer term goal and all the uncertainties...but hope it helps a little

Also sure someone will point out if I've mis calculated anything

@Anon1231990 that is amazing!! Thank you so much ☺️
its really helpful.
essentially, financially in ten years time I’d be in a similar situation in both scenarios (I think? Unless I’ve completely misread?)
in which case, I could live in a posh house for ten years!

That is assuming the houses go up by 6% per year every year.

Your takeaway from their post needs to be that you need to do these calculations yourself because e.g. you need to add the cost of stamp duty on the big house purchase which you won't ever get back, plus the cost of having to move twice and you need to consider if you genuinely think your house will increase in value by 6% and if S&S will increase by 6% on average or if it will be more or less, plus whether or not you even have the leftover pension allowance to pay that much in, plus it's influenced substantially by the mortgage rate.

This is very long, excuse any typos and complete lack of grammer i have just tried to get my thoughts down and not got time to re read and correct.

No problem, in terms of the summarisation it really goes back to the notes info. The take away message is the summary table I've provided is not detailed enough in terms of market data, housing market, risk tolerance, current finance position salary savings etc to be able to use it for any informed decision.

The amount of detail included just isnt enough to be able to make a conclusion tbh. The final 10 year position will be hugely dependant on interest rates, market performance, economy etc and this table doesn't take into account any market analysis, it treats everything as acting the same and applies a consistent 6%. One of the only certaint3 I have is that this 100% won't reflect reality.

Not to be taken as advice at all but my personal view is house prices will slow, stall, or fall over the next 3-5 years in real terms, and then pick up, so the final house value in that scenario would be very very different.

Interest rate 3.5%, and isa /sipp gains 6% used in the cals I think are on the low side

I think investments will out perform house price increases in the next 10 years, but this also depends on what you invest in, which markets you are operating in for both the the ISA/SIPP investment and housing area

Considering real life changes is also key: If you were to become unable to work, your available monthly 2k available might be reduced. In this situation and the upsizing option, you would have a large debt to service (mortgage) and no savings. I don't know if you have any insurance products in place or if my statement re savings is true, all of this needs to play into your decision. Many people would have the solution of selling if they couldnt work, but if you are unable to pay the mortgage whilst in the process, you are in a difficult postion as you cant wait it out. house prices could be stagnent, housing market depressed, interest rates high etc you could be stuck for a period of time and ultimately walk away with similar equity as when you bought but with negative impact to credit worthiness because you haven't properly considered your financial profile.

Your age, current salary, future salary progression, and pension situation is really important to consider. As you can take a 25% lump sum tax free from DC pension and depending on your specific circumstances the tax relief combined with investment gains in certain cases is almost impossible to beat imo

Thats why you really need to go through all of your numbers and look at your wider picture from a personal circumstances POV. Then you can include all the variables and calculate impacts of different rates (interest, investment returns etc) and decide how much / what types of risk you want to take before making a decision.

I know its frustrating, but honestly there are so many considerations that the only way to get comfortable with a decision and hopefully not make a big mistake is to have detailed conversation with someone who is familar with financial planning mkong sure all you and DH finances are considered, and proper market analysis is performed to make the scanarios more realistic (including various rates, timing increases decreases etc). If you dont do that it really could end up costing you huge amount longer term.

Just to demonstrate the personal nature of all the above, in the last 2 years my friend and I have chosen two very different approaches, because our personal circumstances and finances are different.

My decision: purchased house well below mortgage capacity / affordability (below 2.5 x salary), amended lSA and Pension investments to accept more volatility with the aim of higher investment gains. Monthly I am overpaying on each mortgage payment by 35% to increase capital and mininse interest over mortgage term.
Doubled my pension contributions - this is 100% the most beneficial option for me given the tax relief, and importantly my long term retirement goals (age I retire and lifestyle I want etc).
Putting smaller regular amounts into S&S ISA just for secuirty of available cash

The above is very much right for me, from a pure financial POV I really should be ignoring my mortgage and putting that overpayment into my pension, I am just more comfortable with the mix. The key here, is i understand the choices and have made a fully informed decision that I am comfortable with.

My friends Decison: upsized, almost at the limit of mortage capacty with the plan to top up pension with capital increase/house appreciation, once they downsize, the pension would again likely be the most financially beneficial choice, but due to tax brackets not as significant as mine, for her the decision is heavily swayed by blending households and the want/need for a larger house when all the blended family are in one place. Her decision is also influenced by current savings / investments, but she has much less of a risk spread then I do. Again it was a very informed choice that is specific to her personal situation.

In terms of doing calcs - there are some resources that might help

Money saving experts mortgage overpayment calculator for mortgage rates 10 year impacts

Calculator net investment calculator

Hargreaves landown pension calculator

Obviously if you are know at excel you can do all the above in a spreadsheet.

Another real life thing to consider is children. Do you have any?

My DH and could have doubled our mortgage a few years ago based on affordability and upsized to a bigger house. I’d love a downstairs loo and utility room. We decided not to upsize.

This was a deliberate decision as last year we used a joint borrower sole proprietor mortgage to help our DS get on the housing ladder. Our “spare affordability” was used then.

hopefully in less than 5 years time DS will be able to take mortgage on in own right and we can switch to supporting our DD.

Do you want a more expensive house? Either to be bigger, more garden or more desirable area? If not it seems pointless to take on a huge mortgage. It makes more sense if it would bring you joy now. People often don't want to downsize to free up capital when it comes to retirement, as they like their house.

Otherwise pension contributions don't incur stamp duty, or loan interest, but do have tax relief, so you invest more than you put in. You should also consider whether your pensions are currently predicted to be less than you would like, or if they will give you a comfortable lifestyle.

@Anon1231990 thank you I will read through the notes carefully.
i think actually, my takeaway is probably to do a bit of both - upsize a bit house wise, maybe by £700 ish a month on the mortgage, then put £500 a month into DH pension and aim for £500 a month into isa (but this can slip to pay for holidays etc).
@CaptainSevenofNine yes, 3 DC, we have given our daughter £30k house deposit (mainly inheritance we got), we are halfway towards saving the same for the other two. They’re all adults.
@HarryVanderspeigle yes, more expensive area really, I’m happy to go smaller but DP wants a bit of character and I’d ideally like detached or possibly attached so it adds to the cost - our current house is quite big but semi detached and in a slightly less expensive area.

Why do you want to move? If there is no real reason just take that out of the equation. If the interest rate on your pension is greater than your mortgage rate then it's sensible to put as much as possible in there, if your mortgage rate is high I would try to pay that off quickly.

Moving for no particular reason is going to cost quite a bit and you really have no idea whether house prices will go up or by how much, keep it simple. If you want to pocket some equity and downsize when you retire that's when to make that decision, But if you want a house in a better area, or detached, or with more character then just do that first and then reconsider the pension versus paying off the mortgage question.

I would keep the two decisions totally separate. It sounds like you are in a pretty sound financial position whatever you choose to do,

As someone who is risk averse and prefers risks to be spread that is prob what i would do. It is all about what your priorities are, and then making informed decisions based on educated guesses for the future (imo) but noone has a crystal ball. If you read up on all of the options you can teach yourself quite a lot alternatively i am sure there is someone who's job it is to offer proper advice if you wanted to make sure you are maximising your investments in the best way to meet your needs.

Previously my priority was travel and enjoy life in the here and now, and i just didnt know enough to really think about pension / retirement / investments etc so did nothing other than auto enroled pension and a bog standard savings account. After researching and getting some knowledge, I do wish I had maybe made some different choices when I was (not even that much) younger, so its why I am prone to over explaining on this topic 😁🙄

Good luck and hope you find your posh house 🤗