Soldato
26 years here should have overpaid on the mortgage while the rates were low.
Interesting idea with the pension, had never considered that route. I think I might look into that, I like the sound of it!
Mortgage Rate Rises
- Thread starter glenimp617
- Start date
26 years here should have overpaid on the mortgage while the rates were low.
Interesting idea with the pension, had never considered that route. I think I might look into that, I like the sound of it!
Why would that be more beneficial financially than overpaying the mortgage asap and/or using high interest savings accounts to then lump some overpay towards the end of each fix period? I assume you've done the maths? I would think the money you put into pension would have to be significant for that to be more worthwhile with the tax savings?
Interested to hear. Not a criticism.
Associate
Pension contributions are tax-efficient, reducing income tax. Also they'd likely be higher returns on pension investments compared to mortgage interest savings.
Common issue I see with people looking at mortgage figures, too much focus on monthly payments and not enough on outstanding balance. It's like when people compare two different mortgage products, one with a lower rate but higher fee. They look at the cost over the initial fixed period to try and determine which is best, but that's only half the story, you also need to look at how much is left on the mortgage after the say 5 years or whatever, because you'll have paid off less capital on the mortgage with a higher rate.
dlockers will likely be on 40 or 45% tax rate based on his headline gross income. Heck maybe even 60% effective marginal tax rate if he's in the awkward low six-figures territory. The savings on mortgage interest or high interest savings accounts are dwarfed by the tax savings from overpaying pension.
The issue most people have is they simply need money in the short term and can't really afford to lock it away in a pension. So this strategy isn't for everyone, if they have no disposable income, they can't really afford to put too much in the pension. But for high earners with financial stability, you're generally much better off with big pension contributions and a big mortgage than small pension contributions and a small mortgage, because the pension will grow a lot quicker than the mortgage due to the tax relief.
Of course, there's a possibility that the pension loses money on investments, but it's unlikely these losses outweigh the tax relief over the long term. Even a flat pension making 0% investment returns is very efficient because you get the extra cash thrown on top by the taxman.
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Soldato
Personally I don’t want to wait until I can access my pension before I pay off my mortgage..
mainly due to two reasons. I don’t see this house being my final house, in which case I don’t want to be paying two mortgages at the same time. The other thing is that I don’t see myself in full time work until retirement, I either want to take a year or two out, work part time or take a noddy job till retirement, just to keep the job centre off my back.
mainly due to two reasons. I don’t see this house being my final house, in which case I don’t want to be paying two mortgages at the same time. The other thing is that I don’t see myself in full time work until retirement, I either want to take a year or two out, work part time or take a noddy job till retirement, just to keep the job centre off my back.
If two mortgage deals having the same initial balance and same term.
The one with lower monthly payment is the better product, as it means lower interest and faster repayment. The interest is the variable which alters the principal remaining and monthly costs.
Product fee needs to be evaluated separately to the products. Ie if a 2yr deal is fixed at 4% vs a 5yr deal @ 4.1% but the 2yr has product fee of £1999 vs £999 then the 5yr is a winner. However it is more nuanced than that. Effectively 2yr products you have to pay the product fee 2.5x the 5yr so it maybe a situation the cost of borrowing is vastly different. So you really need to look at the deals across the same fixed term with some prediction.
I disagree (I think?) in that I don't think the lower monthly payment is always the better product and that the product fee doesn't need to be evaluated separately. To me, it all matters so you shouldn't look at those facets independently. I mean, you could have two products, same fixed term. One has lower rate and lower monthly payments. But it also has a huge fee, that outweighs the monthly savings and difference in outstanding balance at end of term.
In that scenario, the lower monthly payment product is worse, because when the fixed term is up you've paid out more in total than the sum of fees, monthly payments and outstanding balance on the other product. It's no good saving £1200 on mortgage payments and having £500 less outstanding balance, if you had to pay £2k for the privilege. That's why I don't think you should look at it separately, because deciding that the lower payment product is better is kind of a meaningless/flawed decisions if you aren't also thinking about the arrangement fees etc.
Of course, as you say it gets more complicated when comparing products with different fixed terms.
In that scenario, the lower monthly payment product is worse, because when the fixed term is up you've paid out more in total than the sum of fees, monthly payments and outstanding balance on the other product. It's no good saving £1200 on mortgage payments and having £500 less outstanding balance, if you had to pay £2k for the privilege. That's why I don't think you should look at it separately, because deciding that the lower payment product is better is kind of a meaningless/flawed decisions if you aren't also thinking about the arrangement fees etc.
Of course, as you say it gets more complicated when comparing products with different fixed terms.
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Soldato
Careful in regards the lump sum approach for paying off the mortgage.
Generally withdrawing the lump sum results in less pension over the term.
You need specialist advice however since it can make sense for some.
Generally withdrawing the lump sum results in less pension over the term.
You need specialist advice however since it can make sense for some.
Soldato
Ive seen some Youtube videos on this idea, i think its simply that if the pension fund growth is bigger than the mortgage interest rate (or what you can get in a savings account), then its better to put the extra in a pension. Even if you take the lump sum, this would still hold true as its 'extra' that you've put in, rather than overpaying the mortgage, so it would never have been part of your pension anyway.
Is it ok to have a pensions thread on these forums I wonder? I have some questions about mine and it may help others, but it could also be considered asking for financial advice which I don't know is allowed or not?
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Soldato
There was a pensions thread but the title was a little odd
There are considerations in regards mortgage vs pension that go wider than simply the basic tax position,
such as what happens if the rules change in regards pensions, they have twice in recent times (clamping down on what people could put in, and the reversing that recently)
Talk of making it taxable up front, but non taxable when paid, Gov of course like this since it pulls tax forwards
If you have high LTV you can face more issues and higher rate in regards your ongoing mortgage, plus you could in theory be in a more difficult position should the market crash
What happens if you need to take a job for less money, or you cannot work full time?
Its basically risk vs reward.
There is a mid point thats kind of balancing the risk which is to use the ISA allowance and S&S investments. Should you need the capital its at least available even should you end up having to take it when the market is on a downer (which can happen with pensions as well depending how they are invested)
Your relying on the investments generating more than your interest rate.
But its very personal and situational this stuff so you really need advice to be able to find a reasonable risk vs reward profile for you individually.
Soldato
Like most things seem to be in life, its probably a better choice the more money you have in the first place.
Soldato
Fall to 4% base rate may come this year. https://uk.finance.yahoo.com/news/uk-interest-rates-bank-england-110250278.html
I'd also be happy with 3pc in 2027
Currently on 1.9 until mid 2027.
3pc would probably put the monthly amount same as 1.93.
If I'm even in the UK by then.
That's about average tbh.
Ours was bought for 260 and valued at 320-340 now.
I reckon it's more towards 320.
House opposite is up for 340 and hasn't sold. But I Also think it's overpriced
I don't intend to overpay the mortgage. I am have shifted into the live for now approach.
A year ago I was thinking of accelerating the mortgage to 14 years after the 5 year term is up where it would have been 19.
But no longer see the point.
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Soldato
Would suit me as well - im on 2.84% until 2027.
Anything under 3 is OK for me. As in I wouldn't be bitter about it. It's only 1pc more and a smaller balance. Things could be worse.