Pension or overpay mortgage

Discussion in 'Money makeover' started by pension123, Oct 19, 2016.

  1. pension123

    pension123 New Member

    Posts:
    1
    Last edited: Oct 19, 2016
    Age: 30
    Spouse’s/Partner's age: None

    Annual gross income from employment or profession: 100k
    Annual gross income of spouse: N/A

    Monthly take-home pay ~5k

    Type of employment: private sector employee

    In general are you:
    (a) spending more than you earn, or
    (b) saving?

    saving

    Rough estimate of value of home 450k
    Amount outstanding on your mortgage: 360k - 35 years remaining
    What interest rate are you paying? 3.5%

    Other borrowings – car loans/personal loans etc
    None

    Do you pay off your full credit card balance each month? Yes
    If not, what is the balance on your credit card?

    Savings and investments:
    35k savings

    Do you have a pension scheme?
    No

    Do you own any investment or other property?
    No

    Ages of children:
    None

    Life insurance:
    Mortgage protection only


    What specific question do you have or what issues are of concern to you?

    I recently bought a house, after saving for the deposit for a good while. My mortgage payment is 1500, and I spend about 1500 a month on living costs (including insurances, utilities etc., this is probably too high, I'll admit), so I have 2000 over. For the last few months, some of this has been taken up with one-off expenses (furniture etc for house), but I've started using it to overpay the mortgage. I'm reasonably happy with my current level of savings.

    However, I don't have a pension. My employer doesn't do pension contributions. Would I be better starting to contribute the maximum (20%) to one? This would take about 1000 off my take-home pay, still allowing me to overpay the mortgage to a smaller extent. Alternatively, would I be better paying off the mortgage as fast as possible (if I kept up the rate of overpayment, it would be cleared in around 10 years), and starting a pension later? Intuitively, I feel like I should be minimising the amount of interest I pay on the mortgage by aiming to clear it as fast as possible (and owing so much money makes me slightly uncomfortable), but on the other hand the pension is presumably more tax-efficient.

    I realise this is very much a first-world problem... Thanks for any advice.
     
    Last edited: Oct 19, 2016
  2. username123

    username123 Frequent Poster

    Posts:
    1,233
    Last edited: Oct 20, 2016
    Using the 35k, pay 30k immediately off the mortgage, to reduce interest. At moment you're borrowing at 3.5%to save at 1%, pointless. Keep other 5k for emergency. Split pension and mmortgage overpayment 50/50 for best of both.
    That's what I'd do anyway.
     
    Last edited: Oct 20, 2016
  3. PGF2016

    PGF2016 Frequent Poster

    Posts:
    156
    5k seems like a very small emergency fund. I'd be a lot more conservative. Otherwise in agreement with username123.
     
  4. gnf_ireland

    gnf_ireland Frequent Poster

    Posts:
    634
    I would be with @PGF2016 on this. 5k emergency fund is a bit low. General consensus is around 6 months living expenses is a good target. In your case this is 15k plus whatever pension contributions you wish to make, so around the 25k. You have the option of paying 10k off the mortgage in a lump sum, but that really is up to you.

    The quick maths are you pay just shy of 1500 a month on the mortgage. The total cost of the mortgage is 625k. The balance after 5 years is 331k and 10 years is 297k. You are mortgage free in 35 years, so when you are 65.

    If you were to overpay by 1000 a month, you become mortgage free 19 years earlier [so when you are ~44]. The total cost of the mortgage reduces to 468k. The balance after 5 years is 266k and after 10 years is 154k.

    I would definitely not consider building any more savings in the short term. You have enough given the interest rate you are paying on your mortgage, and your return on your savings.

    Personally, if I was to start a pension, I would keep the contributions relatively low enough to start with - maybe 500 euro a month net/850 euro gross. This gives you 1500 to put against your mortgage say for 5 years, and then change the distribution to put more against the pension, ending up with a more 50/50 split as you hit 40. Once the mortgage is clear you can then put more into the pension should you wish.

    Paying 1500 extra off the mortgage for 5 years would bring the balance down to around 233k after 5 years.

    All this is of course based on the assumption you don't have a master plan to retire at 45 etc.

    The other thing I would say is you don't have any dependants currently. This can of course change over time, and you would need to review it in this case.
     
    He-Man and PGF2016 like this.
  5. MrEarl

    MrEarl Frequent Poster

    Posts:
    993
    Hi,

    How "safe" is your job and if you lost it tomorrow, whats the employment like to get another job at the same level ? Thats a key question when trying to decide how much emergency money to hold - while 6 months net salary is a guideline, sometimes 12 is really whats needed. However, in the current environment, you might not need 12 months so there's not the same pressure on your to save 12 months net salary as quickly.

    Like others here (and after reviewing the plan regarding emergency cash), I would split the available funds between overpaying the mortgage and starting a pension. Things to remember:
    • When overpaying the mortgage, decide if you want to have the additional payments used to shorten the term or reduce the future monthly costs and specificy same in writting to your mortgage provider. There are good reasons for doing both, it depends on your likely future circumstances (i.e. how safe is your long term salary, will you have children or other significant increased costs in the future) and also your personal goals regarding your future debt position.
    • You get tax relief on your pension contributions, so don't forget to factor in this benefit when looking at your cashflows for the next 12 months (or any other period).
     
  6. Bronte

    Bronte Frequent Poster

    Posts:
    11,802
    You most definitely need to start a pension. Make sure you avail of whatever tax breaks are going. Be careful which broker you use. Good advice costs money. There are a few posters on here in this business who know their stuff.