Lump sum question - invest, invest & pay off half mortgage or pay off full mortgage?

[clusterof1]

Background:
* 40 y/o with small family
* Mortgage: ~165k/18 years remaining, 3.15% variable rate (I think I can get that down to 2.75 with a LTV switch). Property is currently worth ~500k
* Income: ~150k/year, saving about 30k/year (typically held in equities), company contributions only to pension
* No other debt or capital assets (generally, I absolutely hate debt, of any kind).

I got a bit nervous a few months ago and I cashed out accumulated equity investments and am holding about $150k in a current account. I see 3 options
1. Add the 150k to pension via some equity/bond/index fund?
2. Split the 150k, pay 75k off the mortgage now, add 75k to pension. Would leave about 7 years on the mortgage I think.
3. Pay 150k off the mortgage now.

I'd initially thought that paying off the mortgage would make most sense, but that would leave us heavily invested in one illiquid asset (which, to be fair, is our 'forever home') and then continuing equity/bond saving elsewhere. On the other hand, I'm not a big believer in corporate-managed pension funds, the returns just seem to be abysmal.

Wondering what the current thinking is amongst the wisdom of the crowds here, particularly given where interest rates currently are and the extended bull market run.

 

[Brendan Burgess]

I'd initially thought that paying off the mortgage would make most sense, but that would leave us heavily invested in one illiquid asset

This reasoning is false. Whether you have a mortgage or not, you still are heavily invested in one illiquid asset!

The least risky option, if that is what you want, is to pay off your mortgage in full.

But given the very healthy position you are in and how comfortable your mortgage is, you should max your pension contributions.

How much is your fund worth?

I think that the right balance is not to fund it more than €800k while you still have a mortgage - especially with 25 years left to work.

But you should either pay off your mortgage or contribute to a pension. You should not be investing directly in shares in your own name as distinct from through a pension.

Brendan

 

[NoRegretsCoyote]

If you take a long view, the return on equities is probably likely to exceed the cost of a mortgage of ~=3% at the moment. So it is no harm to hold on to some of the mortgage while boosting other assets too.

Brendan is completely right of course that priority #1 at your age should be maxing pension contributions to take advantage of tax relief.

 

[clusterof1]

Thanks Brendan,
The equity investments were not quite by choice, they are stock grants from my employer (in addition to my base 150k income) which have been appreciating well over the past 5 years. The main problem I saw was really lack of diversity, hence my decision to sell the stock I was holding and sit on the cash for a few months while I figured out what to do next - and here I am. There are golden handcuffs at play there though - as long as I stay in my current employment I'd expect those grants to become more significant.

My fund is worth about 200k at the moment, less than I'd like. Point taken on maxing out my pension going forward though, I'll look into that this week.

I'm now leaning towards paying off half the mortgage, I see a lot of mental benefits in clearing my mortgage before I get to my 50s and the kids hit college age. However, I need to find somewhere to invest the remaining lump sum long term. I guess I'll go looking for a financial advisor (if you have recommendations with references, please message me).

This reasoning is false. Whether you have a mortgage or not, you still are heavily invested in one illiquid asset!

The least risky option, if that is what you want, is to pay off your mortgage in full.

But given the very healthy position you are in and how comfortable your mortgage is, you should max your pension contributions.

How much is your fund worth?

I think that the right balance is not to fund it more than €800k while you still have a mortgage - especially with 25 years left to work.

But you should either pay off your mortgage or contribute to a pension. You should not be investing directly in shares in your own name as distinct from through a pension.

Brendan

 

[Brendan Burgess]

The main problem I saw was really lack of diversity,

Then you did the right thing to sell them.

What ages are your children? If they are going to college in the short to medium term, then it makes sense to have investments outside your pension fund.

I don't really think that a financial advisor will add much to what you have been told here and there is a real risk that they will steer you to a commission paying product. Only fee-based advisors would recommend that you pay off your mortgage.

Brendan