To pay down my mortgage or not

[squeeam]

I have a mortgage of approximately £92,500 which is due to end in October 2031, just over 8 years away. £48,000 is on a 1.99% rate, due to finish at the end of this year. The other £44,500 is on the Bank of England rate plus 0.5% (currently 5% but will probably go up to 5.5% in the next couple of weeks). I have some savings of £15,000 which I could use to pay this down. Should I pay this down against the £44,500? Would this reduce the term greatly (I’d rather reduce the term than have a lower rate)?

Also, I am now able to withdraw against my pension pot as I am now 55. This is currently approximately £300,000. Would it be a good idea to take say £30,000 out of this (I don’t want to take the full 25%) and pay down more of my mortgage in order to reduce the term even more? I appreciate the pot would be reduced but I really would like to see the end of my mortgage as soon as possible.

I hope this isn’t too convoluted (my explanation, not the scenario).

[Edible Roadkill]

At 5.5% interest & 8yrs remaining a 15k lump sum overpayment would save you around £6300 interest & pay that part of the balance off in 5yrs - 3yrs early.

Taking 30k from your pension (have you found out if you can take this out without starting to draw down, is that what you intend?) & paying off the full 45k loan would save you around 10.5k interest payment. However without looking at the numbers I would anticipate there be more lost in pension income over not too many years if you leave & deferred it for longer.

[Ziplobb]

If you are 55 surely you take the 25% from the pension and with your savings get rid of as much borrowing as possible when its the most adventageous to do so ?
You then free up the income being used to service the borrowing and dont expose yourself to high interest rates

[Edible Roadkill]

By clearing the smaller mortgage loan with the combination of savings & pension lump sum, if you then with only the single (currently 1.99%) loan left to service if you overpaid this one by adding the amount from the closed mortgage monthly payment then you could be mortgage free in around 4-5yrs.

[Panamax]

I'm a simple fellow. Why pay interest to borrow money that you've already got? It only make sense if you can get a better return on your investments than the cost of your interest.

If that £92.5k of loans goes to 5% it'll cost you £400 a month in interest that you have to pay out of taxed income. Over eight years that's £37,000 down the drain in interest payments.

Depending on your employment situation if you were putting that £400 pcm into pension it would buy you something between £500 (20% taxpayer) and £650 (40% taxpayer) of investments. Over the eight years that's £48k - £62k plus tax free investment return.

To my mind it looks a simple decision to "dump the debt" so long as you can continue to build your pension pot without tripping over the recycling rules.

Recycling: Put simply, you can't take out tax free cash and then claim lots more tax relief by putting it back in. Depends on your overall income and pension contributions situation. https://www.unbiased.co.uk/discover/pensions-retir...

[squeeam]

Edible Roadkill said:

By clearing the smaller mortgage loan with the combination of savings & pension lump sum, if you then with only the single (currently 1.99%) loan left to service if you overpaid this one by adding the amount from the closed mortgage monthly payment then you could be mortgage free in around 4-5yrs.

Thank you for responding. I was actually looking to use the £15,000.00 savings and £30,000.00 of my pension pot to reduce the term. Would this then leave me with about 4 years left?

[Edible Roadkill]

squeeam said:

Thank you for responding. I was actually looking to use the £15,000.00 savings and £30,000.00 of my pension pot to reduce the term. Would this then leave me with about 4 years left?

Think it would be closer 5yrs than 4 if you overpay an equal amount on what’s left, subject to overpayment caps which may apply of course.

I’d say it makes sense, but depending on what you forfeit on your pension. You’d need to work that out and compare.

[leef44]

I would be tempted to take the whole 25% tax free from the pension giving £75k. Add to the £15k savings to make £90k and pay the whole lot in one go.

That is if there are no early redemption penalties on the mortgage loan to do that.

The 5.5% interest you are expecting to pay on the loan is equivalent to getting a guaranteed return after tax of 5.5%.

This would also depend on your income situation. Do you have other income during retirement or is the pension for lasting up to state pension age?

[Panamax]

leef44 said:

I would be tempted to take the whole 25% tax free from the pension giving £75k. Add to the £15k savings to make £90k and pay the whole lot in one go.

He's already received that suggestion but doesn't seem to like it. I have no idea why..

Borrowing money from one place to invest in another place is bonkers for most people most of the time, not least because of the way the tax system works.

[Register1]

Pay off as much of your mortgage as you can.
Then take a big breath of freedom
As the poster above said, pay it all off.ASAP

[G-wiz]

Mortgage comes from French for death pledge.

That should give a clue as to whether to pay it off, or not.

[Caddyshack]

Ziplobb said:

If you are 55 surely you take the 25% from the pension and with your savings get rid of as much borrowing as possible when its the most adventageous to do so ?
You then free up the income being used to service the borrowing and dont expose yourself to high interest rates

I am not a big fan of using up precious pension pots to pay off a mortgage as the income is then gone forever. The 25% left in May do a fair bit of growing over 10 yrs too. I am not saying it’s wrong but worth considering.

[Edible Roadkill]

Is OP planning on retiring at 55 or keep working ?

Agreed taking a 25% slice might cost more in the long run than just sucking up the interest rate rise which might be short lived (nobody knows) and paying the mortgage to completion.

Leaving the pension for another 5-10yrs might hold more value than paying down the mortgage.

I paid mine down out of savings but still in my 30’s so loads of time to rebuild the savings & pension pots.

I think some further scrutiny of the pension is required. OP needs to decide on retirement age & get the calculator out to see what the realistic impact on pension will be taking 25% now.

Also some pensions won’t allow you to take the 25% without starting to draw down on the pension so that may be an issue.

[eliot]

Caddyshack said:

I am not a big fan of using up precious pension pots to pay off a mortgage as the income is then gone forever. The 25% left in May do a fair bit of growing over 10 yrs too. I am not saying it’s wrong but worth considering.

Yes agreed.
25% of your pot now is going to be far less than 25% of the same pot (which you may of overpaid with avc’s as well) in 10 years time - you should consider that in your calculations.

[Desiderata]

I'm not a pensions expert by any means so quite happy to be put down, but doesn't taking any sum out of your pension trigger the £4000?? per annum limit on any future tax free pension building?

[leef44]

Desiderata said:

I'm not a pensions expert by any means so quite happy to be put down, but doesn't taking any sum out of your pension trigger the £4000?? per annum limit on any future tax free pension building?

No. If you have a defined benefit/final salary pension and you start taking an annual pension from that then it does not activate the maximum permitted annual allowance.

If you take a lump sum from a defined contribution pension (I can't remember if it is only from the 25% tax free portion) then you don't trigger that limit.

If you into drawdown and take a regular amount or buy an annuity with your DC pension then you trigger than annual contribution limit.

That limit is now increased from £4000 to £10,000

You also have to watch out for rules about recycling tax free pension into pension contributions.

[squeeam]

Edible Roadkill said:

Is OP planning on retiring at 55 or keep working ?

Agreed taking a 25% slice might cost more in the long run than just sucking up the interest rate rise which might be short lived (nobody knows) and paying the mortgage to completion.

Leaving the pension for another 5-10yrs might hold more value than paying down the mortgage.

I paid mine down out of savings but still in my 30’s so loads of time to rebuild the savings & pension pots.

I think some further scrutiny of the pension is required. OP needs to decide on retirement age & get the calculator out to see what the realistic impact on pension will be taking 25% now.

Also some pensions won’t allow you to take the 25% without starting to draw down on the pension so that may be an issue.

Might be an idea to put some more flesh on the bones. I will probably work until I'm 62. I would like to think that the mortgage could be paid by 60 and then, whilst working, save what I would have spent on the mortgage for a couple of years and build back up a savings pot. I may continue working part time whilst drawing down on my pot. Then, when I'm 67, I would then take my state pension.
My thinking in taking £30,000 out of the pension pot is that hopefully it would build back up over time, whilst allowing me to clear the mortgage sooner. Obviously the less I draw down whilst retired the better chance there is of it growing and also this is subject to what growth would occur.
And with regards taking 25% (£75,000) out, I haven't said I wouldn't (looking at you Panamaxhttps://www.pistonheads.com/gassing/imgs/4.gif) but retirement wise I'm not sure that's a great idea. The pot isn't huge and will need to last a while.
Thank you all for your input. It has been interesting to see so many options.

[Abdul Abulbul Amir]

squeeam said:

Edible Roadkill said:

Is OP planning on retiring at 55 or keep working ?

Agreed taking a 25% slice might cost more in the long run than just sucking up the interest rate rise which might be short lived (nobody knows) and paying the mortgage to completion.

Leaving the pension for another 5-10yrs might hold more value than paying down the mortgage.

I paid mine down out of savings but still in my 30’s so loads of time to rebuild the savings & pension pots.

I think some further scrutiny of the pension is required. OP needs to decide on retirement age & get the calculator out to see what the realistic impact on pension will be taking 25% now.

Also some pensions won’t allow you to take the 25% without starting to draw down on the pension so that may be an issue.

Might be an idea to put some more flesh on the bones. I will probably work until I'm 62. I would like to think that the mortgage could be paid by 60 and then, whilst working, save what I would have spent on the mortgage for a couple of years and build back up a savings pot. I may continue working part time whilst drawing down on my pot. Then, when I'm 67, I would then take my state pension.
My thinking in taking £30,000 out of the pension pot is that hopefully it would build back up over time, whilst allowing me to clear the mortgage sooner. Obviously the less I draw down whilst retired the better chance there is of it growing and also this is subject to what growth would occur.
And with regards taking 25% (£75,000) out, I haven't said I wouldn't (looking at you Panamaxhttps://www.pistonheads.com/gassing/imgs/4.gif) but retirement wise I'm not sure that's a great idea. The pot isn't huge and will need to last a while.
Thank you all for your input. It has been interesting to see so many options.

Take out the 25% and pay off the mortgage (assuming no ERC). The money you would have spent paying the mortgage and related interest under your idea could then be used to pay back into the pension gaining more tax relief...especially so if you're a higher rate payer.

[Crumpet]

eliot said:

Caddyshack said:

I am not a big fan of using up precious pension pots to pay off a mortgage as the income is then gone forever. The 25% left in May do a fair bit of growing over 10 yrs too. I am not saying it’s wrong but worth considering.

Yes agreed.
25% of your pot now is going to be far less than 25% of the same pot (which you may of overpaid with avc’s as well) in 10 years time - you should consider that in your calculations.

But presumably he’d be sensible and if he did pay off his mortgage with his 25% tax free from the pension he’d then use his monthly mortgage payment (that he would have been paying) to replenish his pension with the 20/40% tax relief that goes with it. Or put that monthly mortgage payment into a S&S ISA which would then be available tax free when he chooses to take retirement.

I’ve been doing similar scenarios and it’s very close between all options. I’ve come to the conclusion that as long as you’re doing ‘something’ and paying down a mortgage while saving for a pension then you’re doing things right. I think the rest comes down to how lucky you are with pension performance and interest rates.

[eliot]

Crumpet said:

eliot said:

Caddyshack said:

I am not a big fan of using up precious pension pots to pay off a mortgage as the income is then gone forever. The 25% left in May do a fair bit of growing over 10 yrs too. I am not saying it’s wrong but worth considering.

Yes agreed.
25% of your pot now is going to be far less than 25% of the same pot (which you may of overpaid with avc’s as well) in 10 years time - you should consider that in your calculations.

But presumably he’d be sensible and if he did pay off his mortgage with his 25% tax free from the pension he’d then use his monthly mortgage payment (that he would have been paying) to replenish his pension with the 20/40% tax relief that goes with it. Or put that monthly mortgage payment into a S&S ISA which would then be available tax free when he chooses to take retirement.

I’ve been doing similar scenarios and it’s very close between all options. I’ve come to the conclusion that as long as you’re doing ‘something’ and paying down a mortgage while saving for a pension then you’re doing things right. I think the rest comes down to how lucky you are with pension performance and interest rates.

Yes.
But you only get one shot at the 25% tax free - yes you can top it back up, but any subsequent drawdown would be taxable.
So it seems sensible to leave the 25% drawdown in your pension for as long as possible in reality.

Needs a big spreadsheet i guess or a good advisor.