Interest only mortgage with salary sacrifice into pension?
Discussion
You need to take into account the max you can contribute to a pension at the moment is 1 million and will raise in line with CPI (or until a government decides to change it).
As long as the max you want to withdraw is 25% of that amount then why not. Is the mortgage more than £250,000 ?
As long as the max you want to withdraw is 25% of that amount then why not. Is the mortgage more than £250,000 ?
bmwmike said:
You pay more interest on an IO (interest only) though, right? Would a longer term capital repayment and lump-sum pay off be cheaper overall?
Yes you do, as you pay interest on the full amount for the full term then have to repay the capital.......Edited by bmwmike on Thursday 22 February 11:20
It is an interesting conundrum that you pose.
I did a couple of rough calculations, as an example, and probably gone wrong somewhere.
Assume you borrow £100k over 25 years at 3% interest rate.
On an interest only it will cost you £75k in interest. (£250 per month)
On a repayment it will cost you £42k in interest. (£474 per month)
To save £100k in your pension over 25 years you will need £220 per month (at about 3% PA growth). So your net spending per month would be £382(£250 mortgage and £132 net pay into pension)
If you then saved that £92/month saving (£474 - £382) at 3% PA growth you would get £41k over 25 years.
So you would spend £33k (£75k - £42k) in extra interest payments by using interest only, but potentially save £41k if you invested the net monthly saving. So, overall save £8k.
You will also need to make sure that your pension fund is greater than £400k in total to get the 25% out tax free.
Disclaimer : My figures are only examples, and you may get larger growth on your investments (or you may not) and interest rates may not be so favourable.
I will wait for someone to point out the errors in my calculations (I have probably gone wrong somewhere!
)
Mike
I did a couple of rough calculations, as an example, and probably gone wrong somewhere.
Assume you borrow £100k over 25 years at 3% interest rate.
On an interest only it will cost you £75k in interest. (£250 per month)
On a repayment it will cost you £42k in interest. (£474 per month)
To save £100k in your pension over 25 years you will need £220 per month (at about 3% PA growth). So your net spending per month would be £382(£250 mortgage and £132 net pay into pension)
If you then saved that £92/month saving (£474 - £382) at 3% PA growth you would get £41k over 25 years.
So you would spend £33k (£75k - £42k) in extra interest payments by using interest only, but potentially save £41k if you invested the net monthly saving. So, overall save £8k.
You will also need to make sure that your pension fund is greater than £400k in total to get the 25% out tax free.
Disclaimer : My figures are only examples, and you may get larger growth on your investments (or you may not) and interest rates may not be so favourable.
I will wait for someone to point out the errors in my calculations (I have probably gone wrong somewhere!
)Mike
Huntsman said:
How about an interest only mortgage, then salary sacrifice into a pension fund, aged 55, draw down 25% tax free and pay off the mortgage.
Does that work? (I've not really thought it through)
It does work, its very tax efficient for 40+% income tax payers and those above the child benefit threshold but your pension is subject to investment/regulatory risk.Does that work? (I've not really thought it through)
So I do a repayment mortgage, with salary sacrifice used to build up a lump sum to clear the mortgage many years early.
With effective marginal tax rates at £50K of around 65%, it costs me £35 net for every £100 in SIPP. Since I can get back 25% tax-free at age 55, each £25 gets to clear the mortgage early and it effectively only costs me £10 for every £75 remaining in the SIPP.
mike9009 said:
It is an interesting conundrum that you pose.
I did a couple of rough calculations, as an example, and probably gone wrong somewhere.
Assume you borrow £100k over 25 years at 3% interest rate.
On an interest only it will cost you £75k in interest. (£250 per month)
On a repayment it will cost you £42k in interest. (£474 per month)
To save £100k in your pension over 25 years you will need £220 per month (at about 3% PA growth). So your net spending per month would be £382(£250 mortgage and £132 net pay into pension)
If you then saved that £92/month saving (£474 - £382) at 3% PA growth you would get £41k over 25 years.
So you would spend £33k (£75k - £42k) in extra interest payments by using interest only, but potentially save £41k if you invested the net monthly saving. So, overall save £8k.
You will also need to make sure that your pension fund is greater than £400k in total to get the 25% out tax free.
Disclaimer : My figures are only examples, and you may get larger growth on your investments (or you may not) and interest rates may not be so favourable.
I will wait for someone to point out the errors in my calculations (I have probably gone wrong somewhere! )
Mike
I think you've gone wrong just at the end.I did a couple of rough calculations, as an example, and probably gone wrong somewhere.
Assume you borrow £100k over 25 years at 3% interest rate.
On an interest only it will cost you £75k in interest. (£250 per month)
On a repayment it will cost you £42k in interest. (£474 per month)
To save £100k in your pension over 25 years you will need £220 per month (at about 3% PA growth). So your net spending per month would be £382(£250 mortgage and £132 net pay into pension)
If you then saved that £92/month saving (£474 - £382) at 3% PA growth you would get £41k over 25 years.
So you would spend £33k (£75k - £42k) in extra interest payments by using interest only, but potentially save £41k if you invested the net monthly saving. So, overall save £8k.
You will also need to make sure that your pension fund is greater than £400k in total to get the 25% out tax free.
Disclaimer : My figures are only examples, and you may get larger growth on your investments (or you may not) and interest rates may not be so favourable.
I will wait for someone to point out the errors in my calculations (I have probably gone wrong somewhere!
)Mike
With the interest only option, OP pays £250+£132+£92=£474 per month, and at the end of the term he has paid off the mortgage and has £41k saved
With the repayment option, OP pays £474 per month, and at the end of the term has paid off the mortgage
So the interest only option is £41k better than the repayment option
And if you believe investment returns are higher than the mortgage interest rate (which is certainly the case in recent years), then of course this gap is actually bigger, but you need to be comfortable with the risk etc
rpm1969 said:
mike9009 said:
It is an interesting conundrum that you pose.
I did a couple of rough calculations, as an example, and probably gone wrong somewhere.
Assume you borrow £100k over 25 years at 3% interest rate.
On an interest only it will cost you £75k in interest. (£250 per month)
On a repayment it will cost you £42k in interest. (£474 per month)
To save £100k in your pension over 25 years you will need £220 per month (at about 3% PA growth). So your net spending per month would be £382(£250 mortgage and £132 net pay into pension)
If you then saved that £92/month saving (£474 - £382) at 3% PA growth you would get £41k over 25 years.
So you would spend £33k (£75k - £42k) in extra interest payments by using interest only, but potentially save £41k if you invested the net monthly saving. So, overall save £8k.
You will also need to make sure that your pension fund is greater than £400k in total to get the 25% out tax free.
Disclaimer : My figures are only examples, and you may get larger growth on your investments (or you may not) and interest rates may not be so favourable.
I will wait for someone to point out the errors in my calculations (I have probably gone wrong somewhere! )
Mike
I think you've gone wrong just at the end.I did a couple of rough calculations, as an example, and probably gone wrong somewhere.
Assume you borrow £100k over 25 years at 3% interest rate.
On an interest only it will cost you £75k in interest. (£250 per month)
On a repayment it will cost you £42k in interest. (£474 per month)
To save £100k in your pension over 25 years you will need £220 per month (at about 3% PA growth). So your net spending per month would be £382(£250 mortgage and £132 net pay into pension)
If you then saved that £92/month saving (£474 - £382) at 3% PA growth you would get £41k over 25 years.
So you would spend £33k (£75k - £42k) in extra interest payments by using interest only, but potentially save £41k if you invested the net monthly saving. So, overall save £8k.
You will also need to make sure that your pension fund is greater than £400k in total to get the 25% out tax free.
Disclaimer : My figures are only examples, and you may get larger growth on your investments (or you may not) and interest rates may not be so favourable.
I will wait for someone to point out the errors in my calculations (I have probably gone wrong somewhere!
)Mike
With the interest only option, OP pays £250+£132+£92=£474 per month, and at the end of the term he has paid off the mortgage and has £41k saved
With the repayment option, OP pays £474 per month, and at the end of the term has paid off the mortgage
So the interest only option is £41k better than the repayment option
And if you believe investment returns are higher than the mortgage interest rate (which is certainly the case in recent years), then of course this gap is actually bigger, but you need to be comfortable with the risk etc
In that case I should do the same - except I am only a few years away paying off my mortgage and a fair way from 55!Mike
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