Mortgage overpayments

[maomao]

But I'm still surprised how many people overpay rather than put at least some of the surplus in a pension. My back-of-a-fag-packet 'calculations' reckon that, over 20 years, you'd typically get roughly twice a much from paying into a pension as you'd save from overpaying a mortgage - tens if not hundreds of thousands on a reasonably normal wage and mortgage.

And if I pop my clogs in my late 50s the wife and kids will be screwed on repayments and I won't see any of that juicy pension.

 

[Athos]

And if I pop my clogs in my late 50s the wife and kids will be screwed on repayments and I won't see any of that juicy pension.

I think if you die before 75 and haven't started drawing it, most private pensions pay out to a nominated beneficiary.

In any event, if you have life insurance with your mortgage the balance will be paid.

 

[kabbes]

Yeah, I think it best to have a balance. In particular, enough put aside in accessible savings to cover any unforeseen expenses.

In terms of not being able to afford mortgage repayments, that's why I've always gone for a fixed rate, and had various forms of income protection/critical illness cover (either through work, or bought privately).

But I'm still surprised how many people overpay rather than put at least some of the surplus in a pension. My back-of-a-fag-packet 'calculations' reckon that, over 20 years, you'd typically get roughly twice a much from paying into a pension as you'd save from overpaying a mortgage - tens if not hundreds of thousands on a reasonably normal wage and mortgage.

The fact that you have always gone for a fixed rate in your mortgage perfectly encapsulates that there is more to personal finance than pure economic calculation. Going for a fixed rate means you are paying an insurance premium to remove uncertainty, and so it is without doubt the economically poorer option. But you value things about the fixed rate that go beyond that calculation.

 

[A380]

The fact that you have always gone for a fixed rate in your mortgage perfectly encapsulates that there is more to personal finance than pure economic calculation. Going for a fixed rate means you are paying an insurance premium to remove uncertainty, and so it is without doubt the economically poorer option. But you value things about the fixed rate that go beyond that calculation.

Its deffo this, back in the early 2000's it would have made far more 'sense' in terms of me maximising my money to sell my house and chop in the money and my and my wife's savings and her redundancy pay and pension miss selling compensation for either a bigger house (which I could have cashed out for more a couple of weeks back) or a buy to let either on cheap mortgages . But the feeling of not having a mortgage in the former was worth at least a couple of hundred pounds a month to me (I have a low appetite for long term risk financial - compared with a high one in other matters) and I didn't want to do the latter as the thought of not being parasitic scum was worth even more a month to me. Also my wife's medical condition meant we always tried to do 'stuff' holidays, experiences, etc 'now' rather than in some far off future.

Then later I put in as much extra money as I could to a pension, though being a higher rate tax payer that was always a no brainer.

It comes down to circumstances risk appetite for people I guess. Or at least for those of us fortunate to have a choice.

 

[Athos]

The fact that you have always gone for a fixed rate in your mortgage perfectly encapsulates that there is more to personal finance than pure economic calculation. Going for a fixed rate means you are paying an insurance premium to remove uncertainty, and so it is without doubt the economically poorer option. But you value things about the fixed rate that go beyond that calculation.

Yes, I wouldn't argue that personal finances are an exercise in 'pure' economics; sentiment and risk appetite are significant. But I still think too many people overpay their mortgage as a default without really thinking their options through. I know I used to! Then someone pointed out to me that, instead of overpaying, say, £200 a month, if I put it into a pension, my employer would match it, plus HMRC would give me 40% again in tax relief. For the same cost to me, it's £560 invested (typically at a higher rate), rather than £200. Over a long time and compounded that's a massive difference.

 

[platinumsage]

The fact that you have always gone for a fixed rate in your mortgage perfectly encapsulates that there is more to personal finance than pure economic calculation. Going for a fixed rate means you are paying an insurance premium to remove uncertainty, and so it is without doubt the economically poorer option. But you value things about the fixed rate that go beyond that calculation.

I‘m not sure it’s the economically poorer option when you take into account factors such as the opportunity cost of cash savings you might keep on hand to insulate yourself against the possibility of rising payments.

 

[A380]

And of course, meanwhile, there are decent people (many on here) working their socks of and paying stupid amounts of rent, money they will never see again, for grotty rooms and flats with no hope of anything but an ever receding state pension of less £30 a day. That tempers any smugness I have...

 

[Athos]

And of course, meanwhile, there are decent people (many on here) working their socks of and paying stupid amounts of rent, money they will never see again, for grotty rooms and flats with no hope of anything but an ever receding state pension of less £30 a day. That tempers any smugness I have...

Yeah. And it's what put me off following an IFAs advice to get into BTL properties (rather than put it towards a pension).

 

[kabbes]

I‘m not sure it’s the economically poorer option when you take into account factors such as the opportunity cost of cash savings you might keep on hand to insulate yourself against the possibility of rising payments.

That depends what you do with the alternative. If it is part of a slush fund invested more aggressively than in AA-rated bonds, chances are it will do better than the difference between the fixed and variable rates.

The point is that a fixed rate is only certain in nominal terms. The variable rate is actually more stable in real terms. Over the medium term, anyway, since things like stagflation can fuck that relationship up.

Anyway, the whole point is that decisions are not made purely in terms of the best expected outcome. It also needs to include human factors such as security of your home and frailty of decision making.

 

[kabbes]

Yeah. And it's what put me off following an IFAs advice to get into BTL properties (rather than put it towards a pension).

What the hell advice is that? BTL is amongst the worst of all personal investments. It’s truly terrible across so many dimensions. Just to pick one — even if you are lucky with it and it appreciates in value, there is no way to spread the capital gain to take advantage of the annual allowance. Once you sell, you’re going to be clobbered for the full 40% on everything but the first £12k or so. And that’s if you make a capital gain, which is more unlikely than people appreciate.

 

[kabbes]

Yes, I wouldn't argue that personal finances are an exercise in 'pure' economics; sentiment and risk appetite are significant. But I still think too many people overpay their mortgage as a default without really thinking their options through. I know I used to! Then someone pointed out to me that, instead of overpaying, say, £200 a month, if I put it into a pension, my employer would match it, plus HMRC would give me 40% again in tax relief. For the same cost to me, it's £560 invested (typically at a higher rate), rather than £200. Over a long time and compounded that's a massive difference.

This is true, of course. People should put decent focus on their pension as a high priority for excess income, because it’s by far and away the most efficient investment wrapper. I’m just saying that there are other considerations too.

 

[Athos]

What the hell advice is that? BTL is amongst the worst of all personal investments. It’s truly terrible across so many dimensions. Just to pick one — even if you are lucky with it and it appreciates in value, there is no way to spread the capital gain to take advantage of the annual allowance. Once you sell, you’re going to be clobbered for the full 40% on everything but the first £12k or so. And that’s if you make a capital gain, which is more unlikely than people appreciate.

Yes, quite apart from the ethical issue, I was unconvinced. I think what appealed to him was the idea of an ever expanding portfolio, whereby you somehow leverage equity to fund further purchases. I want interested, so didn't get into the details.

 

[Athos]

This is true, of course. People should put decent focus on their pension as a high priority for excess income, because it’s by far and away the most efficient investment wrapper. I’m just saying that there are other considerations too.

Completely agree.

 

[prunus]

Always using your overdraft will affect your credit rating. Might be better to pay any spare cash each month towards the mortgage and have the overdraft available for any emergencies.

I think that using your overdraft to its arranged limit and paying it off every month (as your salary comes in) will probably be positive on your credit rating if anything - using credit within the terms and always repaying on time is seen as an indicator of a 'good' debtor - better than having no credit and living within your means.

 

[kabbes]

Yes, quite apart from the ethical issue, I was unconvinced. I think what appealed to him was the idea of an ever expanding portfolio, whereby you somehow leverage equity to fund further purchases. I want interested, so didn't get into the details.

Borrowing to invest is a very risky process. You can maximise your mortgage on your house and invest it all in leveraged investment trusts if that’s what you want to do. I wouldn’t recommend it though. When it comes to BTL, people seem to somehow see it completely differently, but it isn’t.

 

[Athos]

Borrowing to invest is a very risky process. You can maximise your mortgage on your house and invest it all in leveraged investment trusts if that’s what you want to do. I wouldn’t recommend it though. When it comes to BTL, people seem to somehow see it completely differently, but it isn’t.

Yeah, I think it's another example of sentiment; whilst sub-optimal from a pure economic point of view, a certain sort of investor likes 'owning' something tangible, and can understand the idea of having someone else pay off the mortgage whilst the value of the property goes up.

 

[kabbes]

Yeah, I think it's another example of sentiment; whilst sub-optimal from a pure economic point of view, a certain sort of investor likes 'owning' something tangible, and can understand the idea of having someone else pay off the mortgage whilst the value of the property goes up.

That’s right. And they don’t understand the flip side of that equation, including the nature of the tax arrangements, the frictional costs, the expenses of meeting regulation, the costs of voids, the risks of changes in debt rates, the hidden swings in underlying market values of the property and the difficulty in actually realising any value change.

 

[Athos]

That’s right. And they don’t understand the flip side of that equation, including the nature of the tax arrangements, the frictional costs, the expenses of meeting regulation, the costs of voids, the risks of changes in debt rates, the hidden swings in underlying market values of the property and the difficulty in actually realising any value change.

Yeah, but fuck 'em!

 

[WouldBe]

I think that using your overdraft to its arranged limit and paying it off every month (as your salary comes in) will probably be positive on your credit rating if anything - using credit within the terms and always repaying on time is seen as an indicator of a 'good' debtor - better than having no credit and living within your means.

From what I've seen on clearscore and experians credit rating website always using your overdraft reduces your credit score.

 

[prunus]

From what I've seen on clearscore and experians credit rating website always using your overdraft reduces your credit score.

Oh, well, I don't know what I'm talking about then. Wouldn't be the first time. Sorry.

 

[kabbes]

Using it and clearing it. Not just using it and leaving it permanently overdrawn.

 

[marty21]

I think if you die before 75 and haven't started drawing it, most private pensions pay out to a nominated beneficiary.

In any event, if you have life insurance with your mortgage the balance will be paid.

I cancelled my life insurance after a couple of years - we were told we had to take out 2 policies each - it was costing us about £200 a month - and we both thought fuck it after 2 years - cancelled the policies - we were both working for a local authority which had death in service benefit which was worth more than the mortgage - in the end - neither of us died - we paid off the mortgage


more financial advice tomorrow.

 

[Athos]

I cancelled my life insurance after a couple of years - we were told we had to take out 2 policies each - it was costing us about £200 a month - and we both thought fuck it after 2 years - cancelled the policies - we were both working for a local authority which had death in service benefit which was worth more than the mortgage - in the end - neither of us died - we paid off the mortgage


more financial advice tomorrow.

Yes, no point in paying for it if you're dependents are well provided for by death in service benefits.