# 30yo - pay off mortgage or pension



## Fibo49 (3 Dec 2020)

Hi all,

Age:. 30
Spouse’s/Partner's age: 30

Annual gross income from employment or profession: 40,000
Annual gross income of spouse: 35,000

Monthly take-home pay: 2500 + 2300

Type of employment: e.g. Civil Servant, self-employed: private sector

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

Rough estimate of value of home: 140,000
Amount outstanding on your mortgage: 95,000
*What interest rate are you paying? 
2.45% with aib, fixed for 5 years. 
We started in February at 3.15% fixed for 7 years, then I read here we might not pay fee to break, so last month I asked aib, indeed, no fee, and they send a list of their new mortgages, so we went for the 2.45%.*

Other borrowings – car loans/personal loans etc:
No

Do you pay off your full credit card balance each month?
No credit cards


Savings and investments:
5000€ in savings (we overpaid 5000 when we went from 3.15 to 2.45 last month)

Do you have a pension scheme?
Yes, I put 5%, company 2%

Do you own any investment or other property? No

Ages of children:
No children, can't have any.

Life insurance: with mortgage and with work.

Couple of questions, remarks:

I went through the 2014 thread explaining it's better to pay off mortgage up to 40yo, but the figure are quite different now.
My mortgage rate is 2.45, far from the 5% used as example.
I think we can manage to save enough to pay off the mortgage in full by the end of the 5 years, maybe even earlier if there is still 0 breakage fee.
Should we do that or should I start putting more in my pension and keep the mortgage longer seeing the rate is half what was used in the 2014 thread?

Another point I'm not sure about:
I can put up to 20% in my pension, but realistically only 14-15% are in the 40% tax bracket, so if I were to increase my pension, should I Max it at 20 or at whatever is in the 40% bracket?


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## TheBig40 (4 Dec 2020)

Overpay the mortgage until you reach 60% LTV and move to the lowest rate you can then increase your pension contributions. If you can increase your contribution now to take advantage of any “fee money” from your employer I’d look at doing that.


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## Gordon Gekko (4 Dec 2020)

I would maximise the pension contributions that give rise to relief at the 40% rate and use any surplus to pay down the mortgage. I would also build up my savings to circa 6 months’ worth of household expenditure.


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## Fibo49 (4 Dec 2020)

Thanks for the reply.
I'm in a fixed rate with aib, so overpayment isn't really possible, except for breaking and refixing every year.
So our idea was to save for couple of years and pay a big lump sum.

Thanks @Gordon Gekko, what is the reason for not contributing in the 20% bracket?
Does that mean that people who are under the 35300 threshold shouldn't get a pension?


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## RedOnion (4 Dec 2020)

Fibo49 said:


> Thanks for the reply.
> I'm in a fixed rate with aib, so overpayment isn't really possible, except for breaking and refixing every year.
> So our idea was to save for couple of years and pay a big lump sum.


It's completely possible. They can't currently charge a break fee on their 3 year fixed rate, so pay off as much as you like, whenever you like. You don't have to break and refix the entire balance to overpay a fixed rate mortgage.

I fully agree with @Gordon Gekko


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## Gordon Gekko (4 Dec 2020)

In terms of your query whether I think 20% rate taxpayers should ignore pension funding,  far from it.

However, there is a debate over whether to prioritise pension or mortgage. I’m an advocate for prioritising pension, but with a mix of 40% income and 20% income in this case, I’d have a blended approach.

I would maximise my contributions at the 40% rate, I would build-up my savings, and I would make mortgage overpayments whenever a break-fee can be avoided.

When the time comes, I would switch to a mortgage product more suited to your circumstances (i.e. a cheap one that facilitates overpayment more readily).


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## Fibo49 (4 Dec 2020)

@RedOnion
Why only the 3 years?
I'm on the 5 years, I'll ask the bank how would that work.

@Gordon Gekko
Thanks for your reply, I have a meeting next year with the pension adviser, I'll get it increased to 14 or 15%, whatever is in the 40% bracket.
Can you develop on the "far from it" ? I have relatives in this situation who are hesitant in getting a pension because they feel like it would take too much cash away.


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## RedOnion (4 Dec 2020)

Fibo49 said:


> Why only the 3 years?
> I'm on the 5 years, I'll ask the bank how would that work.


Sorry, I assumed you were in 3 year rate. Exact same applies to the 5 year rate.
Basically AIB would have to drop the rates for shorter terms below 2.45% before they could charge you a break fee. It's the exact same rule that you've used already to reduce your rate.

I doubt AIB will be clear in it when you call, but it's written in your terms and conditions.


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## Brendan Burgess (4 Dec 2020)

Hi Fibo 

It's very clear that _you and your spouse _should only contribute to a pension when you get 40% tax relief. The reason for this is as follows:  As your career progresses, you will move into a higher tax bracket and you can contribute your money to your pension then and get 40% relief on it. There is no point in getting 20% relief when you can get 40% relief.

Brendan


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## NoRegretsCoyote (4 Dec 2020)

Your mortgage is very low for a couple of your age and income. I wouldn't hurry to overpay for its own sake.

Over the long term the return on your pension is likely to be greater than the rate you pay on your mortgage.

Tax relief is a bonus, but the above is true even if you are getting relief at 20% or not at all.

Otherwise I think more precautionary savings makes sense for something like unexpected loss of work, new car, renovations, etc.


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## Brendan Burgess (4 Dec 2020)

Fibo49 said:


> I think we can manage to save enough to pay off the mortgage in full by the end of the 5 years ....
> Should we do that or should I start putting more in my pension a



It's not a question of either or.
Paying off the mortgage within 5 years should not be an objective.  It's nice to be mortgage free but there is no reason for you to pay  your total life accommodation costs over just 10 years of that life.

At 30, you don't need to worry too much about pensions.  Match your employer's contributions if that is required, that is clear.

*There are two big advantages to paying down your mortgage ahead of your pension.*

1) If you get your LTV below 60% or 50% from its present 67%, you can usually get a lower rate on your entire mortgage.  In your case, this doesn't matter too much as you would have to pay off €25k to get a reduction of 0.1%.

2) If you might like to trade up or move at some stage in the future, it's good to have a lot of equity in your home.  At the moment, you have €55k equity. This would allow you to put the required deposit of 20% on a house worth about €250k.  Build the equity up to €80k, and you could buy a house for €400k.

You probably are happy where you are and have no intention of trading up, but plans change.

*So in summary *

1) It is clear that you should not contribute to a pension where the tax relief is only 20%
2) It is also clear that paying off the mortgage within 5 years is not a necessary goal.
3) If you think you are going to trade up, then pay down the mortgage
4) If you don't expect to trade up, use up your full 40% tax relief pension contribution.

Brendan


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## Gordon Gekko (4 Dec 2020)

Fibo49 said:


> @RedOnion
> Why only the 3 years?
> I'm on the 5 years, I'll ask the bank how would that work.
> 
> @Gordon GekkoCan you develop on the "far from it" ? I have relatives in this situation who are hesitant in getting a pension because they feel like it would take too much cash away.



There are threads on that subject already. My own view is that the main longer term benefit of pension funding is the tax free compounding, relief at 20% on the way in and tax-free plus tax at 20% on the way out are perfectly fine, even factoring in PRSI (which falls away at 66) and USC (which is at low rates for low earners).


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## Fibo49 (4 Dec 2020)

Thank you all for the comments and recommendation.
I'll get the pension increased next year to take advantage of the 40% tax bracket, I checked on pwc.ie, it will reduce my net income by 100€. So I should still be able to save for the mortgage.


Indeed we plan on trading up in 5-7 years, that's why we were looking at paying off the mortgage so the next one would just be the difference between what we sell and what we buy.


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## michaelm (4 Dec 2020)

While I don't disagree with Brendan's points, there is a big dollop of security and comfort in being mortgage free.


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## Brendan Burgess (4 Dec 2020)

michaelm said:


> While I don't disagree with Brendan's points, there is a big dollop of security and comfort in being mortgage free.



I presume it's this one that you don't, don't disagree with? 



Brendan Burgess said:


> Paying off the mortgage within 5 years should not be an objective. It's nice to be mortgage free but there is no reason for you to pay your total life accommodation costs over just 10 years of that life.



There is security in being mortgage-free. But there is also security in having a well-funded pension. 

And while there is security in being mortgage-free, having a small mortgage relative to your salary and the value of your property also provides a lot of security.

Brendan


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## peemac (4 Dec 2020)

If you can't have children (same here) I'd also look at lifestyle and maybe spend a little more to enjoy yourself and look at the future with hobbies, interests and groups. 

Only in the last few years have I gone that route and really wish I did somethings a lot earlier to have a focus aside from work. 

So as well as financial planning, I'd also look at life planning and investing in yourselves for the future.


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## Fibo49 (5 Dec 2020)

We live fairly frugally tbh but we do enjoy travelling, this year with covid we actually stayed in Ireland for the now famous "staycation".
@peemac , out of curiosity, did you have sort of a budget for "kids college" before realizing you didn't need one? Where do you spend this money now? (I know it's a bit intrusive but I'm quite curious about someone with a similar situation)


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## Brendan Burgess (5 Dec 2020)

Fibo49 said:


> I think we can manage to save enough to pay off the mortgage in full by the end of the 5 years,





Fibo49 said:


> We live fairly frugally



You have the balance wrong. 

You should not be living frugally so that you can pay off your mortgage by the age of 35. 

What will you do at age 35?  Go mad? 

Brendan


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## Fibo49 (5 Dec 2020)

I don't see how we have the balance wrong.
At the moment we live in an apartment we refurbished. 
We want to buy a house eventually, but with our jobs and no kids it's actually very convenient to stay put for another 5 years. 
If we can pay it off while still enjoying life, then when we hit 35 we take another mortgage to top up whatever we get out of the (potentially fully paid) apartment. The next mortgage will probably be a 5 or 10 years depending on what we buy. It would bring us to around 40-45yo. 
Then we go mad !! (Kidding)
(Bear in mind it's all hypothetical, circumstances changes).


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## Brendan Burgess (5 Dec 2020)

Fibo49 said:


> We want to buy a house eventually, but with our jobs and no kids it's actually very convenient to stay put for another 5 years.



As I said.



Brendan Burgess said:


> 2) If you might like to trade up or move at some stage in the future, it's good to have a lot of equity in your home. At the moment, you have €55k equity. This would allow you to put the required deposit of 20% on a house worth about €250k. Build the equity up to €80k, and you could buy a house for €400k.
> 
> You probably are happy where you are and have no intention of trading up, but plans change.



So  now I think your priority is to build up your equity over contributing to a pension.  

Living frugally so that you can trade up without a huge mortgage is a valid plan.

As you had not mentioned it, I had assumed you were in your forever home and would not be trading up and that you just wanted to be mortgage-free at 35.

Brendan


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## Fibo49 (5 Dec 2020)

Brendan Burgess said:


> As you had not mentioned it, I had assumed you were in your forever home and would not be trading up and that you just wanted to be mortgage-free at 35.
> 
> Brendan



Sorry about that.
Thanks again for all the recommendation


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## peemac (5 Dec 2020)

Fibo49 said:


> We live fairly frugally tbh but we do enjoy travelling, this year with covid we actually stayed in Ireland for the now famous "staycation".
> @peemac , out of curiosity, did you have sort of a budget for "kids college" before realizing you didn't need one? Where do you spend this money now? (I know it's a bit intrusive but I'm quite curious about someone with a similar situation)


Never had a "college fund" and had recession issues in business. Only since a tracker redress 3 years ago have things really moved well on all fronts.

But my plan for retirement is to be a compere/ MC primarily for charity events. So that is taking some learning (toastmasters) and will be another 4-5 years before I can call myself professional. Would have liked to have done this 10 years ago as the little I've done has been really enjoyable.

Got involved in couple of other areas just to have interests well away from work and now looking at getting into hiking / walking more seriously.

Some interests are solely for myself, some are for both of us.

Hence, investment for your future is not always about finance.

As for spending - bought an escape pad without mortgage that is also rented from easter to September and should earn 10% net return.


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## Marc (19 Apr 2021)

Brendan Burgess said:


> Hi Fibo
> 
> It's very clear that _you and your spouse _should only contribute to a pension when you get 40% tax relief. The reason for this is as follows:  As your career progresses, you will move into a higher tax bracket and you can contribute your money to your pension then and get 40% relief on it. There is no point in getting 20% relief when you can get 40% relief.
> 
> Brendan



There is a concept in retirement planning called cost of delay.

It is relatively simple to prove that a younger person making modest savings into a pension will have a larger pension fund at retirement than an older person who saves more and obtains higher tax relief simply because of the impact of compound interest.

pension planning is a function of

how much you save
When you start saving
Your tax rates pre and post retirement
How much risk you take
Less the costs you pay

it’s not just about getting 40% tax relief









						Should I Overpay my Mortgage or Pay into a Pension? - Everlake
					

As with many things, the right course of action is going to be specific to your individual financial circumstances.




					globalwealth.ie


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