# Money Makeover Mid 30's - Tackle Pension or Mortgage



## housemurph99 (13 Apr 2022)

Age:
35
Spouse’s/Partner's age:
35

Annual gross income from employment or profession:
E63,000 with 15% - 25% bonus(10k-15k)
Annual gross income spouse:
E38,000 with 10% bonus

Type of employment:
Both private sector employees

Expenditure pattern:
We moved into a new house Jan 2021 and have been spending a lot of money doing it up. 
We have circa €6k coming in monthly.

Rough estimate of value of home
E520,000
Mortgage on home
E340K - currently paying 1,220 plus 100 overpayment. Total 1,320
Ulster Bank 2.2% fixed until Jan 2026

Other borrowings – car loans/personal loans etc
None

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

Savings and investments:
E30k in Zurich Fund where we also invest €140 children's allowance from Dec 21, so only 5 months premium gone in. 3
Keep 3k in credit union where we use for unexpected items and then top back up to 3k

Do you have a pension scheme?
Yes, I have 90k from my previous employer. My current company does not currently contribute towards pension. I am in the process of setting up PRSA.
Herself has 80k from previous employer. In process of joining company scheme where she will put 5% away and that is matched by the company.

Do you own any investment or other property?
No.

Ages of children:
 2 and expecting another in July.

Life insurance:
Basic Mortgage Protection @350k
Job have death in service benefits and income protection.

What specific question do you have or what issues are of concern to you?
Pension? I was planning on a monthly contribution of 10% salary into a PRSA. 

Is the mortgage overpayment necessary? It was purely to lower the term of the mortgage from 35 to 30 years.

Children's allowance investment? Should I increase pension instead to take advantage of tax relief?

We are lucky that we have had no child care costs to date. This might change but would be max €600 as we are able to rely on family for dig out.

We went straight into work from school so have had to work hard to be in current position and would like some pointers to achieve better financial situation. Any advice would be greatly appreciated.  

Thanks.


----------



## Brendan Burgess (13 Apr 2022)

340k mortgage on a €110k salary is 3 times, which is on the high side.

It's over 4 times the higher salary of €80k if the lower salaried spouse wants to take a career break or quit work.

So I think that to maximise your flexibility, prioritise overpaying the  mortgage ahead of the pension.



housemurph99 said:


> E30k in Zurich Fund where we also invest €140 children's allowance from Dec 21, so only 5 months premium gone in. 3
> Keep 3k in credit union where we use for unexpected items and then top back up to 3k



With two jobs, you don't really need a fund like that. You are better off paying it off your mortgage, where you get a cost free, tax free and risk free return of 2.2%.

At age 35 with a big mortgage, you should only contribute enough to maximise your employers' contributions.  When you have your mortgage at a very comfortable level, you will have much lower mortgage repayments and can then start contributing to your pension fund again.

Brendan


----------



## Brendan Burgess (13 Apr 2022)

What is a comfortable mortgage? 

I would say 3 times the higher salary.  So about €240k.

Or 50% Loan to Value which is €260k.

Certainly get it down below 60% LTV to make sure you can switch to the cheapest mortgage rate around.  That would be €310k or thereabouts so you are not too far off that.

Brendan


----------



## Steven Barrett (14 Apr 2022)

You have the correct structures and approach and that is half the battle. 

You should start your pension. The longer it is investor for, the more impact that compounding can have on it.

Is the Zurich Life plan for future education? If you are putting the children's allowance in it from the beginning, it should ease a future burden on those costs. 

You are already reducing your mortgage term. this is something that can be address over the years by gradually increasing the overpayment amount. Your repayments aren't high and the mortgage will be paid off by retirement. With 3 kids life will be expensive, so the capacity to do so may be reduced. 

You should look at taking out some private life cover for you and your wife. You have work cover and your pensions will pay out lump sums but the loss of a parent/ spouse is devasting. Having some additional cover can ease any financial issues. 


You are in a great place and will do just fine.


Steven
www.bluewaterfp.ie


----------



## Brendan Burgess (14 Apr 2022)

Steven Barrett said:


> You should start your pension. The longer it is investor for, the more impact that compounding can have on it.



A common misunderstanding. I must do a key post on it.

Compounding works on mortgages as well. If you pay off your mortgage early, compounding saves you a multiple of the interest.

Update: Key Post here so I don't have to keep repeating myself: 






						Key Post - Compounding doesn't just work on pensions - it also works on mortgage overpayments!
					

Time and time again, posters will trot out the statement "the earlier you start your pension, the longer you have for the power of compounding to work".   But this is only half the story.  Compounding also works on mortgage overpayments in the same way.  If you make an AVC of €1,000 to your...



					www.askaboutmoney.com
				




Brendan


----------



## Brendan Burgess (14 Apr 2022)

Steven Barrett said:


> With 3 kids life will be expensive, so the capacity to do so may be reduced.



Agree fully that 3 kids will make your life expensive over the next 20 years, which is why you should be reducing your future outgoings by paying off your mortgage.  You won't be able to access your pension until long after the kids have grown up.

Paying down the mortgage, maximises your flexibility.


----------



## Steven Barrett (14 Apr 2022)

Brendan Burgess said:


> Agree fully that 3 kids will make your life expensive over the next 20 years, which is why you should be reducing your future outgoings by paying off your mortgage.  You won't be able to access your pension until long after the kids have grown up.
> 
> Paying down the mortgage, maximises your flexibility.


Brendan, this is a point that I have disagreed with you over on many of these makeovers. There is nothing wrong with reducing debt but it should not be the sole focus. A bit of A and B and C can provide more flexibility than just A. 

The OP has 30 years left on mortgage, already reduced it from 35 years. With 3 kids, how quickly do you expect him to be able to pay it down? Knock another 10/15 years off it? What if he needs money in the intervening years? He can't do an equity release. He would be able to draw down his retained pension benefits from age 50. 


Steven
www.bluewaterfp.ie


----------



## Brendan Burgess (14 Apr 2022)

Hi Steven

I have done a key post on the topic here: 






						Key Post - Compounding doesn't just work on pensions - it also works on mortgage overpayments!
					

Time and time again, posters will trot out the statement "the earlier you start your pension, the longer you have for the power of compounding to work".   But this is only half the story.  Compounding also works on mortgage overpayments in the same way.  If you make an AVC of €1,000 to your...



					www.askaboutmoney.com
				




They are  already contributing to his pension! So they have a bit of A. 

I don't think that drawing down your pension at age 50 should be part of their financial planning. 

I am not concerned with the number of years left on their mortgage.  I am concerned that it is a high multiple of their combined salary and an even higher multiple of a single salary.  

At age 35, trading up is a much more likely outcome than retiring at age 50.

Brendan


----------



## NoRegretsCoyote (14 Apr 2022)

Brendan Burgess said:


> I don't think that drawing down your pension at age 50 should be part of their financial planning.


No, but it gives you options if your circumstances require it.

Most lenders don't permit re-mortgaging your house if you have cashflow needs.


----------



## Brendan Burgess (14 Apr 2022)

I must be missing something here. 

They are 35 years old. 
They have a 2 year old and another on the way.
They have a mortgage of €340 k which is three times their combined income. 
They have €170k in their pension fund.

They are doing very well - but retiring at 50 doesn't seem to be on the horizon. 

Ah, are you suggesting stuff the pension fund for the lower paid person, then retire at 50, and use the money to pay off the mortgage? 

I think if they pay down their mortgage instead, they have a better chance of the lower paid spouse taking time out or retiring early.

Brendan


----------



## Cavanbhoy (14 Apr 2022)

What is the benefit of an education fund in Zurich when you can gurantee 2.2% by paying extra of the mortgage with the same funds. In doing so they will have a lot smaller mortgage in 15 years time and be in a stronger position to deal with education costs out of their salaries. 
Are education funds worth it or just a product that investment firms pull on parents heartstrings with.


----------



## Brendan Burgess (14 Apr 2022)

Cavanbhoy said:


> What is the benefit of an education fund in Zurich when you can gurantee 2.2% by paying extra of the mortgage with the same funds.



Hi Cavnbhoy

Agree fully. 
It's a guaranteed 2.2% tax-free! Versus an uncertain return subject to tax.

They would be much better off paying it off their mortgage and keeping a separate mental account of the money if they want to allocate it to their children.

Many people keep a separate fund for third level education. This is usually not a good idea, but definitely wrong when the eldest child is 2 and they have a big mortgage. 

Brendan


----------



## Sarenco (14 Apr 2022)

The "invest versus pay down debt" debate is a perennial one around these parts.  

My own view is that the return on pension contributions invested in a decent equity fund is highly likely (but not guaranteed) to exceed the weighted average mortgage rate over the same ~30 year term.  That is particularly the case when you include the tax relief on contributions, which effectively constitutes an interest free loan from the State.

So, in general, I think it makes sense to maximise pension contributions in priority to paying down a mortgage ahead of schedule.  The "use it or lose it" nature of the relief on pension contributions is also relevant.

I don't think your mortgage is uncomfortably high relative to your household (or even your individual) income so I wouldn't have any concerns in that regard.

Conversely, our tax code is such that IMO it generally doesn't make sense to make after-tax investments while carrying a mortgage.  So I would re-direct the contributions to the Zurich saving plan to a pension product.


----------



## 24601 (14 Apr 2022)

Brendan Burgess said:


> What is a comfortable mortgage?
> 
> I would say 3 times the higher salary.  So about €240k.



Hi Brendan. I'm just curious as to what had you arrive at 3x the higher salary as "comfortable"? It's an interesting question. It seems differing jurisdictions have arrived at different conclusions on what is an appropriate LTI. I wonder what caused the Central Bank here to arrive at 3.5x as opposed to 3, or 4 as is the case in some jurisdictions?


----------



## Sarenco (14 Apr 2022)

The scheduled monthly mortgage payment represents around 20% of the household's monthly income, net of all taxes.

IMO that's very comfortable.


----------



## DublinHead54 (14 Apr 2022)

I've always worked affordability on this basis

_One way to decide how much of your income should go toward your mortgage is to use the 28/36 rule. According to this rule, your mortgage payment shouldn't be more than 28% of your monthly pre-tax income and 36% of your total debt. This is also known as the debt-to-income (DTI) ratio._


----------



## Brendan Burgess (14 Apr 2022)

24601 said:


> I'm just curious as to what had you arrive at 3x the higher salary as "comfortable"?



I have obviously different ideas of comfort from other people. 

A big rise in interest rates would be uncomfortable. 
Trading up would be uncomfortable. 
Taking unpaid maternity or parental leave would be uncomfortable. 
Reducing one spouse's hours to spend more time with the children would be uncomfortable. 

They could probably handle any one of these. But any two of them would be very difficult. 

They already have €170k in their pension fund, and they and their employers are making regular contributions and they are only 35.  The pension is just not urgent.  Getting the mortgage down allows them to make choices over the next few years. 

To me, flexibility is the real key to financial planning.

Brendan


----------



## housemurph99 (14 Apr 2022)

Thanks all for your input. To clarify, 1 child at the moment aged 2 and another on the way.

Re Zurich. 30k invested in Caustioulsy Managed 80% and Dynamic 20% . My wife got a redundancy payment and we were planning on making a lump sum payment to the mortgage but then the fear set in. What if something happens and we need the money down the line? Maybe be best to invest Zurich where we have access to it. We seem to have come into both funds at their high price but hopefully things settle down in next couple of months. The direct debit into Zurich is for education etc.

Re Mortgage/Home. We did get an exemption from Ulster Bank at the time, Mar 2020, probable the last ones they approved.
We are in a nice area that has very good transport links and very close to both our families. We do not see ourselves moving. My wife did take 6 months off work and we managed through it but that was when restrictions were in place and very little social events took place.

Thanks Brendan on the key post. Its prob just psychological for me, being able to tell hr/payroll to increase my pension and its gone at source.
I suppose setting up pension at 5% contributions and then diverting 5% salary at overpaying mortgage could be a balanced option. My pension pot @90k has retirement age of 60 so I was planning on leaving it alone because if i transfer into new scheme then retirement age would be 65? Is this thinking too much, should i just combine.  And I will look into Life Cover.


----------



## Sarenco (14 Apr 2022)

Brendan Burgess said:


> To me, flexibility is the real key to financial planning.


The OP can stop making pension contributions at any time in the future if their cashflow comes under pressure.

If I had followed your advice and prioritised paying down my mortgage in my 30's over maximising pension contributions, I would be significantly poorer today.

I would also be regretting the fact that I didn't make use of annual reliefs on contributions that are now gone forever.


----------



## 50andOut (14 Apr 2022)

Brendan Burgess said:


> I must be missing something here.
> 
> They are 35 years old.
> They have a 2 year old and another on the way.
> ...



Note - Accessing the pension fund at 50 doesn't mean retiring, you just need to have left the employer where it was earned. At least for DC occupational pension schemes..

You can build a pension pot which grows tax free and which can be accessed at 50 with a tax free lump sum of 25%. Using the lump sum to pay off the mortgage and move the remaining 75% to an ARF where it will continue to grow and you don't need to start drawing on this until age 61. You are then free to move to a new job either at the same level - or as I plan to do, at a much lower level as I take the foot of the gas and find a more relaxing job.

I feel this is a far more flexible than paying down the mortgage as I will be unable to leverage this money later if plans change and inflation/wage increases over the past 15 years have made my mortgage manageable

50+o


----------



## Brendan Burgess (14 Apr 2022)

Sarenco said:


> If I had followed your advice and prioritised paying down my mortgage in my 30's over maximising pension contributions, I would be significantly poorer today.




Prioritising pension is absolutely right when you have a very comfortable mortgage.   

But if you have an uncomfortable mortgage, as the OP has, then it's wrong. 

If you can predict the future...

You will both continue working until your 60s 
You won't ever want to trade up
You won't want to take unpaid leave or reduce your hours
Interest rates won't rise too much 
Equity returns will continue to outperform mortgage rates in the future 
You won't split up 
Pension rules won't change

Then it's very clear, that you should stuff your pension.

But if you can predict the future, then your mortgage is comfortable.

Brendan


----------



## NoRegretsCoyote (14 Apr 2022)

Sarenco said:


> That is particularly the case when you include the tax relief on contributions, which effectively constitutes an interest free loan from the State.


This is a great way of thinking of it.


People also tend to long they are going to live, but also the power of compounded returns over very long periods too. A 35-year old woman is likely to work for another thirty years and live for another fifty years. That means the middle of your expected pension drawdown period is forty years away.

I looked at the S&P annual return (inflation adjusted, dividends reinvested) for the 40-year periods ending below:

2022: 9.1%
2012: 5.2%
2002: 6.1%
1992: 7.0%
1982: 6.6%


This is comfortably above the inflation-adjusted cost of mortgage borrowing over the period (see below), and in many cases by several percentage points. Compounded over several decades, there really are massive expected benefits to equities over paying down your mortgage more rapidly.


----------



## Sarenco (14 Apr 2022)

Brendan Burgess said:


> Prioritising pension is absolutely right when you have a very comfortable mortgage.
> 
> But if you have an uncomfortable mortgage, as the OP has, then it's wrong.


I really don't agree that the OP's mortgage is uncomfortable.

As things stand, their fixed monthly mortgage payment represents less than 20% of the household's net monthly income, excluding bonuses and child benefit payments.

Even if the OP's wife took unpaid leave for a period, the fixed monthly mortgage payment would still only represent around 30% of the household's net monthly income, excluding bonuses and child benefit payments.

That looks perfectly comfortable to me.


----------



## Brendan Burgess (14 Apr 2022)

NoRegretsCoyote said:


> People also tend to long they are going to live, but also the power of compounded returns over very long periods too.



This is the whole point that I am trying to get people to think about.

*The Magic of Compound Interest applies to loans as well! *

It is just not relevant how long they will live.

The OP has a choice 

1) Overpay pensions now and pay off the mortgage in due course.
2) Overpay the mortgage now and make up the "missed" pension overpayments later. 

Both will benefit from compounding.   

In my opinion, there are many uncertainties facing the economy generally and people individually.  This is an uncomfortably high mortgage.  Reduce it to a comfortable level. Your mortgage payments later on will be lower, and you can use the money saved ( and compounded) to up your pension payments later.

Brendan


----------



## NoRegretsCoyote (14 Apr 2022)

Brendan Burgess said:


> The Magic of Compound Interest applies to loans as well!


Compound interest applies also to the difference between the expected return from equities and mortgage interest too!

This difference is, over decades, most likely to be positive.


----------



## Brendan Burgess (14 Apr 2022)

You are correct. 
But we are not talking about decades.
We are talking about the number of years it will take for the OP to get his mortgage down to a comfortable level.
At that stage, they will then increase their pension contributions. 

Brendan


----------



## Sarenco (14 Apr 2022)

Paying down a mortgage ahead of schedule has a compounding effect at the weighted average mortgage rate over the original mortgage term. No doubt about it.

However, pension contributions benefit from tax relief so you have a larger sum compounding over the same term (120/140 versus 100).

The tax relief on pension contributions is effectively the same as an interest-free free loan from the State.  And because of the tax free lump sum, tax credits and lower rate bands on drawdown, you are unlikely to ever have to fully repay that interest-free loan.

Also, the expected (but not guaranteed) rate of return on equities will always be higher than expected residential mortgage rates.


----------



## Brendan Burgess (14 Apr 2022)

Sarenco said:


> Paying down a mortgage ahead of schedule has a compounding effect at the weighted average mortgage rate over the original mortgage term. No doubt about it.



That is great. This is really important for people to understand. People should stop saying "You must start a pension early because of the compounding effect"


----------



## Brendan Burgess (14 Apr 2022)

Yes, you have a larger sum compounding.

But it's important to realise that this will be taxed at 75% of your marginal rate on retirement, which for most people will be 30%.

And in case there is any doubt, when you have a mortgage below 60% LTV (to avail of the lowest mortgage rates) and if it is otherwise comfortable, you should max your allowed pension contributions - even though there is a risk that the historical outperformance of equities might not continue. 

Brendan


----------



## Sarenco (14 Apr 2022)

Brendan Burgess said:


> But it's important to realise that this will be taxed at 75% of your marginal rate on retirement, which for most people will be 30%.


I don't think that's right Brendan.

Take a €800k pension pot.  €200k taken as a tax-free lump sum, with the balance drawn down at a rate of 4% per annum from an ARF.

4% of €600k is €24k.  The total tax liability on that element of the drawdown, less personal tax credits, is around €1,500.  As things stand today, obviously.

So, tax relief of 40% on contributions, and a blended tax rate of less than 5% on drawdowns.


----------



## Duke of Marmalade (14 Apr 2022)

Sarenco said:


> That is particularly the case when you include the tax relief on contributions, which effectively constitutes an interest free loan from the State.


Not sure about that.  To the extent it comes back as a tax free lump sum, it is a gift.  To the extent it comes back as taxable income it is not an interest free loan as the rolled up interest is also taxed.
But your bigger point that equity investment over the longer term should beat 2.2% p.a. even after charges is hard to refute.
There are of course other considerations around flexibility versus a one track question of which has the better growth prospects.

I note this later point.


			
				Sarenco said:
			
		

> The tax relief on pension contributions is effectively the same as an interest-free free loan from the State. And because of the tax free lump sum, tax credits and lower rate bands on drawdown, you are unlikely to ever have to fully repay that interest-free loan.


I am probably being a bit semantic.  But if the eventual benefit is not taxed then it turns out that the original tax relief was a gift, not a loan, as it was not repaid at all, never mind its interest.  Of course, this supports your overall argument.


----------



## Sarenco (14 Apr 2022)

Sarenco said:


> Duke of Marmalade said:
> 
> 
> > Not sure about that. To the extent it comes back as a tax free lump sum, it is a gift. To the extent it comes back as taxable income it is not an interest free loan as the rolled up interest is also taxed.
> ...


----------



## Brendan Burgess (14 Apr 2022)

Sarenco said:


> Take a €800k pension pot. €200k taken as a tax-free lump sum, with the balance drawn down at a rate of 4% per annum from an ARF.
> 
> 4% of €600k is €24k. The total tax liability on that element of the drawdown, less personal tax credits, is around €1,500. As things stand today, obviously.



I don't follow this. 

When you take the money out it will be taxed at 40%. (in this case as they will have a decent income.) 

You might argue that they don't need to take it out and that whoever they leave it to will have a smaller tax liability.

But the chances are that they will have far more than €800k and that they will take out more than 4%? 

And you seem to be allocating the tax credits to this income. But this is marginal income above their state pension.  Won't that use up their tax credits? 

Brendan


----------



## Sarenco (14 Apr 2022)

Well, I assumed that the pension drawdown was the sole income for simplicity.

If you add a full State contributory pension to a €24k drawdown, you arrive at an annual income of around €36k.  The total tax liability on an income of €36k is around €4,500 per annum for an individual over 66.

So, tax relief of 40% on pension contributions and a blended tax rate of less than 10% on retirement income in this case (including the TFLS).

It is certainly true that the attractiveness of a pension from a tax perspective starts to gradually diminish once a pension pot reaches €800k. 

But it never vanishes completely.  At least until you exceed the SFT.


----------



## DublinHead54 (14 Apr 2022)

Brendan Burgess said:


> But if you have an uncomfortable mortgage, as the OP has, then it's wrong.



But the Op doesn't have an uncomfortable mortgage. 

They have combined income of 120k and mortgage is 12% of gross income. That's well within the suggested Debt to income ratio of 26%. 

If they were paying 40% of their income to mortgage it would be concerning but I can't see how in their financial position the mortgage payment is a concern


----------



## Duke of Marmalade (14 Apr 2022)

@Sarenco To the extent that the benefits are taxed at the same rate as the relief, the relief is totally irrelevant,  True your net contribution will grow at tax free interest but so too will the relief and that will all go to the taxman, in fact the relief is nothing more than an investment of the taxman in your pension which also grows gross of tax.  It actually represents an undisclosed asset of the national finances.  I remember colleagues in fat DB schemes who were going to be in the 40% tax bracket on their pension and still piled into AVCs thinking they were getting tax relief on the contributions, it was an illusion.
To the extent, and this is mostly, that the benefit is taxed at less than the relief then the relief is not a loan at all, it is a gift which does not have to be paid pack.
One can see that tax relief is in many situations in part or in full a loan but it is a loan with interest at the growth rate in the fund.

I am just correcting your terminology, not arguing with your overall thrust that pensions in general are a tax efficient savings vehicle, as the _Boss _states.

Examples:
Gross Contribution 100
Tax relief 40
Net Contribution 60
Growth 100%  Pension Pot 200
(1) Withdrawal as Tax Free Lump Sum; nothing paid back to Taxman, no loan involved
(2)  Tax on withdrawals 40% x 200 = 80
Net benefit 120 = 2 x Net Contribution;  Loan of 40 from Taxman paid back with 100% interest, of no benefit whatsoever to the contributor
(3)  Tax on withdrawals 20% x 200 = 40;  Half of loan paid back with full interest, half forgiven and effectively a gift.  In this example, it so happens that it is the same as an interest free loan, as you only had to pay back the original amount of the relief, but this is a coincidence.


----------



## NoRegretsCoyote (15 Apr 2022)

A good friend of mine is 40, has a pension fund of €400k or so, contributing since his mid-20s. He is in an industry that has seen a lot of growth and has benefitted from a long bull run since 2009 of course.

He rented for years and bought a house at 38 for about €400k with a 60% LTV.

It's only one example, but I can't see any scenario where his wealth would be higher today from having prioritised a mortgage over pension contributions.


----------



## Brendan Burgess (15 Apr 2022)

The early 2000s was very similar to now.   We had years of good stockmarket returns.  Pensions were showing good returns.  Many people thought that 100% mortgages were fine.  Big mortgages and big pensions were the financial engineering used to maximise wealth. We all expected life to continue onwards and upwards.

But guess what? We had a big recession.  

Do you want me to go back through the history of Askaboutmoney and find all the people who were deep in arrears, who suffered great stress and who occasionally lost their home?  We had over 100,000 people in arrears.

They would have been far better off if they had prioritised a comfortable mortgage over maxing their pension contributions.  When their finances recovered, their mortgage repayments were lower and they could start maxing their pension contributions. 

Brendan


----------



## Brendan Burgess (15 Apr 2022)

NoRegretsCoyote said:


> A good friend of mine is 40, has a pension fund of €400k or so, contributing since his mid-20s. He is in an industry that has seen a lot of growth and has benefitted from a long bull run since 2009 of course.
> 
> He rented for years and bought a house at 38 for about €400k with a 60% LTV.



A lot would depend on timing.  If he had bought a house when house prices fell, then I think he would be much better off now.   Even if he had bought at the peak, if he had got a tracker, he would be better off now.  But it also depends on comparing the house he bought with the house he rented. 

But that is more about the timing of the purchase of the house rather than whether he prioritised paying his mortgage or his pension.

Brendan


----------



## NoRegretsCoyote (15 Apr 2022)

Brendan Burgess said:


> They would have been far better off if they had prioritised a comfortable mortgage over maxing their pension contributions.


I'm not so sure Brendan, particularly given how hard it is to reposess in Ireland.

Suppose in 2010 you found yourself on a much reduced income and you had the choice of stopping pension contributions or going interest only on your tracker mortgage. Certainly in hindsight it would have made far, far more sense to do the latter: borrow at 1% to fund tax-relieved pension contributions that have doubled (tax free) since. 

Many people can deal with a residual mortgage when they withdraw 25% of their fund tax free on retirement.


----------



## NoRegretsCoyote (15 Apr 2022)

Brendan Burgess said:


> A lot would depend on timing. If he had bought a house when house prices fell, then I think he would be much better off now.


I'm not so sure. Irish house prices are (just) at their 2007 peak, and have doubled from their 2012 trough.

S&P 500 with dividends re-invested has increased approximately three-fold since 2007 or 2012.

Anyway I am cherrypicking here and my friend's experience shouldn't be generalised from. My point though is that there are scenarios where it can make sense to prioritise pensions over a mortgage, even at a young age.


----------



## Brendan Burgess (15 Apr 2022)

Hi Coyote

Have you ever been in mortgage arrears?
Have you ever had to fill in an SFS and plead with the bank to restructure your mortgage? And asked whether you really needed Sky Sports or whether you really needed two cars? 
Have you ever had to avoid phone calls or knocks on the door from creditors?
Have you been stuck in a house wanting to trade up but couldn't because of an impaired credit record?

Brendan


----------



## NoRegretsCoyote (15 Apr 2022)

Brendan Burgess said:


> Hi Coyote
> 
> Have you ever been in mortgage arrears?


No I haven't.

But there is plenty of evidence that tens of thousands of people behaved strategically when it came to arrears in the post-crash years and are much better off as a result today.


----------



## Brendan Burgess (15 Apr 2022)

Hi Coyote

I get it now.
So your advice to the OP is something as follows? 
1) You have a comfortable mortgage now 
2) It's very likely that the world and your personal circumstances will continue to thrive, so my Excel spreadsheet shows that you will be better off at age 65 by stuffing your pension now.
3) Don't worry if you want to take a career break and can't afford your mortgage.  Just take your career break and don't pay your mortgage or pay what you can afford.  The banks can't do anything about it.  Sure, everyone is doing it. 

I don't agree. 

My advice is that you should aim for a comfortable mortgage so that you build up the financial resilience to handle things going wrong.  And when you have that comfortable mortgage, you will have lower mortgage repayments so you can then put more into your pension.   You will also have a lower Loan to Value, so you will be able to shop around for the lowest rate. And, if things do go pear-shaped, as you will have lower mortgage repayments and a lower Loan to Value, it will be much easier for you to reschedule your mortgage. 

But we will have to agree to disagree.


----------



## NoRegretsCoyote (15 Apr 2022)

Brendan Burgess said:


> 3) Don't worry if you want to take a career break and can't afford your mortgage. Just take your career break and don't pay your mortgage or pay what you can afford. The banks can't do anything about it. Sure, everyone is doing it


I don't suggest that. I think this household would still have manageable payments if they lost their second (lower) income.

Overpayment in practice usually means a mortgage paid off a few years earlier. So suddenly you have a lot to stuff your pension with in your fifties but you may be over your tax-relieved contribution limits if you want to do so.


----------



## Brendan Burgess (15 Apr 2022)

NoRegretsCoyote said:


> Overpayment in practice usually means a mortgage paid off a few years earlier.



Again, I am not suggesting that the OP makes no pension contributions until their mortgage is completely cleared.

I am suggesting that they reduce their mortgage to a more comfortable level while continuing to make their normal employer-matched pension contributions. 

It is only going to take 5 to 10 years to do that, and at that stage they should max their pension contributions. 

Brendan


----------



## NoRegretsCoyote (15 Apr 2022)

Brendan Burgess said:


> I am suggesting that they reduce their mortgage to a more comfortable level


But what's a "comfortable level"? Is the OP at an *un*comfortable level? I really don't think so. Mortgage affordability is capped at origination by the lender. Over time (for most people) affordability gets better with inflation and as their wages rise over the course of a career. 

In any case for most people the the value of their house or even mortgage balance is not foremost on their mind. They just have to make a string of payments for 25 years, live in the house for the duration, then own it one day at the end.

Yes there's a risk of a loss of income, but that's the case for everyone. What you are suggesting here is that the OP basically over-insures by paying down the mortgage aggressively. For me it's not at all clear that the risk justifies it and there is a big opportunity cost in neglecting pension contributions.


----------



## Brendan Burgess (16 Apr 2022)

Hi Coyote

The repayments are comfortable now and will continue to be comfortable if nothing changes. 

They both work full time
They don't take long maternity leave or parental leave 
Interest rates don't rise substantially
They don't want to trade up or move 
They don't split up 
But life is not predictable.  

Again, I will stress that they should continue making normal pension contributions.  If they have excess income, they should pay down their mortgage for a few years until it is at a comfortable level where they will be well able to handle some triple whammy of the above changes. 

When their mortgage is at a lower more comfortable level, their mortgage payments will be lower and they can up their pension contributions. 

They have plenty of time.

Brendan


----------



## DublinHead54 (16 Apr 2022)

@Brendan Burgess what is a comfortable monthly mortgage?

I'm reading through this thread and struggling to see how the Op doesn't have a comfortable mortgage. 

Yes there's a risk of job less, but everybody has that. Also a monthly mortgage over payment won't dramatically change your mortgage payment in the short term so doesn't negate the risk of loss of income. 

I'm trying to look at this in the context of my own mortgage which is a higher percentage of my income yet feels completely comfortable on a monthly basis.


----------



## Brendan Burgess (16 Apr 2022)

Dublinbay12 said:


> @Brendan Burgess what is a comfortable monthly mortgage?



Hi DublinBay

It's not a "comfortable monthly mortgage" 

It's the mortgage balance you need to look at. 

As a general guideline, there are two tests it should pass

Less than 60% Loan to Value - preferably less than 50% 
Less than 3 times the larger income 
This allows great flexibility 

You can trade up
You can take unpaid leave
You can reduce your working hours 
You can easily handle an increase in rates 
You can switch to the cheapest lender 
That does not mean that someone should not take out a 90% LTV mortgage and three times their joint income. They should if they need it to get the house they want.   But then they should aim to bring it down to a comfortable level.


----------



## NoRegretsCoyote (19 Apr 2022)

Brendan Burgess said:


> It's the mortgage balance you need to look at.
> 
> As a general guideline, there are two tests it should pass
> 
> ...



Brendan this is totally upside down.  The  LTV is only relevant for two of the below objectives. Most people at most times *don't* want or need to move house.


Brendan Burgess said:


> This allows great flexibility
> 
> *You can trade up*
> You can take unpaid leave
> ...



For everything else it is the *mortgage payment* that matters, expressed as a share of your income. I've seen examples over the years on AAM of people with a 150% LTV with tracker payment that are coming to 15% of net income. The LTV is only relevant if you want to move and, if you don't, mortage payments of 15% of your net income give you flexibility to do a lot of things. Switching is nice but will save you 1% or 2% of your net income if you are doing well. Is it worth it to restrict your lifestyle heavily for a few years just so you have that option? I'm not so sure it is.

As has been outlined elsewhere, affordability kind of takes care of itself now with the Central Bank rules. It's hard to get in over your head at mortgage origination and for most people something like 27% or 28% of net income is mortgage payment. 


I work out my LTV every few months as I'm curious and financially literate. But you have a highly selected population here on AAM. Most people neither know nor care what their LTV is. There was research from the Central Bank about ten years back that found that half of mortgage holders couldn't even vaguely remember what they paid for their house! 

What matters is the string of mortgage payments you have to make, and how that compares to your income.


----------



## Sarenco (19 Apr 2022)

Brendan Burgess said:


> This allows great flexibility
> 
> You can trade up
> You can take unpaid leave
> ...


The OP has already told us that they have no intention of trading up and they have already managed fine for a 6-month period on a single income.


housemurph99 said:


> We are in a nice area that has very good transport links and very close to both our families. We do not see ourselves moving. My wife did take 6 months off work and we managed through it but that was when restrictions were in place and very little social events took place.


The OP has a 5-year fixed rate mortgage @2.2% so short term rate increases are not a concern.

The lowest 5-year rate that I can find, with an LTV of less than 50%, is 1.95%.  Sure a reduction of 0.25% in the mortgage rate would be nice but it's not very material in the grand scheme of things.

All things considered, I remain of the view that the OP would be better advised to prioritise maximising pension contributions ahead of paying down their mortgage.


----------



## DublinHead54 (19 Apr 2022)

In the case of a person wanting to trade up in the short/medium term, it is advisable to prioritize cash savings over paying down the mortgage.

Overall it is my opinion that in this situation pension should be prioritized over mortgage overpayments.


----------



## Brendan Burgess (19 Apr 2022)

NoRegretsCoyote said:


> For everything else it is the *mortgage payment* that matters,



Hi Coyote

But trading up and getting a cheap mortgage are important? 

And, paying down the mortgage balance, reduces your mortgage payments.  

So they are linked.

I suspect that having a low LTV also helps if you get into mortgage difficulty. While the lenders will base any restructuring on the affordability of the mortgage payment,  I think that they would get some comfort from a low LTV as well.

And there is a huge psychological comfort in having a low mortgage balance and a low mortgage payment. I think that is greater than the comfort one gets from having a larger pension fund.

Brendan


----------



## Brendan Burgess (19 Apr 2022)

Sarenco said:


> The OP has a 5-year fixed rate mortgage @2.2% so short term rate increases are not a concern.



Hi Sarenco

Most people who borrow money don't really think that they will ever get into difficulties. They assume that interest rates will remain low forever.

A fix for 5 years gives some comfort.

Again, I would stress that this is not a case where I am saying "Pay off your mortgage and don't put anything into your pension fund."

I am saying that he should get his mortgage down to a comfortable level, where he can handle anything and will have the flexibility to take time out of work without having to worry about finances.

That will take about 5 years.  After that, stuff the pension.

But we will have to agree to disagree.

Brendan


----------



## NoRegretsCoyote (19 Apr 2022)

Brendan Burgess said:


> And, paying down the mortgage balance, reduces your mortgage payments.


In theory yes, in practice no as you just pay off your mortgage sooner. Then you have a big chunk of free cash flow a few years early and you may not be able to take advantage of tax-relieved contributions in the given years.



Brendan Burgess said:


> But trading up and getting a cheap mortgage are important?



There were about 12k second-or-subsequent mortgages drawn down last year. That's less than 1% of all owner occupiers. Many of these could be trading sideways or even down. There are just not many people who need to trade up and, for those who want to, it's a smaller number for whom LTV is a binding constraint.




Brendan Burgess said:


> I suspect that having a low LTV also helps if you get into mortgage difficulty. While the lenders will base any restructuring on the affordability of the mortgage payment, I think that they would get some comfort from a low LTV as well.



If you want to be totally cynical then you're better off having pension fund stuffed to the max as it is (in general) exempt from the terms of any PIA.


----------



## Brendan Burgess (19 Apr 2022)

NoRegretsCoyote said:


> In theory yes, in practice no as you just pay off your mortgage sooner.



Hi Coyote. Not sure why you say this.

All the advice on AAM is to tell people to keep the term the same.

But when I update the key post on this topic, I will specify that.

Brendan


----------



## peemac (19 Apr 2022)

For the OP 

You have the basics of a pension at present, so it's not as urgent as it would be for other 35 year old with no pension.

Put 25k against the mortgage. 

Switch to Avant 7year fixed @1.95%

Over 25 years this will be 1320 / month 

You will be mortgage free by 60.


----------



## Bagman (4 May 2022)

Hi there, just reading this thread and interested to see no mention of income protection or serious illness cover and only a brief mention of life cover. Im just wondering if people are sceptical about the need for these 'products' if mortgage and pension are being well looked after?


----------



## Sarenco (4 May 2022)

Bagman said:


> interested to see no mention of income protection or serious illness cover and only a brief mention of life cover.


Well, the OP seems to be well covered in this regard - 


housemurph99 said:


> Life insurance:
> Basic Mortgage Protection @350k
> *Job have death in service benefits and income protection*.


----------

