# Overpay mortgage and pay into pension, or focus all on mortgage



## stiofan85 (5 Sep 2016)

Fiancee and I can afford to overpay our mortgage by quite a lot (100%). Our goal is to be mortgage free in 6-7 years and then buy a second, larger home. From first home we would then like to use the post-tax rental income to overpay on second home and be mortgage free by 45-50 and have some rental income also.

Would it be more advisable to increase the over-payment on house #1 rather than contribute to a pension? We're 31 and have quite high earnings so we can afford it. Since we're over-paying already, would it be better to pay into a pension and have a degree of diversity or put it all on the house and be mortgage free sooner?

House #1 would be a fall-back position should anything happen to one of us.

I've budgeted our money for the next 5 years to allow for babies and other expenditure, so I'm quite confident in our ability to overpay.

Thanks

(Previous attempt at starting this thread was deleted but I can't find why so hoping re-writing will get posted. @Mods, if you delete this thread can you please tell me why? cheers.)


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## Brendan Burgess (5 Sep 2016)

If you read the Posting Guidelines, it should be obvious why your last post was deleted.  It's very clearly spelled out in Guideline no. 3.

Brendan


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## stiofan85 (5 Sep 2016)

Thanks.


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## Boyd (5 Sep 2016)

As I mentioned in deleted thread, ye seem to be over leveraging into property IMO. You dont say where you are living currently (I'm guessing renting, as you said you had just gone sale agreed), or how much the rent is, but in general, I dont see why you are buying a house now, and another one in 6-7 years. What happens if you cant sell house #1, or cant rent it out? This sounds like 2006-type buying of a starter home with the idea of selling it on later. 

Im in similar-ish position (lower salary) and am planning on saving for next 6 years and buying one house outright. Im currently also contributing max AVCs for my age to pension. IMO, on 100K, you should be able to contribute into plenty into a pension and save for house as well, especially if both of ye are almost on similar money. Buying multiple houses sounds messy, getting into being a landlord merely to have a "fallback" house doesnt appeal to me at all.


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## Joe_90 (5 Sep 2016)

You will need to give some details.

Current value of house
O/s Mortgage
Rate of interest

Earnings
Savings

Value of house to be purchased.
Current pension.

If you have a standard variable rate mortgage then it makes no sense to pay it off and then borrow at the same rate for a PPR.


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## stiofan85 (5 Sep 2016)

username123 said:


> As I mentioned in deleted thread, ye seem to be over leveraging into property IMO. You dont say where you are living currently (I'm guessing renting, as you said you had just gone sale agreed), or how much the rent is, but in general, I dont see why you are buying a house now, and another one in 6-7 years. What happens if you cant sell house #1, or cant rent it out? This sounds like 2006-type buying of a starter home with the idea of selling it on later.
> 
> Im in similar-ish position (lower salary) and am planning on saving for next 6 years and buying one house outright. Im currently also contributing max AVCs for my age to pension. IMO, on 100K, you should be able to contribute into plenty into a pension and save for house as well, especially if both of ye are almost on similar money. Buying multiple houses sounds messy, getting into being a landlord merely to have a "fallback" house doesnt appeal to me at all.



Hi 123,

Thanks for your reply. I felt the same on over-leveraging property - I'd read the thread in the key-posts section on paying off your mortgage before contributing to a pension, so that's why I posted:

http://www.askaboutmoney.com/thread...-a-pension-but-dont-leave-it-too-late.189981/

The high salary has only come about very recently after a bit of a slog so have only had the resources in recent months. Mrs isn't on that much yet, but should be in a few years. We got back from travelling 2 years ago so enjoyed the savings we had prior to that and have started at zero again.

Current rent is same as mortgage on #1, near Dublin City Centre. Renting should never be a problem - it's not 2006 style thinking of buying to sell on later. Why pay so much rent when I can afford to buy a home and put my own stamp on it? We have a child on the way and would like a home of our own - that's what it boils down to: we're sick of renting and would like somewhere of our own.

Totally agree I should be able to contribute to a pension and save/pay for a house. My question is on foregoing the pension for now and overpaying more, based on the thread I referenced, but I thought that sounded more risky.

But, to take your logic of saving for 6 years and buying outright: if I can overpay at a rate of 3x the monthly payments, the overall interest on the mortgage becomes very low as I'd pay it off very very quickly, and wouldn't be that different from saving for those years, except I buy the house at today's value rather than in a few years' time?

Genuinely on being a landlord, this is something I am happy to do. I see it as the work involved to secure additional income. No different to doing my day-to-day.



Joe_90 said:


> You will need to give some details.
> 
> Current value of house
> O/s Mortgage
> ...



Hi Joe,

Can you please elaborate on why it doesn't make sense? My rationale is that it's roughly equivalent to having a longer duration mortgage, split across two properties, but we would own one of them outright? Should something happen to one of us, or one of us can't work, then we always have that. 

Should we both be healthy, the first house can generate an income to offset the cost of the second one. I would have thought this would be a fairly sound long-term strategy?

I suppose having come out of college during the height of the financial crisis I'm conscious of both the financial and property collapses, so I'm trying to secure an asset for the future and spread some risk. If my pension was to collapse, we would at least have the house.

I've also many friends who's parents had a similar setup to what I'm trying to put together and were able to live in their parents' first home when they left college, which helped them get on their feet. This is something I would love to be able to give to my children also.

Thanks for the input from you both.


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## Gordon Gekko (5 Sep 2016)

Pension is nearly always superior (when done right).

Only when you own your own home, have an emergency cash fund, and have your AVCs maxed out, should you look at another property. And even then, you should look at a diversified investment portfolio, or REITs if property floats your boat.


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## Boyd (5 Sep 2016)

Youre assuming price is always going to go up so you are buying today out of fear of tomorrow's price. As I said, you didnt indicate the rent in first post, which is why I asked. Our rent is currently E1500, but we are planning to move to another place which is E800 per month. At that price, we are saving an extra E8k per year, meaning renting for few years is a no-brainer vs interest on mortgage. 

If your pension collapses, keep contributing as you will be buying on sale. Pension collapsing is only a concern 10 or so years to retirement, at which time you should be moving towards more bonds anyway. At 31, you should be hoping for an equity crash, as I am at similar age.


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## Gordon Gekko (5 Sep 2016)

username123 said:


> If your pension collapses, keep contributing as you will be buying on sale. Pension collapsing is only a concern 10 or so years to retirement, at which time you should be moving towards more bonds anyway. At 31, you should be hoping for an equity crash, as I am at similar age.



Yes re welcoming market weakness. However, the point about moving towards bonds is not right. With the "ARF option", "lifestyling" is generally wholly inappropriate. 99 times out of 100, the capital endures rather than being used to buy an annuity. Therefore the investment time horizon extends also.


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## Joe_90 (5 Sep 2016)

stiofan85 said:


> Hi Joe,
> 
> Can you please elaborate on why it doesn't make sense? My rationale is that it's roughly equivalent to having a longer duration mortgage, split across two properties, but we would own one of them outright? Should something happen to one of us, or one of us can't work, then we always hav



Ok so you have a loan of €100k on your PPR there is no tax relief.

If you had a €100k on the rental property 75% of the interest is allowable.


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## stiofan85 (5 Sep 2016)

Gordon Gekko said:


> Pension is nearly always superior (when done right).
> 
> Only when you own your own home, have an emergency cash fund, and have your AVCs maxed out, should you look at another property. And even then, you should look at a diversified investment portfolio, or REITs if property floats your boat.



Hi Gordon,

Thanks for the reply. I had always thought the pension is superior - I was just a bit confused by the key post on paying off your mortgage first, then pension.

Trying to convince the missus about emergency cash, she only sees how many shiny things she can buy! Looking at my financial plan for the next few years I believe we can achieve these things. I've just been trying to get additional opinions.

I've already emailed my mortgage broker about a meeting to discuss pension options so I'm looking forward to hearing his thoughts.

Thanks for the advice.


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## Gordon Gekko (5 Sep 2016)

I don't believe that you have to choose mortgage over pension. You try and do a combination of both.


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## stiofan85 (5 Sep 2016)

Joe_90 said:


> Ok so you have a loan of €100k on your PPR there is no tax relief.
> 
> If you had a €100k on the rental property 75% of the interest is allowable.



I see. This is not something I had thought about. I suppose it becomes a mathematical question to calculate the delta between the cost in lost tax relief and potential rental income. This is not something I've done (clearly) so will have to look at it. It's pretty interesting so thank you for flagging.



Gordon Gekko said:


> I don't believe that you have to choose mortgage over pension. You try and do a combination of both.



This was always my gut feel.


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## stiofan85 (5 Sep 2016)

username123 said:


> Youre assuming price is always going to go up so you are buying today out of fear of tomorrow's price. As I said, you didnt indicate the rent in first post, which is why I asked. Our rent is currently E1500, but we are planning to move to another place which is E800 per month. At that price, we are saving an extra E8k per year, meaning renting for few years is a no-brainer vs interest on mortgage.
> 
> If your pension collapses, keep contributing as you will be buying on sale. Pension collapsing is only a concern 10 or so years to retirement, at which time you should be moving towards more bonds anyway. At 31, you should be hoping for an equity crash, as I am at similar age.



Our rent is €1400, mortgage + insurance is about the same. Property tax and other costs will add to that. Moving to a smaller place isn't an option with a child on the way. We want to enjoy a home together and place a value on that. For you, renting is a no-brainer, but for us it really isn't. Each to their own.

Overpaying by 100% of the mortgage value would save me ~48k (60%) of the interest. I can't guarantee the future value of the house so if they were to increase dramatically, despite saving for those years, I may still have to pay that in the price of the house? Whereas I get the utility and enjoyment of my own home in the immediate, save on the interest/cost price and peace of mind. I don't think you can be sure of where things will go, but I like the idea of the peace of mind of knowing I have a home paid for and secure for my family. What if I lost my job or died between now and whenever I could save enough for a house? At least with the insurance required for the mortgage it would be covered in the event of one of us dying.

I don't think I can predict where my pension will be at 10 years out from retirement or what my financial situation will be then, and I will surely be seeking advice at that stage. For now I need to know I'm doing right by my family and that appears to be in the form of 1: Securing a home for the long term and 2: Securing a pension. It may not be the absolutely perfect long-term strategy, it seems to be a good compromise between short and long term security.

Thanks!


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## MrEarl (5 Sep 2016)

Hello,

How secure are both of your jobs and your current incomes ?

.. if extremely secure then I would lean towards making pension contributions. There is the obvious attraction of the tax break (see limits for your age etc.) and also, the fact that each individual is probably going to need a personal retirement fund in the region of €2m. to have a comfortable retirement, given longer age expectancy, expense of accomodation and nursing home care, poor performance from bonds etc. etc.  Obviously, I'm assuming here that you do not have  Defined Benefit Scheme.



stiofan85 said:


> ....Trying to convince the missus about emergency cash, she only sees how many shiny things she can buy! ....



Set up all the standing orders and direct debits to come out of the Bank account as quickly after payday as possible. If the money is not there it cannot be spent.  Thats the approach I had to take, then I followed up by introducing the concept of living off a monthly budget - but set attractive investment goals that interested her (holiday of a lifetime, wedding, unborn children's college fees etc. etc.) 



stiofan85 said:


> ....I've already emailed my mortgage broker about a meeting to discuss pension options .....



Your mortgage broker is unlikely to be the right person to speak to about this, as it's retirement planning and overall wealth management rather than mortgage related (in isolation). 

I suggest you set up a meeting with a Wealth Manager - ideally someone who will give a first consultation free and also, someone who is fee based and not incentivised by commissions from some of the product suppliers they sell services for.


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## dishwasher (5 Sep 2016)

Have you really factored in the cost of childcare - €1000 per month for a baby in Dublin and say €1900 per month for a baby and a toddler ? 

Would the picture change of you were a one income family?

Have you thought about what area you want to be in long term that will suit your family with good  schools etc or are you thinking about your first house as just somewhere for a year or two?

You made a comment about your fiancée wanting new shiny things
- is she fully on board with a putting so much of your income into house buying? Will she want a nicer lifestyle for your family in nicer area if you are high earners?

would you get the same feeling of security by having 6 or 12 months salary in savings, life insurance, a decent pension contribution and  mortgage that is manageable on one salary as you would from having a spare house?

If you had all that then when the time comes and you've spare cash you could start to make choices about overpaying mortgage on the family home, upping the pension or buying an investment property.  But this comes after you are well on the way to securing the family home.  It just doesn't make sense to me to start with the investment property. 

And if you've no savings, isn't the first priority saving the deposit ?


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## Boyd (5 Sep 2016)

Ah here, 2 million private pension?!


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## Gordon Gekko (6 Sep 2016)

username123 said:


> Ah here, 2 million private pension?!



That probably is what a high earner will need.

It's more than achievable for a professional in his/her 30s.


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## Boyd (6 Sep 2016)

I recently remember a thread about pensions and 1million was being used as a target, 2million seems very high. Isn't that near the limit on private pensions?

OP, I'd split cash between the two, mortgage and pension, at least to get the employer match. You will not notice that much drop in nett pay due to tax relief.


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## Dan Murray (6 Sep 2016)

username123 said:


> I recently remember a thread about pensions and 1million was being used as a target, 2million seems very high.



I think we need to bear in mind that _a nickel ain't worth a dime anymore_.

On a serious note, I'm not clear if people are talking about €2m in actual or today's money terms.


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## Mrs Vimes (6 Sep 2016)

stiofan85 said:


> At least with the insurance required for the mortgage it would be covered in the event of one of us dying.



Just on this note - you can take out life assurance entirely separate from any mortgages and surviving spouse could use it to buy a house outright if it happened so this really shouldn't be a consideration.


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## Gerry Canning (6 Sep 2016)

Dan,
Hard to guess what your nickel is to be worth in X years, maybe its a moot point, because if your nickel is  of dime value in the future,  we are banjaxed anyway!. 
So 2 million in X years time should still  be of real value.Today it would be worth a lot .


Today @ 65 you need pension savings of circa 20,000 to get 1,000 pension per annum.
Today @ 66 State pension is (same) as a pension pot of circa 230,000.

So on retirement now you have own  pot of 230,000 + state pot of 230,000 = circa 460 per week.

So aim for 1 million + and enjoy the cruises.


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## stiofan85 (6 Sep 2016)

Lots of good replies since yesterday!

Re Missus enjoying shiny things - she is on board, I was exaggerating a tad. I've got our salaries mandated to our shared account and I use a standing order to give us both an allowance for the month. The rest is used for savings etc...

Re factoring in childcare costs - this is in my financial plan. I've budgeted €1000 per month per potential baby.

Re saving for deposit. We have this plus ~25k in savings and adding to it rapidly.

Re: 2m for a pension pot. This is a separate question I had, but it's for another day. Seriously though, 2m seems like a lot! Definitely not relying on the state pension being there in 40 years though.

Re Job Security: Hers is 100% secure and on a scale. I'm in tech....that industry is strong but I'm not foolish enough to think it can't crash. I've a lot of transferable skills so if it should collapse tomorrow I'd be able to find work, but at a lower rate of pay. For this specific reason I want to secure a home.

It seems like striking a balance between owning our own home (overpaying mortgage), pension, and emergency cash is needed, which is what I'd always expected and planned for.

The 2nd house down the line is a plan - it is not set in stone. If it happens, great. if not then we'll re-evaluate as needed. For the present we need a home for the family and security, so to answer my original question: It doesn't make sense to double down on the mortgage and sacrifice the pension as per this thread:

http://www.askaboutmoney.com/thread...-a-pension-but-dont-leave-it-too-late.189981/

Thanks!


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## MrEarl (6 Sep 2016)

username123 said:


> Ah here, 2 million private pension?!





Gordon Gekko said:


> That probably is what a high earner will need.
> 
> It's more than achievable for a professional in his/her 30s.



Folks,

I am talking €2m per person, to give a decent pension in retirement from say age 65.

Key considerations:

* We are living longer with average age expectancy for males in the mid 80s and females mid to late 80s.  Thats going to continue to increase over the next few decades, before the original poster and their partner get anywhere near retirement, not alone past it.

* Accomodation costs and nursing home costs are serious expenses.  While the original poster may be working on getting a debt free family home to provide accomodation, healthcare and nursing home costs will need to be considered in the future.

* Inflation obviously plays its part. €2m in today's money won't have anything like the same purchasing power in say 30-40-50 years time, which is really the period of time we are talking about.

* The Irish state has a serious problem on it's hands and cannot afford to fund the future state pension costs, not alone increases in same. So don't bank on collecting €12k pa in 30-40-50 years time... or that qualifaction for the state pension will be from age 68, as odds are it will have been pushed back to an older age for commencement.

Take a little time to mess about with the Pension Calcuation on the Pension Authority's website: http://www.pensionsauthority.ie/en/Calculators/Pensions_Calculator/


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