Accelerate Mortgage Payments vs AVCs into Pension

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RebelC

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Hi
I trying to determine if paying off a portion of my mortgage early is a better than continuing to pay AVC amounts into my pension.

My details are as follows:

Mortgage Period Left: 16 yrs
Target Retirement Age: 65
Current Age: 49

Mortgage 1: 44K, 2.95%
Mortgage 2: 177K, 1.5% (tracker)
Both mortgages scheduled to finish in 2035.

Salary: 90K with employee & employer pension contributions. Annual Bonus of 30K (Gross)
Spouse: 25K (Net)

I currently contribute two AVC amounts (in addition to employee & employer monthly contributions)

300 p/month
8K, once-off payment annually.

Current pension stands at 200K.

I have also recently received a lump sum of 25K, which I have currently earmarked for kids (3) college fund, which would be needed from years 2020 - 2027 incl.

I am considering cancelling my monthly AVC (300) and instead put it towards Mortgage 1, to take 8 yrs or so off the mortgage. I can then divert the mortgage payment and extra AVC monthly payment to my pension..

However, based on my calculations (using pension rate of return of 4%), I'm not sure that makes financial sense ?

I could also take the lump sum 25K and use that and annual bonus to clear Mortgage 1 quickly, with a view to then increasing AVC payments and slowly building up education funds

Does it only make sense to use a larger extra mortgage payment, to clear the mortgage quicker to allow more pension growth ?

All opinions welcomed.

RebelC
 
Hi @RebelC

I take the view that, in most circumstances, it makes sense to prioritise maximising pension contributions (at least where they are relieved at the higher rate of income tax) before paying down a mortgage ahead of schedule.

So, in your shoes, I would keep up (or even increase) the AVCs.

Maybe use the €25k to pay down Mortgage 1 (assuming that relates to your PPR), while keeping the term the same for flexibility.

You should be able to fund your children's education out of your improved cashflow. There's no point having money sitting in an account earning zero interest while carrying a mortgage.
 
Theres a few choices here, but the priority should be, get mortgage 1 balance reduced, as its your highest loan interest rate, keeping the term the same, so improving cashflow as Sarenco highlighted.

Personally, i would not use all of the 25k to pay down mortgage 1, but, work out (try at least!)how much your college expenses will be in 2020 & 2021 put that 2 years expenses away, and put the balance against mortgage 1.( no reduction in term) In the meantime, the improved cashflow, needs to be ring fenced, for college expenses in 2022 and beyond. The 2 years put away + improved cashflow once mortgage 1 is reduced, gives comfort.
Review everything next year, as when you turn 50, the max pension & avc combined, % limit increases to 30% of gross earned income.
 
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