Money Makeover Mid 30's - Tackle Pension or Mortgage

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.
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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.
 
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
 
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.
 
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
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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.
 
NoRegretsCoyote said:
Overpayment in practice usually means a mortgage paid off a few years earlier.
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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
 
Brendan Burgess said:
I am suggesting that they reduce their mortgage to a more comfortable level
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But what's a "comfortable level"? Is the OP at an uncomfortable 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.
 
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
 
@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.
 
Dublinbay12 said:
@Brendan Burgess what is a comfortable monthly mortgage?
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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.
 
Brendan Burgess said:
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
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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
  • You can reduce your working hours
  • You can easily handle an increase in rates
  • You can switch to the cheapest lender
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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.
 
Brendan Burgess said:
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
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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.
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.
 
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.
 
NoRegretsCoyote said:
For everything else it is the mortgage payment that matters,
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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
 
Sarenco said:
The OP has a 5-year fixed rate mortgage @2.2% so short term rate increases are not a concern.
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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
 
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Brendan Burgess said:
And, paying down the mortgage balance, reduces your mortgage payments.
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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?
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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.
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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.
 
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.
 
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?
 
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