Paying Off Mortgage

[xian]

I appreciate advice on the following:

being a debt-o-phobe, I have consistently been beating down my mortgage, and will have only a couple of K left on it by the end of this month.

I realise gearing is a good thing when prices are rising, but they aren't, and that's also part of the reason I wanted to pay it off. I plan to gear again when it appears prices begin to rise again whenever that may be.

However, I am starting to wonder if my actions could be wrong. I'm avoiding a rate of 4.65, so that's better than earning a rate of 5% and then being taxed at 40%.

But thereagain, the repayments I have had on my mortgage would be effectively pennies in future years, yet I have dumped large sums into my mortgage when today's money is worth today's value.... inflation would make this very little in future.

I plan to start investing all the money from now on that would have otherwise been spent on mortgage repayments. I can put 14k pa into ISA's, one under my name, one under my partners (before April this year). After that, not sure (apart from 10k a year ISAs between us), since I'll have a bit more than that to invest.

Also, I'm female, so may well be taking a career break in the next few years.

I have the ability to redraw all my mortgage overpayments.

I'm about as economically wise as my smartest dog, so would appreciate views as to whether I am heading in the right direction or not.

Am confused, so comments and advice welcome. Thanks in advance.

Edited January 19, 2006 by xian

[zorn]

However, I am starting to wonder if my actions could be wrong. I'm avoiding a rate of 4.65, so that's better than earning a rate of 5% and then being taxed at 40%.

Paying down your mortgage gives you a risk-free tax-free return of 4.65%. If you think you can beat this by investing the money elsewhere, then you might want to go for it. If you don't, then paying down the mortgage is the only sensible thing to do.

[frugalista]

I appreciate advice on the following:

being a debt-o-phobe, I have consistently been beating down my mortgage, and will have only a couple of K left on it by the end of this month.

I realise gearing is a good thing when prices are rising, but they aren't, and that's also part of the reason I wanted to pay it off. I plan to gear again when it appears prices begin to rise again whenever that may be.

However, I am starting to wonder if my actions could be wrong. I'm avoiding a rate of 4.65, so that's better than earning a rate of 5% and then being taxed at 40%.

But thereagain, the repayments I have had on my mortgage would be effectively pennies in future years, yet I have dumped large sums into my mortgage when today's money is worth today's value.... inflation would make this very little in future.

I plan to start investing all the money from now on that would have otherwise been spent on mortgage repayments. I can put 14k pa into ISA's, one under my name, one under my partners (before April this year). After that, not sure (apart from 10k a year ISAs between us), since I'll have a bit more than that to invest.

Also, I'm female, so may well be taking a career break in the next few years.

I have the ability to redraw all my mortgage overpayments.

I'm about as economically wise as my smartest dog, so would appreciate views as to whether I am heading in the right direction or not.

Am confused, so comments and advice welcome. Thanks in advance.

Very interesting question. It certainly seems to beat taxed cash savings, as we discussed in another thread.

I think the next question is, does it beat pension savings?

How do you feel about pensions? On the one hand they are untouchable, until you retire, and even then they are not very liquid. On the other hand, you can get a massive amount of tax relief and these days you can actively manage them yourself quite easily, so you don't have to be tied up in one asset class.

Have you maxed out your pension contributions?

frugalista

[xian]

Very interesting question. It certainly seems to beat taxed cash savings, as we discussed in another thread.

I think the next question is, does it beat pension savings?

How do you feel about pensions? On the one hand they are untouchable, until you retire, and even then they are not very liquid. On the other hand, you can get a massive amount of tax relief and these days you can actively manage them yourself quite easily, so you don't have to be tied up in one asset class.

Have you maxed out your pension contributions?

frugalista

i have negligible pension. Although 33, I've only been working in a prof capacity for 6 years, only earning a significant amount for the last 4. I'm generally wary of pensions. I don't like the idea of fees, the additional taxation that was introduced in the last couple of years, or annuities. I was planning to do this via private investment .... which means developing a new set of skills.

However, I am also intending to speak to my accountant in the next week or two on this very subject... is it true you can sink a lump sum into your pension to account for the last few years earnings?

I need to consider this against the idea of saving all income over the next few years in ISAs and other vehicles and doing BTL on current home while moving to different house (which gives CTG advantage plus gearing possibility, plus tax offsetting capability).

I think I need a good IFA!!!

[Minos]

I appreciate advice on the following:

being a debt-o-phobe, I have consistently been beating down my mortgage, and will have only a couple of K left on it by the end of this month.

I realise gearing is a good thing when prices are rising, but they aren't, and that's also part of the reason I wanted to pay it off. I plan to gear again when it appears prices begin to rise again whenever that may be.

However, I am starting to wonder if my actions could be wrong. I'm avoiding a rate of 4.65, so that's better than earning a rate of 5% and then being taxed at 40%.

But thereagain, the repayments I have had on my mortgage would be effectively pennies in future years, yet I have dumped large sums into my mortgage when today's money is worth today's value.... inflation would make this very little in future.

I plan to start investing all the money from now on that would have otherwise been spent on mortgage repayments. I can put 14k pa into ISA's, one under my name, one under my partners (before April this year). After that, not sure (apart from 10k a year ISAs between us), since I'll have a bit more than that to invest.

Also, I'm female, so may well be taking a career break in the next few years.

I have the ability to redraw all my mortgage overpayments.

I'm about as economically wise as my smartest dog, so would appreciate views as to whether I am heading in the right direction or not.

Am confused, so comments and advice welcome. Thanks in advance.

I was in the same situation as you until December. I was running a balance of £275 outstanding on my mortgage for a couple of years. I too had one of those flexible mortgages that allowed you to draw money back out.

I was always thinking it would be good to have in on tap if an opportunity presented itself and I needed the money. In the meantime I kept saving. Decided in the end to pay it off and be done with it. It's a bit weird, but although the payments were less than a couple of quid a month and would never have presented a problem it was a bit of a relief to just get it out of the way. Glad I did it.

If you only have a few K which you were looking to invest elsewhere (for a better return) instead of redeeming, how much difference is going to make ? Is it really worth fussing about ? Pay the mortgage off and forget all about it.

[xian]

I was in the same situation as you until December. I was running a balance of £275 outstanding on my mortgage for a couple of years. I too had one of those flexible mortgages that allowed you to draw money back out.

I was always thinking it would be good to have in on tap if an opportunity presented itself and I needed the money. In the meantime I kept saving. Decided in the end to pay it off and be done with it. It's a bit weird, but although the payments were less than a couple of quid a month and would never have presented a problem it was a bit of a relief to just get it out of the way. Glad I did it.

If you only have a few K which you were looking to invest elsewhere (for a better return) instead of redeeming, how much difference is going to make ? Is it really worth fussing about ? Pay the mortgage off and forget all about it.

i'll be able to pay off the mortgage in full in feb, but will keep a few quid on it so i don't have to look after the deeds. Then I'll have quite a bit each year spare. 14k this year prior to april can go into isas, 10k pa after that, but there will also be another large excess that I need to invest too.

but one of my main worries is what inflation means in all of this, and what impact that has. maybe it works in my favour, maybe not. I simply don't get it!!

[frugalista]

i have negligible pension. Although 33, I've only been working in a prof capacity for 6 years, only earning a significant amount for the last 4. I'm generally wary of pensions. I don't like the idea of fees, the additional taxation that was introduced in the last couple of years, or annuities. I was planning to do this via private investment .... which means developing a new set of skills.

However, I am also intending to speak to my accountant in the next week or two on this very subject... is it true you can sink a lump sum into your pension to account for the last few years earnings?

I need to consider this against the idea of saving all income over the next few years in ISAs and other vehicles and doing BTL on current home while moving to different house (which gives CTG advantage plus gearing possibility, plus tax offsetting capability).

I think I need a good IFA!!!

I am no expert but I think you can put in an amount equal to your annual taxable income if the destination is a SIPP. A SIPP will generally solve the fees worry that you have. It also gives you almost total flexibility for investments. I think you're right to be put off by the dividend taxes, they are a true stealth tax and something Gordon Brown should be ashamed of if he is trying to encourage pension savings.

I guess the thing about annuities is not so much that the money must form an income (we'll all need an income in our old age) but that you might be forced to get one when annuity rates are rather low. Although I think you can wait till you're 75 so perhaps you have a certain amount of market timing available.

I think my attitude is that pension forms a part of your plan, since the tax relief on contributions is pretty huge, but perhaps it cannot be the whole plan. I think it is good to put money in early in life as then you get more years of growth. I'm 31 and I have about 27k split between a UK plan and a US one. My UK one is great, the fees are only 0.6% per year and I can switch between funds online. I believe stocks should outperform property in the long term, but if I change my mind there is a (commercial) property fund available and I could move my money into that.

frugalista

[Minos]

i'll be able to pay off the mortgage in full in feb, but will keep a few quid on it so i don't have to look after the deeds. Then I'll have quite a bit each year spare. 14k this year prior to april can go into isas, 10k pa after that, but there will also be another large excess that I need to invest too.

but one of my main worries is what inflation means in all of this, and what impact that has. maybe it works in my favour, maybe not. I simply don't get it!!

Don't worry about the deeds. They are registered in an electronic register and the LR apparently. If you look up you property details on the LR website after you redeem they will appear almost as identical as before but with the reference to the lender removed.

I asked the lass at the LR if the form they sent me needs to be kept in a safe place and she chuckled and said I can if I want.

I guess the only good thing about not redeeming but keeping a small balance is that you don't have to pay the deed handling fee. I think A&L charged me about £175 quid or there abouts.

I've been concerned about the effect of inflation on my savings ever since reading about money creation - scared the hell out of me. So I've chucked all but one years spending money into gold and I'm confident that over the long term it will take of inflation for me. I definately won't be paying any money into a scam pension. And looking at the price today, the golds been doing grand. Glad I didn't leave it sitting on deposit.

[IMupNorth]

I think I need a good IFA!!!

Most of these IFA's inhabit a spot one rung above the lowest of the low, EA's - don't trust a word of what they say.

Short term you could keep a little on an offset mortgage and then invest into an account linked to this - many banks do this now. Basically, they pay you interest on your savings at the same rate as your mortgage.

From the banks point of view this is normally very good business as most people have very little savings and a really big mortgage. Therefore they are giving bugger all away.

However, if you have a very small mortgage and lots of savings then you end up winning.

If you can't do this then, pay off your mortgage as quickly as you can and then start investing your savings in a wide array of investments. I have yet to meet anyone who regrets paying off their mortgage.

First I think you should max out on your £3k per annum ISA's - not brilliant interest but safe - 30 years on you should be able to build up a nice nest egg.

When you start feeling like a bit more risk, then try some shares. Over a period build up a portfolio of different shares which should help to protect you. And get a few premium bonds along the way - you might get lucky.

Oh and if you ever think property is good value, then you could try some of that as well.

My own opinion is build your own pension and do not invest ina pension scheme as you have no control over what these people will do with your money. Build your own portfolio, which you control and can liquidate it when you want to or need to.

The best advice, is to not have all your eggs in one basket. Watch the markets like a hawk and be prepared to follow your own instincts, then you only have yourself to blame !

[the_duke_of_hazzard]

Most of these IFA's inhabit a spot one rung above the lowest of the low, EA's - don't trust a word of what they say.

Agree totally. I met with one once - he was little more than a photocopier salesman and what he knew about investing I learned in about two hours with a good book. It cost me 350 quid, and now I can get the same investments fee-free on the web.

[xian]

I am no expert but I think you can put in an amount equal to your annual taxable income if the destination is a SIPP. A SIPP will generally solve the fees worry that you have. It also gives you almost total flexibility for investments. I think you're right to be put off by the dividend taxes, they are a true stealth tax and something Gordon Brown should be ashamed of if he is trying to encourage pension savings.

I guess the thing about annuities is not so much that the money must form an income (we'll all need an income in our old age) but that you might be forced to get one when annuity rates are rather low. Although I think you can wait till you're 75 so perhaps you have a certain amount of market timing available.

I think my attitude is that pension forms a part of your plan, since the tax relief on contributions is pretty huge, but perhaps it cannot be the whole plan. I think it is good to put money in early in life as then you get more years of growth. I'm 31 and I have about 27k split between a UK plan and a US one. My UK one is great, the fees are only 0.6% per year and I can switch between funds online. I believe stocks should outperform property in the long term, but if I change my mind there is a (commercial) property fund available and I could move my money into that.

frugalista

i thought it was possible to put into a pension an amount dependent upon your last few years savings (don't know how many years) rather than just based on one years earnings..... ?

[frugalista]

My own opinion is build your own pension and do not invest ina pension scheme as you have no control over what these people will do with your money. Build your own portfolio, which you control and can liquidate it when you want to or need to.

I think you do have quite a bit of control. That said, sometimes the value of the fund management is not worth the fees.

frugalista

I've been concerned about the effect of inflation on my savings ever since reading about money creation - scared the hell out of me. So I've chucked all but one years spending money into gold and I'm confident that over the long term it will take of inflation for me. I definately won't be paying any money into a scam pension. And looking at the price today, the golds been doing grand. Glad I didn't leave it sitting on deposit.

I am also spooked by the reality of money creation. But I think that just means owning any asset which will be of value in the future is a good bet.

What makes you think pensions are scams? Honest question. My dad was caught out in the Equitable Life meltdown so perhaps I should be wary. Do you still think it's not worth it even if your employer makes matching contributions?

frugalista

[xian]

I think you do have quite a bit of control. That said, sometimes the value of the fund management is not worth the fees.

frugalista

I am also spooked by the reality of money creation. But I think that just means owning any asset which will be of value in the future is a good bet.

What makes you think pensions are scams? Honest question. My dad was caught out in the Equitable Life meltdown so perhaps I should be wary. Do you still think it's not worth it even if your employer makes matching contributions?

frugalista

agreed. Re your last point, my problem is that I am my own employer! So matching my own contribs... not actually sure how that works since I've not investigated! Would it be advantageous in any way i wonder? I'm not self employed, I'm the sole director, and sole employee of a LtdCo which I have 100% ownership of.

This just adds another level of confusion to my whole financial scenario.

[frugalista]

agreed. Re your last point, my problem is that I am my own employer! So matching my own contribs... not actually sure how that works since I've not investigated! Would it be advantageous in any way i wonder? I'm not self employed, I'm the sole director, and sole employee of a LtdCo which I have 100% ownership of.

This just adds another level of confusion to my whole financial scenario.

That last post takes us way beyond my puny financial knowledge!

frugalista

[xian]

That last post takes us way beyond my puny financial knowledge!

frugalista

more worryingly for me, mine too

Thanks for your good replies though. Will def be investigating pension possibilities with acct.

[a j]

agreed. Re your last point, my problem is that I am my own employer! So matching my own contribs... not actually sure how that works since I've not investigated! Would it be advantageous in any way i wonder? I'm not self employed, I'm the sole director, and sole employee of a LtdCo which I have 100% ownership of.

This just adds another level of confusion to my whole financial scenario.

I'm a bit out of date on this - check with your accountant - but there are savings in employers NI if you pay directly to a pension scheme. If you would have paid yourself through a salary rather than through dividends, employers NI amounts to 12.8%. Added onto the saving on your marginal rate of tax pension can be an attractive method of investment.

[xian]

I'm a bit out of date on this - check with your accountant - but there are savings in employers NI if you pay directly to a pension scheme. If you would have paid yourself through a salary rather than through dividends, employers NI amounts to 12.8%. Added onto the saving on your marginal rate of tax pension can be an attractive method of investment.

yes, i have a small salary (10k) and maxed divis, therefore avoid alot of e&e NI. I believe there is a breakeven point... i.e. if you pay more salary, you attract more employer and employee NI, but are allowed to contribute more to pension pro rata... there is a break even point based on the advantage of a 40% break in pension contribs. The prob is from initial figs, this is quite high, maybe 40-50k salary required, and I have baulked at the rates of NI payable. Thus I pay myself a v small salary, which makes possible pension contribs small. However, I have a feeling pension contribs could be based on total income, rather than just salary.

Anyone know if pension contribs can be based on income rather than just salary?

Additionally, I simply haven't trusted pension to pay back more in the long term than paying off mortgage early (given front loading) and taking the income in later years that would have otherwise been spent on repayments elsewhere.....

[a j]

yes, i have a small salary (10k) and maxed divis, therefore avoid alot of e&e NI. I believe there is a breakeven point... i.e. if you pay more salary, you attract more employer and employee NI, but are allowed to contribute more to pension pro rata... there is a break even point based on the advantage of a 40% break in pension contribs. The prob is from initial figs, this is quite high, maybe 40-50k salary required, and I have baulked at the rates of NI payable. Thus I pay myself a v small salary, which makes possible pension contribs small. However, I have a feeling pension contribs could be based on total income, rather than just salary.

Anyone know if pension contribs can be based on income rather than just salary?

Additionally, I simply haven't trusted pension to pay back more in the long term than paying off mortgage early (given front loading) and taking the income in later years that would have otherwise been spent on repayments elsewhere.....

Xian, I'm not sure of the tax rules in your case as they are in a bit of flux concerning owner-directors, but pension contributions can be made by either the employer (company) or employee (or both). Thus an employee can be given, for example, pension contributions of £10k pa (deductible from corporation tax) and a salary of £10k pa. Many plc directors are paid huge pension contributions - partly tax planning and partly as its a less visible form of salary.

[abroad]

I believe there is a program on TV now looking into this. Some comments on it from anoither BBs

http://taboard.com/forum/index.php?showtopic=32850