My question is whether we should clear our mortgage when we have enough savings to do so – or should we continue saving or investing in a pension?
I am married and 40 years old – with no kids (yet). My wife and I have been overpaying our mortgage steadily for the last five years while also investing ‚Ç¨450 a month in managed funds.
I started a private pension last year and am paying close to the maximum in additional voluntary contributions (AVCs), but my wife (who is a few years younger) hasn’t started hers yet. We will both be entitled to the state pension.
We haven’t had any other debts for several years. In March of this year, our mortgage will be down to about ‚Ç¨20,000 and our managed-fund savings will be around ‚Ç¨25,000. Our mortgage rate is 2.75pc variable and our managed fund is blended between three different levels of risk, which deliver an average return of around 2.5pc to 3pc. We usually have around ‚Ç¨1,000 to ‚Ç¨2,000 in our current account each month.
We are very happy in our current home, so our future plans don’t involve selling it for another five years at least. We hope to start a family, but our current monthly mortgage repayments are only ‚Ç¨600 (without the extra repayments), so we are never under pressure to make payments.
Psychologically, I would love to clear our debt in March instead of letting the mortgage run to 2024, but that would mean clearing out the bulk of our savings. Some people have suggested that it would be better to invest our savings elsewhere with the potential of returning more than 2.75pc. What do you think would be the best option? Michael, Co Galway
Firstly, well done on having the discipline to overpay your mortgage each month and also on having a good savings and retirement plan in place. From a financial planning perspective, there are some key steps that I would suggest you could take from here.
First: maximise tax efficiencies. As you are paying close to maximum AVCs, you are almost getting the maximum tax relief on pension contributions that you are entitled to. You could build a regular contribution into an AVC for your wife as part of your budgeting. This will reduce her tax liability while improving her retirement funds.
Second: establish your saving goal. You have no trivial debt such as a car loan or credit card debt, which is a big advantage. However, you should clarify what the goal of your managed fund savings is. Are these long-term savings or have they been earmarked for something in the shorter term? The nature of the investment and the investment risk that you take should be heavily influenced by how soon you need to access the funds.
Within your risk profile and if you are to look at an investment horizon of 10 or more years, investing in a diversified basket of global equities has historically proven to be a better use of funds. You ask if it would be better to invest your savings elsewhere – with the potential of getting an investment return of more than 2.75pc. For an investment to make financial sense versus reducing your mortgage debt, the investment return needs to be at least double that (around 5.5pc a year or more) – assuming you are a higher rate taxpayer. If you can achieve this return on your investments over the medium term, it would be better to leave the funds invested than to use your savings to clear your mortgage.
I don’t see a pressing need to use your savings to clear your mortgage. You have a reasonable mortgage interest rate which should remain unchanged for the foreseeable future and your repayments are easily manageable over the next four years. You will also be in the enviable position of being debt-free in your early 40s in a home that meets your requirements. As mentioned, you may have a family by then, and a career break or a move of home would be easier with an investment fund still in place.