I have done an updated version of this video that assesses this strategy using historical stock market and mortgage data. Check it out: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-9MfCVkRvjQs.html
I prioritised my mortgage and am so glad I did! It is no good having a massive pension that you can't access until a certain age that keeps increasing, if you are in your 30s or 40s and something happens like you lose your job, health, spouse or encounter some other unforeseen hardship that leaves you unable to pay your mortgage. That did happen to me, and I'm glad I have an actual house rather than theoretical future money.
Biggest lesson i learnt in 2023 in the stock market is that nobody knows what is going to happen next, so practice some humility and low a strategy with a long term edge.
Nobody knows anything; You need to create your own process, manage risk, and stick to the plan, through thick or thin, While also continuously learning from mistakes and improving.
Uncertainty... it took me 5 years to stop trying to predict what bout to happen in market based on charts studying, cause you never know. not having a mentor cost me 5 years of pain I learn to go we’re the market is wanting to go and keep it simple with discipline.
“NICOLE ANASTASIA PLUMLEE’’ is the licensed fiduciary I use. Just research the name. You’d find necessary details to work with a correspondence to set up an appointment.
I went mortgage free by downsizing, but I used a chunk of pension when I retired to sort another outgoing cost. I covered my roof in solar panels and got a powerwall. My house energy bills are now neutral throughout a year. I also bought an EV, and as I charge at home 90% of the time the equivalent of a tank of petrol is about £8. Yes it takes a while to get pay back on these things, but the cost living crisis hasn’t ruined my retirement…… yet.
Thanks, very interesting. I hate debt, but I had a lot of it, mortgage, and business loan, which was double my mortgage.. The day after the business was sold I walked into the branch office of the building society and asked how much to pay off the mortgage, I got my cheque book out and signed the cheque. The feeling of being debt free for the first time in my adult life was amazing, so for me being debt free was a real driving force. Retired soon after.
Not to mention that if you were really hard up, you could always borrow from your property in the future, which you wouldn't pay any tax on as it's a debt. Debt free is the way to go.
Your videos are life changing for me. I realised I needed a financial advisor, fortunately I got a good one and am now heading to retirement at 60. Love your YT channel please keep them coming. School kids should be made to watch these as part of their curriculum.
Well they've held at 5.25% interest so it's still £80k better off. With the BoE saying they will cut next year if things go to plan then that is going to be back to 120k. The LTA could change year to year within the UK now as the tories or labour flip flop endlessly.
Wow, this is a game-changer, maybe even life-changing! I have been loyally following the mortgage repayment route and it would never have occurred to me that this was a viable option. But since watching this video and crunching a few numbers this strategy would allow us to ramp up my wife's pension and give us better options in retirement. We have a bit of time to go on our fixed rate but when it comes time to re-mortgage, this will be the way to go. Your content is fantastic. As we enter the last decade (hopefully) before we retire your videos have given us a much better understanding of what we can achieve, how it can be done and a plan to get there. In a very uncertain world this is a significant comfort. Thank you!
@@JamesShack Hi, any chance you've created an online calculator since this video? Would be amazing! Also, with very uncertain times ahead, and the chances of a stock market crash looking likely, pensions invested in such could actually lose, not gain. That'd be a HUGE issue.
@@carlos777uk Just as the video suggests, the pattern is that after a crash the economy comes back. These corpos now are so big that they're more than just national companies really, so it will take them a while to pivot but rest assured they have the money to adapt to whatever happens. So TL;DR, if a crash happens, just ride it out. Might take 5 years but your money will be back to where it was or go up. And if it doesn't... well, take solace in knowing that everyone else is screwed too and so a mass solution would have to be found and it will include you somehow too. It's not like there'll be anything you can do pre-emptively about it anyway unless you want to just sleep on a cash mattress out of fear.
yes but two issues to consider: Divorce ( hopefully won't happen but women change a LOT in their 50s) and if either of you are out of work for a long period, your debt will be higher as you stopped paying off the capital. I have been mortgage free since my 30s now in my early 50s and divorced. Despite that due to the amount I was able to save ( she saved 00) I had to pay her off but still mortgage free.
Great video James. Hunt didn't freeze the LTA as you feared but has abolished it! Big risk with your strategy is any meddling with the 25% tax free cash- be great to see how that plays out in you stress tests !
@@rocketpig1914 couldn't agree more. Contract law seems to apply in every aspect of life except for when you sign up for a pension on the basis of drawdown at 50 then after you've committed to the deal the government changes the terms with zero rights for you to pull out
I wish I could show this video to 25 year old me. I've reached 40, planned retirement at 65 but like everyone would love to retire 55-60. I consolidated old pensions into one, started a life time ISA although I only plan to contribute £200 a year at the moment but still unsure how to be financially independent. This is certainly some food for thought though which I'll look to explore in more depth 👍🤞
The Jeremy Hunt comment killed me! The fun police are truly out in force! Love your channel, James! Aiming for FI by 38, using a lot of strategies you discuss. Keep it up, mate!
I love videos like these which look at different strategies! - A couple of things to keep in mind: Taking the income part of the pensions triggers the Money Purchase Annual Allowance, which will limit future pension contribution tax reliefs if the person works beyond the age of paying the mortgage. Therefore the person should already have a substantial pot of money already saved up in a pension (or other sources) or is banking on higher returns to meet retirement expenditure. The other thing is the tax savings of keeping the Tax free cash portion in place is extremely beneficial as this is ultimately growing along with the pension. Once you incorporate the drawdown of the pension for each situation, the picture could look different.
Some challenges to consider: 1) What happens if you die prior to paying off. Leaving partner with an unpaid mortgage. 2) What happens if you loose your job or downsize your job at 55 when you had intended to have paid off - You then cannot afford to put as much in pension. Also be great to share the model sheet for others to play around with, I love this concept too.
If you die before the age of 75 your spouse, or whoever you chose, inherits your pension as a tax free lump sum. So they would be in a better position then had you paid off the mortgage. A loss of income at any points affects each scenario in the same way. After 55 both scenarios would simply have less going into the pension. If you experienced a loss of income prior to 55 you are arguably in a better position with the pension because you can stop contributing whenever you want. But with a mortgage you can’t stop paying it.
Great video, I initially had this strategy (31y/o, 20% salary sacrifice), but ultimately decided it was too early for me to adopt. I'm thinking I wouldn't be able to access this cash until at least 60y/o, and wouldn't be surprised if the 25% tax free lump sum and other benefits were scaled back too by the time I get there, and I would likely hit the £1.07M mark way too early. Financial independence for me in the short term was knocking down some of my mortgage, and having ISA cash available as a fallback and ability to move around when needed. But always good to be ready to switch to this approach when I feel the time is right.
Yes that might be right. It’s often better to do a bit of both, and have investments spread across different tax wrappers, especially if your a long way off retirement and tax rules could change.
Had this in 1990, then in 2010 the govt changed NMPA retirement date of personal pensions in uk from 50 to 55, so had five years extra to pay before accessing lump sum.
My 2p worth. I paid into my mortgage before putting into pension. I had offset mortgage ( dont think they do them anymore), any savings were offset against mortgage. Every spare penny went on mortgage. Mortgage finished at 40, then i put every single penny i could afford into pension . Worked 2 days a week for the last 3 years . Plan to retire at end of year at 56. Not a huge pension, but enough so i can tick over and not work with 2 nice holidays a year. Did i do the best thing financially, who knows, but its worked for me.
I really like your approach to money and how you educate people. Regarding pensions, I checked my annual statements for last year and I lost more money than actual earned (my pension pot was reduced), plus the pension charges a % fee, so even less money. I really don’t like pensions because of this. Plus their fees are way higher than investing. I started investing on an ISA (cash as I’ll need the cash to pay the mortgage in 3 years) and a few K on an index fund just to text how it works. I’ll review my pensions performance as I also want to take advantage of the tax benefits.
This strategy uses your home as collateral (a mortgage is a form of an asset-backed loan) to arbitrate the difference between the interest-only interest rate (e.g. 4%) vs market index returns (e.g. 6-8%) inside a pension tax wrapper (utilising the 25% lump sum). Fine in theory, just a problem when your loan term comes to an end and the market crashes (e.g. if it ended during the 50%+ crash during 2020). This is similar to the BTL strategy, where rental yields of 6-8% is similar to the above - on one hand it's possibly taxable, but on the other hand you can sell and move virtually at any time instead of waiting to 57+.
I’ve recently stopped overpaying my mortgage and instead now do salary sacrifice with work pension so this video is welcome news! I also max out a S&S LISA every year and invest whatever I have left into a S&S ISA. I’ve even opened a savings account for the first time in years as the rates on it are the same as overpaying my mortgage was, so using that to build up some liquidity/emergency fund as that’s the area I’m lacking in at the moment. Not quite convinced enough yet to switch to interest only mortgage but I’m now giving it some thought
Its sounds like you have a lot of diversity which is no bad thing. Within a few years you may be financial secure enough to be confident not needing to repay the mortgage. When you know you could pay it off, via other means, if really needed.
I paid my mortgage off when I was 33. Best thing I ever did. You cannot beat that security of knowing you will always have a roof over your head that no one can take away, whatever happens .
Exactly. People in general are dumb nowadays saying stupid stuff like 'cash is trash' and that renting is better than buying. Also people are too greedy. Instead of hoping for a cash tree to magically appear they could just spend less or earn more. It blows my mind how gullible the population is falling for scam after scam. I hate using this statement but some people are literal cattle
@@williamlyons3947 Being smart is foolish? The bank can't force him out as its now fully paid off. He can live minimally and doesn't need excess cash to show off to people he doesn't like while you are in the rat race indulging in debt until the bubble bursts
@@williamlyons3947 There's no such thing as a free meal. By having a mortgage you are a slave to the government. You can't just quit your job anytime you want and forever in debt to another man. That ain't freedom. Instead of living a life full of debt paying off a mortgage means that person can live off less and even focus on minimalism. The everyday sucker spends so much on garbage that maybe if you didn't spend so much on trash you wouldn't need a high paying job to be happy. I value my time so with a paid off mortgage means I have time to do what I want when I want. Being debt free is priceless
Option C. Interest only mortgage with offset account and an overpayment each month of 25% of the mortgage initial monthly payment, but fixed for the term of the morgage. E.g. Mortgage repayment = £100, so you pay a fixed amount of £125. Add the balance of what would have been the repayment mortgage monthly repayment into the offset account each month increase the amount of offset and Prime pay back. It would be interesting to see the number crunch on that scenario.
This is a great explanation of how to use your pension to your advantage. The one thing you didn't mention is the annual allowance. That may limit the contributions some people are able to make to their pension without losing the tax advantages. That's especially the case for your suggestion to move money from an ISA to a pension just before you retire - if it is a significant amount of money then you'll need to spread it out over several years. You also need to consider the money purchase annual allowance. If you take money from your pension to pay off your mortgage before you retire then you will be limiting the contributions you are able to make after that quite severely.
The FCA don't make money out of you. The Financial Advisers, fund managers and pension companies are the ones that do even when you lose money, they always get their fees. The FCA require every financial adviser/company that is part of their organisation to look at every scenario going forward and how wrong it can go. What happens in job loss, death, health etc situations going down the line. Your money is stuck in that pension till say 57 and you are 45-50 years of age. You are in shit street for those 7 years and you havnt paid a penny off that mortgage. The FCA are there to protect us hopefully on false promises. Always remember the government will not let you get out of any sticky situation until 55-57 and there is threats of raising it even higher to get your pension money out early. James is wrong with this one, he is not looking at every scenario of your money being stuck. It is a fantastic plan if everything goes 100% I agree with that but there is a real world out there where changes of circumstances are high to even thinking of a risk like this.
Yep, imagine becoming unemployable aged 50 and having a massive pension pot and little to no income. If you are a basic rate tax payer and with interest rates rising it’s making more and more sense to pay off the mortgage. All scenarios need to be weighed up.
@@danteburritar2822yeah pay. The mortgage off and then buy a property, and if you fall on hard times after 50 then sell it, but at least you have no mortgage.
Hi James, really enjoyed this alternative view and insight. Probably not one for me as the lifetime allowance is a blocker. Biggest challenge with this approach is being comfortable with the debt as often a mortgage is a millstone around our necks. Would be interested to know approaches for people that will exceed the lifetime allowance - think this will become a problem more people will experience given the high rates of inflation.
Hybrid approach: Reduce pension contributions if getting close to LTA and then split between ISA and repayment mortgage. Don't get too worried about the LTA though, and certainly don't start the hybrid pivot until you really are close, like within 100k close.
So I've worked for three different UK-based companies from medium to very large, the defined contribution pension I've had with then over the first 15 years of my career has grown at LESS THAN 1% (that accounts for money I've invested each month and looks at the underlying increase in value of the shares / assets) Stocks and shares in the open market might be 7%+ but I've not seen anything like that. So that's the only area that I can fault your analysis, the rest of it hangs together very well.
I suggest the answer to your client’s Q “why don’t more people do this?” is that the Endowment Mortgage scandal put a lot of individuals & lenders off this sort of strategy. Nothing fundamentally wrong with Endowment Mortgages; but they were miss-sold to people who didn’t understand the risks.
This has the same objective as an Endowment mortgage, but is executed entirely differently. Total control, transparency and the benefits of tax relief.
Good luck trying to get the young ones to pay more into a pension... They tell me they could die any day and what is the point of putting money away that they will never see... So they go out and buy loud exhaust pipes and lowered suspension springs instead...
I currently salary sacrifice 8%, with a 11% employer match. Also got a very short term mortgage so home on track to be paid off by the time I'm 42. Waiting until I'm 58, if not higher to pay off my house is too long for me.
I'm lucky that my employer pays in 12%. I pay in 12% myself. Although i am paying off my mortgage but am on a very low rate and the monthly payments are also very low. So for now that makes the most amount of sense for me. I'm in my 40s but have been lucky in my education on pensions at a younger age so have built up a reasonable pot albeit I will remain under the LTA or if it seems I will breach it may use the mortgage pay off technique as a strategy. Salary sacrifice and the government 20% top up is such a useful mechanism. Especially if you're over the 100k mark
Ive had many discussions with colleagues about why pay off mortgage earlier with money that could be getting 40% tax relief plus growth. Many are very cautious though despite me pointing out that grabbing 40% tax relief could be regarded as the cautious approach. I woke up to this later than i shoudl but it did pay off for me.
I guess one thing to consider is in pension strategy one would exhaust the 25% lump sum in paying the mortgage. The best strategy I would say would be repayment with a longer mortgage term and let the surplus go into pension.
The interest needing to be paid is higher if not paying off the capital too. On a 150k loan, over 30 years interest only would cost over £70k more compared to repayment over that term. When I calculated putting in that extra £221 (which is excl. any tax relief) into a pension at 5% over 30 years, the final value is £208k so doesn't this work out as being worse than just paying the capital off as well?
Spot on! This is my strategy too - IO mortgage, and maxing out the pension contributions. A couple of thoughts: - availability of IO mortgages is quite limited, and particularly challenging if you are looking to extend the term into later life - there are other costs (mortgage application fees etc) to add - proximity to 55 / pension access age. There's a lot of uncertainty around how pensions tax rules might shift over the next years, and clearly it's a challenge if you are trying to predict many years into the future (eg change to LTA, tax relief etc) - cash flexibility. It's generally easier to vary your pension contribution in time of financial challenge, than it would be to reduce a mortgage payment. This means that an IO approach would give more flexibility than a repayment one - as you note, the marginal tax rates on relief and when you access the pension make a huge impact. Clearly HR tax, or marginal around the £100-£125k income level, can give huge benefit, presuming you aim to be a BR taxpayer in retirement.
Thanks Kevin, your points are valid. - IO mortgages normally need £100k household income. - The risk is that pension rules change (again) which is why doing a bit of both doesn't hurt. - Agreed on the cashflow point. - 60% tax relief and 45% (for £125k+ now) is a much bigger benefit.
Because when you retire, you're not earning a wage, so there's a high chance your "earnings" from pensions put you in the lower tax brackets. Basic research. Watch anything about "why pensions"
@@MarkHanfordnot as much to be gained from someone who's in the regular 20% tax bracket their whole working life. You'll be in the same bracket when you draw down unless you keep it really low (like below personal allowance low)
There were pension mortgages sold 30 years ago , like endowments as long as payments are kept up and investments do ok then always a good option. If difficult times come and people just pay the interest only part Not so good .. In the right hands with investments that don’t fall and enough life insurance cover , well then a good idea . Pay your money take your chance
Paying off your house early not only provides the feeling of security, it actually emboldens you to pile even more money into investments like never before without worrying about losing the roof over your head or job. I would argue paying off the mortgage enables a significantly more risk based mindset thats hard to quantify but ultimately results in more wealth long term. I’m not disagreeing with the numbers, but its fear that holds a lot of people back from doing anything, so would be interesting to provide a video that’s based on paying off your mortgage, enabling you to double down on investing without fear. Paid off my modest home at 40, (didn’t get the dream house and debt to go with it), enabling me to invest more and spend more on family experience’s
The primary risk with this strategy could be less to do with average interest rates and investment growth over the long-term (though they are of course still important risks), and more about the risk of changes to pension legislation. The pension access age may well move again (as you mention), but we also haven't had any significant changes to pensions since freedoms were introduced in 2015. I'm not suggesting there will be wholesale changes, but changes nonetheless could have a significant unforeseen impact on the viability of this strategy. Risk vs reward etc.
The client has two stand-out atteibutes: 1. Desire to be financially independent, debt-free with the roof over his head secure. 2. Already takes risk in his life through more risk-prone investing. I would not advise this client to leverage the risk further by taking this interest-only gamble (which is already failing). It imperils his stated desire to own his home and, quite frankly, his pension is under-funded as it is. If he’s unable to adequately fund his pension then he should at least have the certainty of owning his home and stick with the repayment mortgage. This guy is substantially exposed to a scenario where he actually loses his home or has practically zero pension.
Depends on interest rate rental from my rental house which own outright but added to mortgage on house live in it covers my whole mortgage and no tax on interest either like a rental would
I have an interest only mortgage & have been putting the money I save on the repayment mortgage into my private pension, then the tax man tops it up by 25%, then when there was about £125k in the pension I set up a SSAS & transferred it into that tax free, the SSAS then purchased a small industrial unit that rents out at £1000 pcm, this £1000 is tax free if left in the SSAS. Now the SSAS is saving up for the next unit but can also borrow using the equity in the first unit or borrow max 50% just to buy the next. You can transfer any existing pensions you have into the SSAS also, only problem that I see is later if you need the money out you can still only get the 25% tax free. Also the SSAS cost about £1500 per annum to run by a third party, best thing is anything in the SSAS is inheritance tax free for your kids or wife etc.
Hi James, it all makes sense the problem is that you are investing in a pension funds that is not backed up by the demografic around. Yes it is true you “should” pay the mortgage and make more money as result but it is not guaranteed. If you py off the mortgage at the end 100% you are free of the biggest expenditure in your life if you don’t and you funds drops massive due to a market crash…you are absolute broke. I use debt as leverage but not when i have zero control on it…this is why i think pension funds as a scam. I rather invest in company with dividends or buying a second house and have income rather than pension…just ask yourself why the age keep going up…that is the answer
If you lose your job income level at 55 or before. It does feel safe to have somewhere to live forever like after you finish your paying off your house
I have one risk and one extra consideration to add to this informative article: the risk is if a future government changes or removes the tax free cash allowance from pensions. It’s been mooted before, so definitely a risk to this strategy. The consideration to add is the client’s job security and/or health and size of the mortgage relative to the income level that he might have after an adverse redundancy/Ill health event. If such an event occurs before he can access his pension pot, or before it is large enough, he might regret not clearing the mortgage, so he can live on a much reduced income. Personally I utilised an interest only Offset Mortgage, so I had the benefits of overpaying the mortgage, no investment risk, but also access to the repayment capital as time went by, which I could take out and feed into my pension as my career path became settled and I got closer to the age at which I could access the pension.
Really interesting video. I think the number of assumptions on these calculations should make people extremely cautious, but hey, it already assumed the test case was comfortable with high risk investments. I've always been dismissive of interest only mortgages, but this made me think of them in a new way.
My only concern would be timing the market to align with his retirement date. With the repayment, he knows that on a certain date in 15 years' time his mortgage will be zero; the reverse can not be said of the pension route. I'd be fine with it, and I'm sure he was, but it is not like for like. A great tip though.
You're right. Nothing in guaranteed, but over a 17 year period, the odds are very much in his favour. That's why these decisions can only be made with the full context of risk tolerance, emergency funds, personal insurance etc.
Food for thought! I've been overpaying on the mortgage and there's no way I'm remortgaging any time soon as I have 3.5 years left at 1.8%. But maybe those over payments could be invested into a pension instead 🤔
Legislative changes could totally scupper this strategy, if they ever reigned in the 25% TFC, or restricted drawdown access. Important for people to consider that.
Hey James. New viewer here. Going through your back catalogue of videos and learning so much. Thank you for your balanced, unbias expertise. I, like a sizable priportion in the UK, pay into the NHS Pension scheme. Have you ever done a video on this pension scheme? Does it differ to other schemes? My understanding is that if you draw out any funds before retirement age, currently 67, you incur significant penalties and so would not be a valid strategy here. Any information is greatly appreciated :)
The NHS pension scheme is a complicated one and split into two main parts. I'm not an expert on these schemes, but i believe you can get the option of a tax free lump sum but it may reduce the ongoing income you receive. So you need to do a calculation to work out if it's worth the cost.
Unless he is financially stressed, the issue isn’t about the loan, it’s he’s not salary sacrificing. Pay off the loan and also salary sacrifice to the concessional cap.
Most of us who are contributing to a UK workplace AE DC pension scheme have little control over investment returns as these schemes typically offer a limited range of funds and performance of these has been quite poor recently. The way I look at it is that I make an instant return of 40% (tax saved) and anything else is a bonus. I believe these days few mortgage providers offer interest only mortgages on main residence. Those that do have higher interest rates. Mine’s repayment and all earnings above £50,270 go into the pension via salary sacrifice. Hoping to have settled the mortgage by 65 but if I need to retire slightly before that, the pension pot can then be drawn down to cover the mortgage payments, 25% of each withdrawal being tax free and of the balance, anything above the PTA is taxed at 20% as withdrawals would be well below the level at which 40% tax is payable.
Great video. My only observation is people put too much focus on the LTA - this is a 'first world' problem.😂 Hopefully, most of the £1m will be made up of capital gains - not real money so paying tax should not be an issue. Just focus on maximising your pension. It is also a great way to transfer wealth to your children. Also, repayment mortgages are generally 'front loaded' - meaning the early years are focused on paying the interest as opposed to the capital.
Problems with this: 1) If you look up the gov website - it says you can draw down 25% tax free but then you need to draw the rest out within 6 months... Is this a new thing? 2) Mortgage lenders require you to have a capital allocation plan in place to pay off the amount due when the term is up if it want an interest only mortgage. I guess they'd accept this strategy but I'm not sure. 3) Paying interest on the mortgage for 15 years in my circumstances would = £130k/15 years. Then i still have to pay off the amount i owe for the initial loan on top of that meaning a grand total of 300k. With a repayment mortgage over 15 years, I'd have a grand total of £270k to repay 4) if i drew down 25% tax free after putting 300k into my pension, that's 75k. I'd still owe 100k on the mortgage which I'd have to pay off over say 5 years and that's while I'm still paying interest on it of 6k/year which probably negates any tax savings. Then I'd end up with 100k left in my pension which isn't very good In summary - that 25% draw down needs to be significant enough to wipe out the majority of the mortgage or it's not worth it. Although I'm going to look into this further to fully understand it
Whilst a great strategy in some regards, it is harmful if you want to move up the property ladder, since being on an interest only mortgage builds no equity, made worse If all the new available cash from that type of mortgage is invested into your pension as it becomes inaccessible. Really important for people to understand all aspects
interesting video! I have a pension contribution plan and also a 100 percent global fund ISA and can hopefully pay my mortgage off within a year👌hopefully it serves me well at retirement!
These videos are really getting my brain ticking. But I just am not confident or feel intelligent enough to know what to do. I work for an employer where what ever I put in percentage wise I put 5% they put 8-10% can’t actually remember 🤦🏽♂️. Also I’m in the share save scheme maxing it out on the 3 and 5 year option. I’m fixed on my mortgage till jan 2025 on a 1.75% interest. I’d love to know what the perfect strategy is for me 😬
What does it cost to discuss the same situation as your friend with a financial consultant? Also are there any ramifications for the consultant if the advise goes Pete tong
One big flaw in that strategy is the fact mortgage rates are not fixed on long term. Everytime you renegotiate your rate and repayments, it’s dependant on the LTV (which doesn’t improve, as your ownership remain the same initial 10% or 15%). So the rates you’re offered are way worse than with a repayment mortgage, which can end up pretty big if you have a large debt.
Hi James. Great show, as always, and an interesting strategy. Two points: if the IO mortgage ends he would have to pay the balance there and then, would he not? So no additional savings. Also, the sums are a bit out. 189K/198K and the sub-1000 figures.
We sold up wary 30s and moved to a postcode tht wasn't as valued... Got a huge house and now Yr on Yr the increase in out house value is insane. Point is, check up and coming areas and invest there. I have 70k left of a house worth over 500k at 36. I have now spread thst amount over 20yrs...its just over 300quid a month. I did that because I'm young and want to live my life whilst able... I have 3 kids so we experience loads. And as they get older, I may opt to pay more on my mortgage... I might not.
Interesting. We have 11 years left but have a fixed mortgage rate of 2% till 2026. I always thought in a high inflation environment, it's better NOT to pay off low cost debt, as we'll be paying it with money that is worth less in the future. Our LTV is about 15% and we have about £100k to pay off (to make the maths easier.) I currently pay 20% into my pension but can put more in. I'm thinking it's better to stick with what we've got, with a very low interest rate, but then adopt this strategy in 2026.
Keep the 2% rate in and put more into pension now if you can as you seemingly alluded to. Chances are by 2026 interest rates will have peaked, fallen and back down to c2%.
This doesn't account for risk at all! What if this chap falls and hurts himself, loses his job or dies. Leaving debt not paid off in order to make money is fine, and I'm sure there are some good things that COULD come of it, but this doesn't account for the mess or muddle that you're left in if there is a problem: Death = a large mortgage still existing and grieving friends and/or family with a bigger muddle than there needed to be, to deal with. Losing your job = you have a big mortgage and no money to pay it off or to pay into your pension. Being injured or ill = you have a big mortgage and no money to pay it off or to pay into your pension. The stress test in this video is pants, because it always assumes that the person is going to remain the same. But none of us do, we all change and our situations too.
Not sure. I’ve paid off mortgage at 50, heavy overpayment of a tracker, I.e. get a good rate above all else, to hell with fixed. 14 years end to end. Maxed out pension and it’s half a million already. No debt and all very very simple in my view. My pension has returned 8% a year as has everyone I know.
You should def max out your pension contributions (if possible, and especially if you’re a higher rate taxpayer), but it’s unclear how to invest them - a typical 60/40 default portfolio may not do very well for a while. Also - you are not calculating real returns in your projections (inflation adjusted). It’s possible real returns for the next 10 years will be close to zero if we see persistent inflation and low growth, and no central back tailwind pushing the markets as we’ve had for the last 10+ years
Incredibly useful video, just used this advice to get a hybrid mortgage, part repayment, part interest only (debt covered by pension). Current 2 yr fixed term about to end. End result is only a small increase in monthly payments - on a new 5yr fixed deal. If I hadn't watched this video, a couple of months ago, wouldn't have known this was an option, might have have lost the house. Terrifying. THANKYOU
Uncapped interest rate exposure, inability to upsize home if required, and uncertainty on when you can access the pension because of age rising and/or that tax relief potentially diminishing? Interesting thought exercise, but mad to actually do …
I stopped overpaying my mortgage in favour of increasing my pension contributions. I like your idea, however I'm already worried that they could pull the 25% tax free lumper from the table. Also what's the chances of being allowed an interest only mortgage as when I've asked before they wanted a proper business plan to prove you'd have the funds to pay mortgage off
This would be my worry. I started on final salary pension with guaranteed lump sum on retirement (% tax free) - they pulled this and now on an average salary with no lump sum
Unfortunately i have been unable to get an interest only mortgage as i don't earn enough/ have enough equity. Im quite happy with this strategy though.
We are also forgetting here that he still has the entire equity in the house left over so if he were to down size his home he would have a further X amount of money back from the sale of his house which in theory should have added an extra load on top of what the mortgage was originally worth.
Thank you for making this video, I've been banging this drum for years and people look at me like I am crazy. You are also the first person finance expert I've seen talk about this strategy in my 20 years if reading and watching personal finance. It seems that the 25% tax free allowance was meant for this purpose.
It's a risky strat as an endowment scheme, and locks that money so it can't be used or even financial considered to potential house move if you want to move up or spilt with a partner.
You failed to mention that this only works if you're intention is to retire at 55 or 57 when you can take the 25% tax free. Would the person be expected to live off the reduced pension he now has it his pot . Also, am I correct in saying that once you have drawn down then there's restrictions on how much you can contribute back into a pension for growth? Still thank you for the insight into this strategy it's very interesting
Pension Mortgages were all the rage in the 90s. Went the same way as endowments as the contributions were never enough to achieve the goal and were comparable in monthly cost to a repayment mortgage.
A few minutes in I realised this is exactly what my Dad did! He retired last year at 69 and I was surprised he had been paying his mortgage as interest-only. Now I totally understand what that was all about.
I switched an ISA mortgage plan to a SIPP way too late, if I had done it that way from the start I could most likely have paid the mortgage just from the tax free lump sum on the SIPP for the same monthly contribution. But beware if you do need to use the taxable portion to pay mortgage, need to be managing that properly before the mortgage is due to not negate the tax advantage of the pension with higher rate tax on pension payments. Also with the lifetime allowance currently frozen to 2028 and who knows when it will actually be increased it's highly likely that anyone starting on this route now is going to run foul of the limit and have pension income implications as a result.
I've interest only tracker (30year)mortgage on a second property. ALL profits are put into my AVC, and the Irish Government give me 42% tax back minus the taxed profit
Did you stress test the returns? For example how do you model a 20% sell off and then average returns after that? Great video by the way! Keep up the good work!
Stress testing at the worst times is the right way to go - ask how they would react and feel even it is feels unlikely or bad luck now. Even 20% sell off can be conservative depending on where the assets are invested. Other downsides: - you’ve said it already but in a slightly different way - with the LTA you will have less to save in your pension for your actual retirement needs. - this strategy will also need to be reviewed and ensure that the client does not get a false sense of security for their retirement. They still need to save for it!
@@cubeh8331 I meant delay paying off the mortgage, you would not necessarily have to delay retirement so long as you have saved independently for that - which is what this plan suggests.
This is basically borrowing money to invest in stocks but with some tax benefits. Would you out a loan to invest in the stock market? It may have positive expected returns but it is risky. If theres a large financial crisis, this could end up poorly.
It's ok if your predictions are optimistic. I take the view that even though my life expectancy is about 80 years, going by my own family history and previous lifestyle choices, I'd be doing well if I made it to 70. I also assume the government will raise state pension age to at least 70 for my generation, or it'll be gone by then, so I'm not counting on it at all. Lastly, I'm assuming the age at which I can access my private pension will end up being at least 60 and I am determined that no matter what I refuse to work past that age! My parents generation did well to retire at 55, so 60 feels right for me. All that considered, my plan is to pay off my mortgage no later than age 50 by making overpayments and then get a decade of working with no mortgage before packing it in and enjoying at least a decade of reasonable health. Before I get old my property is going in to a trust for my children so it can't be used for care costs. When I get access to my pension I'm taking as much as I can and living it up. If I run out of money and survive to state pension age, I'll live off just that. Old age is rubbish whether you have money or not, so if I'm going to work my backside off now I'm planning to finish with a bang later. Being rich is useless when you're blind ,deaf, arthritic and house-bound!
