plonkee money an english-er's thoughts on personal finance

May 25, 2007

overpaying your mortgage or investing for retirement part 2

Filed under: house,investment — plonkee @ 7:14 am

Free Money Finance posted earlier on whether it is better to invest for retirement or pay off your mortgage earlier, and I posted earlier about which of these strategies is likely to result in a larger financial gain. (The answer was generally to invest for retirement).

Thinking now about which strategy will be easier to set up and stick to, lets look at the problems with each strategy in turn.

Overpaying on the mortgage is relatively easy to accomplish, just send them extra money every month. To make this easy to carry out, you’ll probably want to set up an automatic payment system, probably a standing order. You can also easily overpay with an lump sum amounts that you have lying around. You’ll need to check the terms of your mortgage agreement to determine whether there is any overpayment penalty. With some fixed rate deals you can repay up to 10% month without penalty, with some tracker deals there is no penalty regardless of the overpayment amount.

Once an automatic overpayment has been set up there is nothing more that you need to do to ensure you stick to the strategy. The only ways that you can then access the repayments is to re-mortgage or take out another loan on your property. This requires reasonable credit and will take some time to achieve.

Setting up retirement investments is also relatively easy to accomplish. You just need to sign up with a pension provider (stakeholder, personal or SIPP), which is much the same process as opening a bank account, they’ll need proof of identity and your National Insurance number (to reclaim tax for you). You can almost always set up a monthly plan to invest the money, where you have a standing order into your pension and the money is invested in funds / shares in accordance with your pre-determined wishes. You will need to determine your investment strategy – I prefer to use index funds myself

Once your retirement investment has been set up, you need to do a little work each year to ensure your strategy is up to date and to rebalance your portfolio if necessary. I estimate this to take at most half a day, depending on how much research you want to do on investment strategies and how quickly you read. It is incredibly difficult to access your retirement investments prior to retirement age (50, rising to 55 in 2011) – you essentially need to die or be incapacitated.

On balance, I would say that either idea is easy to set up and overpaying the mortgage is marginally easier to maintain. Since we are trying to make money with these strategies we want to protect ourselves from the desire to withdraw the money. On this measure, investing for retirement has the edge.

In either case, it would seem, its pretty much a wash with investing for retirement having the edge because it is likely to offer a greater financial return. However if you are not convinced of its financial return and you think that maintaining an good investment portfolio is more work than you’d like, overpaying your mortgage is also a solid way to generate wealth.

Once your retirement investment has been set up, you need to do a little work each year to ensure your strategy is up to date and to rebalance your portfolio if necessary. I estimate this to take at most half a day, depending on how much research you want to do on investment strategies and how quickly you read. It is incredibly difficult to access your retirement investments prior to retirement age (50, rising to 55 in 2011) – you essentially need to die or be incapacitated.

On balance, I would say that either idea is easy to set up and overpaying the mortgage is marginally easier to maintain. Since we are trying to make money with these strategies we want to protect ourselves from the desire to withdraw the money. On this measure, investing for retirement has the edge.

In either case, it would seem, its pretty much a wash with investing for retirement having the edge because it is likely to offer a greater financial return. However if you are not convinced of its financial return and you think that maintaining an good investment portfolio is more work than you’d like, overpaying your mortgage is also a solid way to generate wealth.

Similar Posts:

If you like what you're reading, why not leave a comment below, subscribe to my feed, or check out some of my best posts.

Powered by WordPress