An interesting blog, from a fellow firm of Chartered Financial Planners, got me thinking about how I personally take investment risk. Whilst not bragging, our firm’s mortgage adviser got me a phenomenally good deal on our mortgage, and I’m presently only paying 1.34% interest each year!
It doesn’t make “financial sense” for me to be clearing this, as I could probably get 3% per annum, or thereabouts, from a cash ISA, with no investment risk. So why do I clear my mortgage?
By having a repayment mortgage I am guaranteeing my mortgage is clear at the end of the term (as long as payments are maintained), and by taking the minimum risk on my mortgage, I can take other risks elsewhere.
The point made in Informed Choice’s blog was that “using the tax free lump sum to pay off an outstanding mortgage is a very sensible strategy”, but my view is it’s actually a high risk strategy for three principal reasons:
- The author mentions that regular reviews are required to stay on track, but if performance is poor, through factors outside of the investor and advisers control the cost will increase, and of course there’s no guarantee you’ll have enough to clear the mortgage, and your home is ultimately at risk
- You take a huge legislation risk! What if the Chancellor decided to remove, or at least tax the pension commencement lump sum (as it is now correctly known, and the cynics amongst us might say for a reason!)
- Finally, whilst you receive tax relief on the way in, every £4 of fund currently only repays £1 of mortgage. Even a 50% tax payer would likely be able to clear a mortgage with an ISA (or repayment mortgage) at lower cost. Of course the benefit of the pension is the 75% that doesn’t clear the mortgage can provide for a retirement income.
These three risks make the use of the pension commencement sum to clear a mortgage very niche. My view is that most individuals would be better placed on a repayment basis, guaranteeing their mortgage is clear at the end of the term (as long as payments are maintained).
So answering my earlier question, and why I clear my mortgage though it doesn’t make “financial sense”; by being ultra-cautious with my home, I can take additional risks with pensions and other savings, and despite having a share-holding in a very successful business (Wingate Financial Planning); I follow the same advice I give all business owners – don’t have all your eggs in one basket, and have a long-term plan should something happen to your business, or your ability to work; your business may form part of your retirement income, but don’t treat it as your only “pension”.
