I'm in the grip of an obsession with financial planning at the moment.
I'm back trying to figure out how we can get the mortgage paid off so the pressure to work is reduced. Mostly for Martin's benefit, as his firm has decided to ratchet up his workload to such an extent over the last 5 weeks I think they are trying to get him to physically collapse so they can medically retire him.
I'm looking at two possible ways to pay it off:
Overpaying: we pay a shedload extra every month, the number of years you have to pay it over drops and we're mortgage free in three, maybe four, years.
Pension lump sum: we increase our pension contribution into Martin's pension by the same amount as our overpayment by dumping some money into an AVC (a fund that allows us to make Additional Voluntary Contributions to pump up our pension). Then when he is ready to retire, we take the optional 25% lump sum and use that to pay off the mortgage.
Both have their good points and bad points.
Making overpayments is simple, and we can physically see the mortgage being paid off every month. That will spur us on to keep going. But on the negative side, we won't have much in the way of savings for retirement, and when it comes to compound interest we need as many years between us and retirement to accumulate the cash as possible. Paying off the mortgage and then going hell for leather for the last few years saving won't give us as much as we might need. Mind you, compound interest probably won't help as much as getting out if a toxic brutal workplace as soon as possible will. Finally, it won't save us much in interest to do it as we are now into the phase of the mortgage where most of our payment is going towards the capital repayment.
That's how mortgages work - in the beginning the majority of your payment goes towards the interest not the capital and then it slowly shifts the other way during the mortgage term.
On the other hand, putting more money into Martin's pension requires steely nerves, as we won't be able to see what is going on until the yearly statement comes in, and have to invest on the basis that one day we will reap the rewards. But he will end up with a bigger retirement pot overall, even after the lump sum has been taken, because the lump sum comes comes from his AVC and his normal pension stays untouched.
I worked out that for us the amount of money we could make through extra pension contributions outweighs what we would save by directly overpaying the mortgage.
In fact, theoretically if we remortgaged and increased the term from its current term of 12 to 20-25 years, we could reduce our monthly payment right down, and put the difference between that and what we currently pay into the pension as well. Along with an overpayment, it would come out as an even bigger pension pot when he retires and we still get to pay off the mortgage early with plenty left over. Being 12 years younger and having 24 years until I am 65, I would have to have the mortgage in my name as our lender won't allow Martin to have a mortgage which takes him past his retirement age.
There's only one problem, and that is the variable deal we are on is so good we cannot find anything else that comes close, either in interest rates or terms and conditions. By remortgaging we would end up with a worse mortgage product, to the tune of almost doubling our interest rate and with less flexibility to overpay. We've ruled this option out now unfortunately. It was a great sneaky plan though.
So I'm sitting here this morning working out a detailed spreadsheet of all of our forecast monthly expenses based on the detailed expenses tracking I've been doing for the last seven months. Martin is pretty adament he wants to work until he is 60, as he wants to chance to earn the maximum possible so he has enough money after to do whatever he wants. Also there may be an opportunity to take voluntary redundancy with a large payout.
So first of all, I'm working out what the remainder of our mortgage payments will be every month until the end of the term in 2026. Then alongside that, I'm working out the potential figures for accumulating savings and investments in a number of different places. What I'm looking for is the savings/investment vehicle that gives me the earliest month when the forecast amount matches the amount left on the mortgage. That's the time we'll be mortgage-free.
While it sounds daft to plan in such detail so far in the future, you have to start somewhere. If the savings amount goes up or down I can adjust the figures very easily in a spreadsheet.