Trying to pay off mortgage - interest only ideas?

peterg1965 · 30 June 2007 at 9:54AM

I have been mulling over different ideas about paying off my mortgage earlier than currently planned.

My situation: £255,000 repayment mortgage, currently with 16yrs 8 months remaining with Nationwide BS, fixed until Feb 09 at 4.94%. Mortgage is split into two (£177K and £78K). Monthly mortgage payments are £1875, which is roughly £1000 interest and £875 capital repayment at the moment. My current plan is to have the mortgage paid off by the time I am 53 (I am 41 at the moment), when I leave my current employment with a £31K pension (todays rates) and a £100K lump sum tax free. This will go up in the intervening years of course.

What I was thinking was changing the mortgage to an Interest only loan, and investing the remaining amount in relatively 'safe' investments, but would be willing to accept a moderate level of risk. Initial thoughts would be to maximise cash ISA's (£6K a year between my wife and myself - £500.month @ about 5.75%) and the remaining in a S&S ISA £350 month again split). using a simple compound interest calculator this could yield about £179,000 after 12 years at an average increase of 5.75% a year (I accept this may fluctuate especially in cash ISAs with BoE rates going up and down). That is £10,200 invested every year rising at 5.75% per year over 12 years. That would mean that I could very easily pay off my mortgage at 53 and have a tidy lump sum left over.

Does this make sense? Am I missing something here? I know that when my current mortgage deal expires I will have to get another fix, unlikely to be at 4.94%? but I would try and get a very competitive 5 year fix. I do not have the capacity to overpay my mortgage at the moment, as this would eat into our family quality of life which we are not prepared to do.

What do you think?

ailuro2 · 30 June 2007 at 10:03AM

I think that your plan sounds very similar to the old style endowment mortgage- keep paying interest on the full amount and hope that your other investment will do well enough to pay it off in x number of years. Completely reliant on your investments doing well enough to pay off the full amount.

If it was a successful way of paying off a mortgage, wouldn't the banks be offering something similar?

Jonbvn · 30 June 2007 at 10:13AM

Can you change from your fixed rate repayment mortgage to an interest only one now, without incurring an ERC?

The problem I can foresee is that come Feb 2009, the interest rate on the mortgage will likely be higher than the return on your savings/investments.

peterg1965 · 30 June 2007 at 10:32AM

ailuro2 wrote: »

I think that your plan sounds very similar to the old style endowment mortgage- keep paying interest on the full amount and hope that your other investment will do well enough to pay it off in x number of years. Completely reliant on your investments doing well enough to pay off the full amount.

If it was a successful way of paying off a mortgage, wouldn't the banks be offering something similar?

Agree, however, I would be fully in charge of my investments inlike an Endowment policy, Cash ISAs are as safe as having cash in any large financial institution. The money is tax free, although the interest rate goes up and down and there future is not guaranteed beyond 2012(?). The other Investments would be invested in the same sort of funds as Pension investments and most people admit that provided you are sensible with your choice of funds and risk level then they make sense for a long term investment stategy.

Admit that success here would be largely dependant on getting a very competitive long term interest rate when I come to remortgage, however at that stage I may be able to absorb any increase payment with pay rises etc.

moneysavingobsessive · 1 July 2007 at 11:46AM

If you can get better returns than your mortgage is costing you, then why would you want to pay it off?!! Once you reach the point where you have the capital matching the debt you wouldn't need to make further payments, but you may as well let the investments run if your cost of capital is lower than your return.

If you are in a flexible mortgage then of course you could always repay or part repay if your investments start to underperform....

peterg1965 · 1 July 2007 at 11:53AM

ailuro2 wrote: »

I think that your plan sounds very similar to the old style endowment mortgage- keep paying interest on the full amount and hope that your other investment will do well enough to pay it off in x number of years. Completely reliant on your investments doing well enough to pay off the full amount.

Actually having thought about this, it is in no way like an old style endowment. The bad publicity and misselling of endowments surrounding the 'low cost' variety which were massively misrepresented in terms of unrealistic investment returns. In my case If this was an 80's style 'low cost' endowment I would probably have been flogged a policy which cost about £300 per month. £850 is considerably more and 'properly' invested in a considered portfolio is likely to yield much more than endowments ever could. It is more akin to a pension mortgage I think.

ailuro2 · 1 July 2007 at 1:26PM

Ahh, but you can't escape from the fact that the basic idea is the same though-

you are not going to pay off the capital amount on your mortgage, you are going to invest the money and hope it does well enough to eventually pay off the capital amount. There are no guarantees of how each investment will perform.

If you are capable enough to make it work this way, then good luck to you.

I know I don't have the type of personality that is happy to have a sizeable debt against my name and to believe I can control all my other investments- however for the size of my mortgage now, any savings would be pretty minimal (see my signature) so in my case it is irrelevant.

For your situation there is more to work with/gamble/save/lose/risk.
It depends on your personality which of the above words you choose.;)

InMyDreams · 1 July 2007 at 5:16PM

ailuro2 wrote: »

Ahh, but you can't escape from the fact that the basic idea is the same though-

I see what you're saying, and actually agree with you. But I don't believe that this basic idea is flawed. The problem I had with endowment mortgages was with the endowment product itself, not the 'basic idea' of saving and/or investing alongside your mortgage which I still think is appropriate for some people (myself included). Does anyone investing buy into endowments any more? But that doesn't mean that investing itself is necessarily a bad idea.

I took an endowment out when I didn't know better (young and naive) and I wish I hadn't. I don't wish I hadn't invested (even though this was just before the crash... bit pointless to bring hindsight into the argument) I just didn't realise that there were other ways of doing it.

ailuro2 · 1 July 2007 at 6:36PM

I'm not against the basic idea, I just believe you need to be very up on what investments to use, etc. to make it worthwhile.
Mr and Mrs. Joe Public isn't up on this, and folks like me would worry too much-as I said- good luck to those who can trust themselves ,and have the means to deal with the consequences quickly if they start to underperform.

getmore4less · 7 July 2007 at 10:35AM

You need to decide what you are going to do with the pension lump sum.

With a pension of £31k you need to protects as much "other" income from tax.

With 12yars to go I would forget the cash ISA and probalby max out the S&S ISA's then overpay the mortgage with any other spare cash(*) and use the lump some to finish of the mortgage if any left.

*I would also have a serious look at your spends and see if there is something you can do to reduce the costs without inpacting Quality of live. Most people have some waste or poor value in the spends.

jamesd · 7 July 2007 at 12:38PM

peterg1965, your idea is fine but using the cash ISA is wasteful, since it reduces the stocks and shares ISA amount available and that's where the higher returns are.

You might usefully consider switching some of the money gradually into lower return investments as you approach the time when you can repay the mortgage but continuing to keep most of it in high return investments. Then keep on investing past your earliest possible repayment date to leave you with a surplus after paying off the mortgage. Perhaps start moving 10% a year once your pot is big enough to repay the mortgage, and keep on moving 10% a year until either that is enough to fully repay or the mortgage term ends.

It's entirely possible to end up with half a million in the ISAs of each of you sixteen years from now if you invest well and end up with 15-16% return each year on average. 9% would leave you a 100% surplus over your mortgage repayment cost.

As for the endowment comparison, those had several features different from this:

fixed end date, so you had to cash out at a time when the markets were down.
lots of low yielding fixed interest investments and forced movement into more of them as regulation increased.
often the discredited with-profits funds.
usually payments significantly lower than repayment level even before you removed the amount paying for insurance.

Trying to pay off mortgage - interest only ideas?

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