Extend mortgage to fill ISAs?

Alexland · 18 February 2018 at 2:56PM

Would appreciate some feedback on my 'nice problem to have',

At an average of mid 30s we have repaid around 80% of our family home with a mortgage of around £400 per month for the next circa 25 years which is roughly when I would like to retire early. This mortgage repayment is around 10% of our regular income even after using most of our pension allowances and paying tax, etc.

My dad has advised he is likely to pass down the first tranche of inheritance in the next 2-3 years and it will be more than we would require to pay off the mortgage. As such we are likely to get into an ISA stuffing problem where the excess income means it takes many years to wrap up the remainder of the inheritance.

However for the next 2 years we are unlikely to use our full ISA allowance. So in this position would it seem reasonable to borrow a further 2% on the mortgage (no fees, attractive rate, extend term to keep monthly payment liability low) now to fill up our S&S ISAs now and perhaps again at the end of the next tax year?

Alex

kidmugsy · 18 February 2018 at 5:10PM

Unless your father finds it convenient to lend you some money before he gifts you any then there may be a case for it. Heavens, there may be a case for stuffing your pensions too. But it would all make you highly geared investors in stocks and shares. Is that what you want? Or are you thinking of Cash ISAs to begin with?

Declaration of interest: we borrowed some family money and used it for the forerunners of ISAs and SIPPs. We eventually paid it back out of pension TFLSs. It all proved very satisfactory. We are alert to the possibility of doing the same thing for our own offspring. But sourfaced people would doubtless allege that we were merely extremely lucky investors who took mad risks. I would argue that we were indeed lucky in that the opportunity arose when shares looked pretty decent value, and then an enormous and obvious bubble gave us a chance to leap out again profitably. There's no guarantee that such an opportunity will happen in your investing lifetime.

TheShape · 18 February 2018 at 5:12PM

If it's affordable I can't see why not.

With the ISA allowances restricting the amount you can subscribe, I think it would make sense to borrow to fill them now and then pay down the debt later with spare income/inheritance.

Alexland · 18 February 2018 at 5:33PM

Thanks both for confirming I am not going mad. The pensions are already getting stuffed and next year I expect to use carry forward allowance to remain under 40% tax. I am also buying the maximum amount of extra holiday to reduce my income.

Unfortunately my dad is building a couple of family homes in his back garden and until the first one is sold he cannot pass anything down.

We have never held much cash but keep a rolling balance in 5% savers with offset dates. I am ok with most of our money in property and funds.

We have previously been mortgage overpayers so borrowing more seems very non initiative but in this situation it seems to make sense. I am not looking forward to explaining to the bank why I want additional borrowing. It might be easier to just say I plan to waste it on a trip to Disneyland.

Alex

Fatbritabroad · 18 February 2018 at 5:34PM

I would say provided you can fix it for a decent term yes. I've got a large in terms of number mortgage at 287k but it's less than 3.5 times salary and have 60%equity in the house and a decent amount in a pension already and am 37. My non pension saving is relatively small (about 48k) so I've fixed my mortgage at 2.4% and borrowed over a longer r period (32years) leaving the payment at about 1k a month. I'm drip feeding 300k a month to my s and s isa and putting 400 a month in to various Saye schemes. Hopefully after 10 years I will either have enough to pay a decent lump off the mortgage or at least have redressed the balance in non pension/property assets

Alexland · 18 February 2018 at 5:43PM

I was actually going to do the additional borrowing at variable rate with no ERC and then roll it into my main remortgage early next year. Even then it might not make sense to fix for long if the mortgage will be redeemed soon anyway.

Fatbritabroad · 18 February 2018 at 5:48PM

True yes in your situation actually probably not worth fixing my bad

MallyGirl · 18 February 2018 at 6:49PM

It is a bit easier for me as I have a flexible offset mortgage but I am certainly increasing our mortgage outstanding amount at the moment to beef up my pension and fill both of our S&S ISAs. It will go up further if DD goes to an Indie 6th form next year (currently her preference). We have 10 years to go till desired early retirement at 60 so it makes sense to me to max out the ISAs and pension while the option is available - the next budget may not be so generous. We are at 10% LTV so I have no doubt that we will be able to either extend current mortgage term at 60 or take out a new one - if we haven!!!8217;t paid it off by then. Till then we retain the flexibility.

Voyager2002 · 18 February 2018 at 6:57PM

As you present the situation then yes, the plan is eminently reasonable. You do need to "stress test" it: how would your situation look if your Dad needed to wait longer before passing on any money; if he decided to leave it all to an animal charity instead; if he found he needed to move into a care home and was assessed as having to pay the fees himself...? Another dimension to these stress tests would be to assume different movements in interest rates: a delay of five years while base rate moved up a quarter point would be annoying, while if we returned to 15% p.a. then could you survive?

Alexland · 18 February 2018 at 8:13PM

MallyGirl wrote: »

It is a bit easier for me as I have a flexible offset mortgage but I am certainly increasing our mortgage outstanding amount at the moment to beef up my pension and fill both of our S&S ISAs. It will go up further if DD goes to an Indie 6th form next year (currently her preference). We have 10 years to go till desired early retirement at 60 so it makes sense to me to max out the ISAs and pension while the option is available - the next budget may not be so generous. We are at 10% LTV so I have no doubt that we will be able to either extend current mortgage term at 60 or take out a new one - if we haven't paid it off by then. Till then we retain the flexibility.

Thanks I hadn't considered using an offset mortgage to flex the borrowing to get the full amount into the ISAs each year. I was resigned to phoning the bank every year and redoing all the affordability checks. That might be a good option for us next time our main deal runs out as we will have gaps of several years between the tranches of money being passed down and my strong preference is to get the money ISA wrapped. Glad I am not the only one thinking of doing this.

Alex.

Alexland · 18 February 2018 at 8:23PM

Voyager2002 wrote: »

As you present the situation then yes, the plan is eminently reasonable. You do need to "stress test" it: how would your situation look if your Dad needed to wait longer before passing on any money; if he decided to leave it all to an animal charity instead; if he found he needed to move into a care home and was assessed as having to pay the fees himself...? Another dimension to these stress tests would be to assume different movements in interest rates: a delay of five years while base rate moved up a quarter point would be annoying, while if we returned to 15% p.a. then could you survive?

Thanks. I doubt he would leave it to the cats home as he did well out of inheritance and feels a duty to pass it on and knows I would do likewise to my son etc. He is under some pressure from my mother who thinks they should have already started passing it down - she is worried about the final tranche going to pay inheritance tax.

We are young enough that we can do it by adding extra years onto the end of the mortgage and keeping the monthly repayment the same. Even if the repayment went up 5x then it would still only be 50% of our income. If we really got unexpectedly stuck and exhausted our cash then we could always withdraw from the ISAs although this is not ideal.

Alex.

Extend mortgage to fill ISAs?

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