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  • FIRST POST
    • Pete36
    • By Pete36 12th Jan 18, 8:50 AM
    • 15Posts
    • 2Thanks
    Pete36
    Interest only mortgage
    • #1
    • 12th Jan 18, 8:50 AM
    Interest only mortgage 12th Jan 18 at 8:50 AM
    Hi,

    Is it possible to get an interest only mortgage again? Our current mortgage is about 175k on a property worth 450k and we've got 13 years to run. We'll be getting some inheritance in a few months so mortgage will be down to about 125k I reckon.

    My wife earns roughly 55k at the moment. I've taken myself out of the equation here as just starting up new self employment. My idea is that we could pay down this 125k out of the 25% drawdown in 14 years. Her pension plan is very good with 25% salary going in per annum and the pot is 170k at the moment. Some quick calcs state the drawdown will be high enough and shes been there 11 years. My idea is then to put the capital 'saved' into her scheme to get the 40% tax relief and also gets below the 50k child allowance threshhold.

    I think this is a good idea and could only become unstuck if interest rates rise too much to offset the tax boost going into the pension scheme, just need someone to shoot down my logic!

    Pete
Page 1
    • ACG
    • By ACG 12th Jan 18, 9:01 AM
    • 16,106 Posts
    • 8,282 Thanks
    ACG
    • #2
    • 12th Jan 18, 9:01 AM
    • #2
    • 12th Jan 18, 9:01 AM
    Ive not tested your logic, but interest only can be done yes.

    You need to have an acceptable exit strategy - ie how you will clear the mortgage at the end of the term. If you can evidence a healthy and/or growing pension then that could be enough, inheritance would only be accepted if the person had passed away and there is something to evidence it is coming to you - otherwise they may change their Will or outlive you.

    Speak to a broker.
    I am a Mortgage Adviser
    You should note that this site doesn't check my status as a mortgage adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
    • enjoyyourshoes
    • By enjoyyourshoes 12th Jan 18, 9:17 AM
    • 933 Posts
    • 1,150 Thanks
    enjoyyourshoes
    • #3
    • 12th Jan 18, 9:17 AM
    • #3
    • 12th Jan 18, 9:17 AM
    What happens if she looses her job and you still have an interest only mortgage?

    How much cash per month will you not be spending on capital repayment element of mortgage?

    Are the risks worth that 'saved' capital repayment amount?
    Debt is a symptom, solve the problem.
    • ACG
    • By ACG 12th Jan 18, 9:23 AM
    • 16,106 Posts
    • 8,282 Thanks
    ACG
    • #4
    • 12th Jan 18, 9:23 AM
    • #4
    • 12th Jan 18, 9:23 AM
    What happens if she looses her job and you still have an interest only mortgage?
    Originally posted by enjoyyourshoes
    The repayments are lower than if on a repayment mortgage and she looses her job.
    I am a Mortgage Adviser
    You should note that this site doesn't check my status as a mortgage adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
    • Pete36
    • By Pete36 12th Jan 18, 9:38 AM
    • 15 Posts
    • 2 Thanks
    Pete36
    • #5
    • 12th Jan 18, 9:38 AM
    • #5
    • 12th Jan 18, 9:38 AM
    If she lost her job then I'd pick up the tab by then with regular earnings again. The inheritance is a red herring as that will chip down the mortgage before we go interest only. It's only the pension plan that'll be the repayment vehicle. So it sounds like a goer. Even the more modest illustrations that the pension plan send us show the future drawdown will be far in excess of our current mortgage debt so by putting in another 1k per month will only help!
    • Jenniefour
    • By Jenniefour 12th Jan 18, 3:42 PM
    • 1,298 Posts
    • 1,402 Thanks
    Jenniefour
    • #6
    • 12th Jan 18, 3:42 PM
    • #6
    • 12th Jan 18, 3:42 PM
    Might just be worth running some of this by the folks on the pensions board - it's not always the wisest decision to pay down a big chunk of the mortgage with a large windfall especially as you will be significantly depleting the future pension if you get an interest only mortgage. Helpful to consider what you are trying to achieve in the much longer term.
    • getmore4less
    • By getmore4less 13th Jan 18, 9:07 AM
    • 31,168 Posts
    • 18,680 Thanks
    getmore4less
    • #7
    • 13th Jan 18, 9:07 AM
    • #7
    • 13th Jan 18, 9:07 AM
    If you qualify this could be a candidate for a First Direct offset.

    They can be run on an interest only basis

    The inheritance becomes a pool to pay the interest if the jobs fail.

    The offset offers good cashflow timings to optimize where and when any surplus goes.
    • Pete36
    • By Pete36 13th Jan 18, 10:15 AM
    • 15 Posts
    • 2 Thanks
    Pete36
    • #8
    • 13th Jan 18, 10:15 AM
    • #8
    • 13th Jan 18, 10:15 AM
    It wouldn't be depleting a future pension because the pension fund would be enhanced by the extra contributions+40%. If fact the danger is breaching the 1m pension pot allowance (that's a nice problem lol!)
    • Jenniefour
    • By Jenniefour 13th Jan 18, 10:51 AM
    • 1,298 Posts
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    Jenniefour
    • #9
    • 13th Jan 18, 10:51 AM
    • #9
    • 13th Jan 18, 10:51 AM
    It wouldn't be depleting a future pension because the pension fund would be enhanced by the extra contributions+40%. If fact the danger is breaching the 1m pension pot allowance (that's a nice problem lol!)
    Originally posted by Pete36
    Brilliant!
    • Thrugelmir
    • By Thrugelmir 13th Jan 18, 11:16 AM
    • 56,702 Posts
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    Thrugelmir
    What's plan B if the market dips at the time you need to liquidate the holdings in the pension fund to redeem the mortgage. Easy to become complacent after a decade in which the Central Banks interventions have made the markets benign. The next decade mght not be so investor friendly.
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
    • getmore4less
    • By getmore4less 13th Jan 18, 1:24 PM
    • 31,168 Posts
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    getmore4less
    The pot may be big enough to continue the mortgage into retirement using drawdown and supplement with income if needed.
    • Pete36
    • By Pete36 13th Jan 18, 4:08 PM
    • 15 Posts
    • 2 Thanks
    Pete36
    What's plan B if the market dips at the time you need to liquidate the holdings in the pension fund to redeem the mortgage. Easy to become complacent after a decade in which the Central Banks interventions have made the markets benign. The next decade mght not be so investor friendly.
    Originally posted by Thrugelmir
    A good point but I'll only need 125k to pay off the mortgage (Only ha ha!) . On my extrapolating spreadsheet, if I assume low growth at 2% of the fund per annum and increase AVCs from 7k per annum to 17k per annum (extra 10k say is the capital for the mortgage foregone and thats before tax relief) then the fund will still hit 700k in 2033 and 25% x £700k = £175k, a lot more than I need. But I take your point that if Trump pushes the button then the fund could plummet but I guess then I'd have a bigger worry?

    The only other exposure I potentially have is if interest rates rack up then I'd be paying more interest on a higher capital balance than had I stayed with a repayment which would only offset when the pension fund liquidates in 2033. Also, the government may start reducing the 40k pension contribution allowance?



    Pete
    Last edited by Pete36; 13-01-2018 at 4:13 PM.
    • Thrugelmir
    • By Thrugelmir 13th Jan 18, 5:17 PM
    • 56,702 Posts
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    Thrugelmir
    But I take your point that if Trump pushes the button then the fund could plummet but I guess then I'd have a bigger worry?
    Originally posted by Pete36
    Markets historically fall on the unknown. Trump won't be in power by then. As can only serve 8 years (2 terms) as President.

    Also, the government may start reducing the 40k pension contribution allowance?
    No need to reduce the allowance. Inflation will have the same impact over time. The £40k allowance came into full effect from 6th April 2016. Nearly 2 tax years have passed so far. With no intention of increasing the allowance from next tax year.

    One assumes that the plan is to let the allowance wane until it reaches what is considered an appropriate level. At which time it will become index linked.
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
    • Pete36
    • By Pete36 15th Jan 18, 9:58 AM
    • 15 Posts
    • 2 Thanks
    Pete36
    No need to reduce the allowance. Inflation will have the same impact over time. The £40k allowance came into full effect from 6th April 2016. Nearly 2 tax years have passed so far. With no intention of increasing the allowance from next tax year.

    One assumes that the plan is to let the allowance wane until it reaches what is considered an appropriate level. At which time it will become index linked.
    Originally posted by Thrugelmir
    . Also they are going to let the £1m limit rise with inflation, it's a good number to chase!
    • Pete36
    • By Pete36 17th Jan 18, 10:29 AM
    • 15 Posts
    • 2 Thanks
    Pete36
    Ran this past someone who really could pick holes in it as well. His response was 'what if they reduce the 25% tax free' drawdown before she's 57 (Assume drawdown ten years before retirement) which given the track record of sucessive governments is not beyond the impossible! This is the biggest worry!
    Last edited by Pete36; 17-01-2018 at 10:33 AM.
    • getmore4less
    • By getmore4less 17th Jan 18, 12:11 PM
    • 31,168 Posts
    • 18,680 Thanks
    getmore4less
    When you do pick a product go for the longest term you can.

    You still have the option to pick away at the debt as income allows.

    If you keep an eye on the repayment schedule you can make judgment calls on if you need to structure differently.

    There will be a point where it won't be affordable to clear the debt only reduce it, inflation will push that date out.
    • Pete36
    • By Pete36 18th Jan 18, 3:56 PM
    • 15 Posts
    • 2 Thanks
    Pete36
    When you do pick a product go for the longest term you can.

    You still have the option to pick away at the debt as income allows.

    If you keep an eye on the repayment schedule you can make judgment calls on if you need to structure differently.

    There will be a point where it won't be affordable to clear the debt only reduce it, inflation will push that date out.
    Originally posted by getmore4less
    I agree. An interest only mortgage for 125k is not a lot in the scheme of things and perfectly manageable even if the drawdown was completely eliminated (which I doubt). I think I'm going to opt for interest only then for a long period . We'll then also then have some flexibility to pay some capital off if we want in the next 17 years whilst having a pot to obliterate it in the future when we have to.

    Thanks all,

    Pete
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