Interest only vs repayment mortgage

swtw_2

We ahve approx 132,000 owing on a 22 year mortgage. We are repaying, but are now due to remortgage and it has been suggested that we go interest-only and stash the 'saving' into a pension, with a view to using the tax-free lump sum which will pay out form the pension to repay the mortgage on our retirement.
Does anyone have any thoughts on how sensible this is in today's climate? Any advice would be very welcome indeed!!
Thank you from a confused homeowner

_Andy_

Not very. Who suggested this?
Are you aware the payments into the pension will need to be pretty huge?
If you can afford repayment why not just continue on that giving yourself the guarnatee of it being paid off?

swtw_2

What do you mean by pretty huge? If you don't mind me picking your brains! I can't quite get my head around the thought of not repaying, but the chap suggested that, with the tax uplift of any payment into a pension, coupled with the withdrawal of a tax free lump sum, meant that the government was contributing nicely to your mortgage repayment. Sounded good at the time, but doesn't sit quite right.
Also, we are likley to move house and need more borrowing within 5 years or so...

_Andy_

Who was 'the chap' - is it a professional IFA?

swtw_2

It was, but someone we've not dealt with before. Anyone would think I was not a very trusting person! Just want to get a wider opinion on this as it is such a new concept for me. I've always been a 'pay off my debts' kind of person before!

opinions4u

swtw wrote: »

We ahve approx 132,000 owing on a 22 year mortgage. We are repaying, but are now due to remortgage and it has been suggested that we go interest-only and stash the 'saving' into a pension, with a view to using the tax-free lump sum which will pay out form the pension to repay the mortgage on our retirement.

It's not an uncommon choice, especially for a higher rate taxpayer.

How old are you? Does 22 years fit in with a reasonably planned retirement age for you?

Does anyone have any thoughts on how sensible this is in today's climate? Any advice would be very welcome indeed!!
Thank you from a confused homeowner

You are effectively relying on the investment returns of the pension fund to repay your mortgage. Not dis-similar to relying on an endowment policy to do the job.

My view (generally speaking, without knowing your full circumstances) would be to get your mortgage on to a repayment basis, but make sure you have adequate retirement provision too. But their can be cases where specific circumstances justify doing what's been suggested.

swtw_2

My husband and I are both 34, so no issues there. We are also not (yet) higher rate tax payers, though my husband is likely to be one soon. I guess what I am hearing so far re-itterates my thoughts that it is more secure to know what we have repaid / have left to pay....

Cozworth806

Well the pension when you are 56 will need to be even larger so it is a massive undertaking as the pot would need to be at least £500,000 in 22 years.
Maybe someone could give you the investment rates needed to get that much?

dimbo61

What the other people on here are saying is that to clear the £132k mortgage in 22 years you would need a pension pot of over £500,000 as you can only take 25% as a lump sum TAX free ( with the existing rules!!!!)
Now who knows what will happen over the years THINK endowment mortgages!
I like simple repayment as you know how much you owe and what interest you are paying
Having said that I have a FIXED OFFSET mortgage which works for me!
Check out First Direct and Yorkshire BS GOOD LUCK