Interest only - to change or not to change?

Zork

Hello all. I have had a fairly disastrous financial history when it comes to buying property and would appreciate your views on what to do now.

Back in the late eighties I bought a flat with my now wife for £54950, this was using an interest only mortgage with an endowment policy via an IFA.

We lost £15000 in the big crash but decided to move anyway. We borrowed the short fall via a separate loan which we paid back over about 4yrs. The new mortgage was backed with another endowment policy.

A few years later we moved again ( Losing a further £4000 on the deal...sigh).

A few more years passed. This was about the time the endowment problems were starting to make the headlines. Rightly or wrongly we cashed the main one in which gave us about £9000 and allowed us to move house again.

We then invested in ISA's ( via the IFA) to cover the capital.


We have been here for about 10yrs and the value of our property has gone from £96000 to about £270000. Having remortgaged we owe £120000 and are aiming to pay it off in 15yrs or less from now.


I have just had a review of the main ISA. Surprise, surprise there will be a shortfall. However if I pay an extra £30 a month all will be well, ( until the next time). My wife's will also increase by about the same amount.


Basically none of these investments have made much , if anything what with fees etc and I was wondering if it was time to cut my losses, or will I shoot myself in the foot, again. (I'm running out of toes).

As can be seen I am no financial wizard but based on an interest rate of 6%
( because it's easy to calculate), I would currently be paying, ( if i increased the ISA), £923 per month, this includes four ISA's and a small endowment.

If, however I cashed these all in now, (they would be worth about £30,000), and paid them off my mortgage, then a repayment mortgage over the same period would be about £800 per month which would include an allowance for life assurance. I could of course overpay the extra £123 difference as well.

In addition to this I have a savings plan with my work into which I am paying nearly £200 per month. I expect to get about 25-30K from this in 6-7yrs time.

Is it worth suspending payments ( which is an option) and dumping them into the mortgage, or waiting for the lump sum?

Sorry to be boring, but what brought me here today was when I was told my ISA wasn't performing and I could increase payments, the first £125 and 0.1%per year goes to the IFA! :rolleyes:

Thanks for your time.

Zork.

dunstonh

I have just had a review of the main ISA. Surprise, surprise there will be a shortfall. However if I pay an extra £30 a month all will be well, ( until the next time). My wife's will also increase by about the same amount.

Why surprise surprise? All the mortgage ISAs i have on my agency are above track. Most by about 30%. I did a review of one a few weeks back that is on track to hit target 9 years early.

Dont assume anything with these.

Basically none of these investments have made much , if anything what with fees etc and I was wondering if it was time to cut my losses, or will I shoot myself in the foot, again. (I'm running out of toes).

Depends on the investments, your risk profile, the timescale.

You currently have £30,000. @ 7% a year that would come out at £82,770 after 15 years.

£900pm for 15 years @ 7% pa comes out at £281,576.

So, you are looking at around 360k at 7% a year. Your mortgage is £120k so you are looking at getting back 3 times more than you need if 7% p.a. is achieved.

Sorry to be boring, but what brought me here today was when I was told my ISA wasn't performing and I could increase payments, the first £125 and 0.1%per year goes to the IFA! :rolleyes:

Market average is 1.8% of each contribution and 0.5% p.a. of the fund value.

In what way is the ISA not performing?

Zork

Thanks for the reply.
I realise no-one can predict what the investments will do in the future or else we'd all be rich and I do understand that these are long term investments.

Just for the sake of clarity our ISA payments per month total about £300 and the endowment about £21. The £923 figure was including the mortgage interest as well.

I suppose my question should really have been will it be more cost effective to pay all my available capital into the mortgage to get it paid off early or go for the long term invesment.

Zork

dunstonh

Just for the sake of clarity our ISA payments per month total about £300 and the endowment about £21. The £923 figure was including the mortgage interest as well.

I thought it was too good to be true

If we ignore the endowment but do £300pm for 15 years, then that comes to £93,859 @7% p.a. So add on the £82,770 from exisiting values and you are looking at around £176,000.

7% should be an achievable figure for average funds over the long term. A better spread should be aiming for 10% average over the long term (ideally 15% average). However, working to 7% is a prudent figure.

It is possible that the target growth rate is as low as 5% and that is why you are being asked to increase. The target rate and the actual rate rarely marry up.

I suppose my question should really have been will it be more cost effective to pay all my available capital into the mortgage to get it paid off early or go for the long term invesment.

A decent investment spread should do the job for you with room to spare. There are no guarantees with the investment returns but the figures you have posted suggest the target growth rate is low figure (thats good) and that you have a good margin for error (almost too good, if that was possible).

The investment returns should average out more than the mortgage interest rate over the long term.

The key thing is the quality of the investment funds. If they are naff insurance company funds, then you need to be looking at switching and redirecting them to better funds. Thats a simple transaction and can make the world of difference. If the funds are good quality, then you could be looking at a lot more money back if the returns do average out higher than 7%.

Zork

Thanks for the 'sums' it's made things clearer.

I think it will be a bit lower because it includes life insurance and fees. But the good news is, is that looking at my initial target on my first plan ( which used to be a PEP), it was £83 per month for a return of £49500 at 9% after 25yrs. That was ten years ago.

5yrs ago the return was £35000 at 9%. I didn't top it up. This week it is up to £40000. So I'm guessing that is a good thing. It will be a similar story for my wife's at £77PM, These are currently worth together about £20500,then we have a couple of top up's which we took out 4 yrs ago totalling £80PM Inc fees etc) these are worth in total about £2500 at present. So my total ISA's are now worth about £23000. I calculated my endowment wrongly which is only worth about £4500 so the total is £27500 not 30K.

The ISA cost is £240Pm unless I top to £300 ( £30PM each)

The fund manager is NDF administration ( formerly Newton). I don't know what funds they invest in.

Thanks again

Zork.