Humming and Hawing

kissjenn

Hi there all.

I've a diary over in Debt Free Wannabe, lovely folks who keep me on the straight and narrow.

In reality I'm debt free if you exclude the £1.5m I've sunk into Buy to Let mortgages but that's another story.

My own house has £117,000 left on the mortgage and a drawdown of upto £250,000 at 2.19 over base so 2.69% currently. About 15 years left on it.

Mortgage is £230.00 a month interest only and there's a small over payment in there as I've paid money already into the offset account.

Now I could pay the mortgage off tomorrow if I used savings and a bit of my Isa or work til Christmas and pay it off without touching my isa or pay off £100k now and leave the £17k to trickle down etc etc.

The reason for the humming and hawing is that I 'm a freelancer and have been off 17 of the last 26 months with two occurrences of Breast Cancer.

I don't qualify for benefits, even been a battle to get my SSP as HMRC have completely cocked it up. I need to be able to fend for myself and not get caught short.

So what would you good people do?

Pay it off now?
Pay it off at Christmas?
Pay £100k (or whatever) and keep some stashed in case?

Also keep thinking that if I really really needed money then I've access to cheap cash, quickly and easily as long as I've some balance left.

Really look forward to your thoughts and ideas.

KJ

beanielou

I'm no expert but how about paying off part but keeping a cushion too.

kissjenn

Hi Beanie,

Thank you for being the one!!

I think that's what I'm going to do...pay over £100k and keep the DD the same to chip away at what's left. Once I've a bigger cushion, I'll pay it off when I'm ready.

KJ

jamesd

Do you have mortgages secured on the BTL properties? Are those all at rates of 2.69% or lower? If not, increasing the mortgage on your own property to reduce the mortgage at a higher interest rate on some BTL would be the way to go. The interest remains deductible from rental income at the 2.69% or whatever variable rate it moves to because the additional advance is for a business purpose.

Alternatively you could clear most of the mortgage then later use the facility to borrow most of the £250k to reduce the amount secured on the BTL properties. That would involve more money so it'd be of greater overall benefit.

kissjenn

Thanks James.

That would be a great idea unfortunately I'm a joint owner with a very bitter ex. Life does like to throw up little challenges

jamesd

Sad, but that's life.

So, you have high risk investments in the form of the BTLs. Why pay off the mortgage instead of using investments of other sorts instead?

kissjenn

Hi James.

I've BTL investments, share portfolio, ISAs, some pensions.

Given the illness and possibility of recurrence, lets be practical here and park positive mental attitude for everyday living, I want to ensure my 20 son who has aspergers and my 86 year old father are secure. Both live here and this would offer them the security of a roof after I'm gone.

But loathe to dismiss a quarter of a million line of credit at 2.69% unless / until I have to.

jamesd

To provide for you you during possible long term illness and for your son you need investments that will grow in value. Saving 2.69% may well not even keep up with inflation.

In the short term you need some accessible money. I kept and still keep between two and three years worth of normal spending in near cash forms. For the rest, I invest.

A quarter of a million line of credit is many years of living expenses, I hope. Longer term illness protection if you need it but will recover.

For death, life assurance is probably cheaper. I don't know whether your son would qualify as a dependent but if you have not taken pension benefits he could get 100% of the value of your pension pots with no tax. If taken benefits and if he is not classed as a dependent he'd get 45%.

Assuming you'll be 55 before the end of the mortgage, using pensions is the most efficient blend of way to both pay off the mortgage early and provide retirement or forced early retirement income. That's because you effectively get tax relief on your mortgage capital payments when you use the 25% tax free lump sum for mortgage payment, something you can do from age 55.

kissjenn

Genuinely useful stuff there James, thanks.

I knew son - who is sole beneficiary in trust - would get current unvested value of pensions. There's also life cover. Didn't know about the 45% of annuity. I'll check into that.

Also want to explore SIPP options as hey may work for me.

I know none of know when we'll die but knowing what I do know chances are it'll be of cancer for me and sooner rather than later. Such a craps shoot.

Again thank you for giving me a new set of options to explore.

jamesd

It's not 45% of annuity. If you purchased a normal annuity to get your income he'd get nothing and I don't know of any exceptions.

I was assuming the use of income drawdown for pension income. That's just taking income from the investments within a personal pension of some sort. Can be any personal pension, not just the self-invested personal pension (SIPP) type.

There are two general types of income drawdown, capped and flexible. Capped has a limit on how much money that can be taken out which rises as you get older and depends in part on the interest paid by 15 year UK government bonds, gilts. It's around 6% of the capital value a year at age 55. flexible drawdown lets you take out the lot but you must have £20,000 a year of guaranteed income in payment at the time you start it. That can be from the state pensions, work pensions or annuities.

For those with reduced life expectancy there is also the option of drawdown using something called a scheme pension. With those, an actuary individually considers your life expectancy and decides what percentage can be taken as income each year. This allows those with impaired life expectancy to take more income, commensurate with the expected number of years that the money would need to last.

If you just wanted to build up a pension your son can inherit you can do that. You only have to take benefits when you reach 75. Until then he'd be able to get 100% of whatever you've built up. But then you couldn't use the lump sum to pay off a mortgage or have income yourself. One way to do the mortgage payoff is to take the lump sum and pension income, then pay the income into another pension to get another set of tax relief. He'd only be able to inherit 45% of the first one but if you take nothing out of the second he'd be able to inherit all of that one.

Should you have a hundred thousand Pounds and up in a pension you might also find it useful to investigate family pension trusts, which can sometimes be useful.

kissjenn

Amazing stuff James.

I better get reading. Unfortunately / fortunately they don't stamp a use before date on your backside...it's hard to plan for the unknown. At least with Logan's Run I'd blow up or something obvious :rotfl: