Mortgage choices - cant see the woods for the trees...!

It_Aches

Hello - long time lurker tempted out of the shadows here!

MY PROFILE: Male - mid 40s - NW England - higher rate tax payer (£100k+) - maximising company pension scheme payments to receive max company contributions - current pension pot circa £180k - OH is a non tax payer - house value circa £210k

MY SITUATION: Remortgage next year after the ERC period. Using £50k of ISAs/shares to reduce mortgage from what will be £125k to £75k. Would leave me with circa £10k shares but building up over next 12 months by approx additional £15 to £20k of shares.

MY REASON: I NEED to do this - simply because I am the type to worry about job security etc and I have fantasised for years about having a smaller mortgage to hopefully give myself more career choices - Ideal would be to have no mortgage and then be able to take less stressful career options.

Having lurked for some time I am aware that some would question the sense of paying a lump off the mortgage rather than investing etc - however my emotional need to reduce the mortgage outweighs the financial benefits of other options.

MY PROBLEM: I could possibly pay off the balance of £75k through overpayments in around 5 years. However, this site has taught me there are many ways to go about clearing mortgage debt other than simply overpaying. Plan was to take 2 year fixed rate over 18 years (current residual balance) at £430/mnth then overpay by allowed 10% reduction in the capital each year. This gives me the comfort of a relatively low payment required if the worst was to happen but ability to attack the capital with overpayments.

Thanks to this site I understand the limitations of the above approach - even though to me it seems the most DIRECT route to being free of this debt. I have seen where people remortgage to an interest only mortgage over the longest period and plan to repay the capital with the 25% tax free lump at pension time. I ran the figures and that could mean an interest only payment of between £95 and £150 on a FR for next 5 years - and then hopefully with my pension pot today at £180k today then I should be able to clear the capital with the 25% when I get to 60/65.

I would then have £700-£900/month to invest that would have went on the mortgage/overpayments - to ensure this plan was as fail safe as possible - what would I do with that £700. Some might say put it in the pension for the tax relief but that commits the money till I'm 55 - I'd love somehting that is a little shorter term than that which gives me the flexibility to pay off the debt sooner if my emotions get the better of me.

Any thoughts? Any one been in a similar position? Would be so gratedful for a view on this...

It_Aches

Just a quick bump to see if any of the day shift has any ideas...

edinburgher

You have thrown in a heck of a lot of variables and options, but have left out a few things.

Such as:

What is your current mortgage rate? What do you expect it will be with/without overpayments?
Are the shares you're considering selling held in an ISA?
Does your wife hold shares in an ISA? If not, are you making the best use of your tax allowances?
On the same note, does your wife have a pension? If not, more tax benefits to be had

I appreciate that you want rid of the mortgage (we all do), but it's important to think about the best way to go about it.

Also, while security is nice, reducing expenses (i.e. pay off mortgage) and increasing income/wealth (i.e. keep the shares if they are rewarding you with income/and or a bit of growth) are the two sides of the same equation. It's worth considering how much the security is worth to you.

I think the references to building up shares etc. might be a bit of a red herring in terms of what you're asking. I think your main questions are how does the return on your shares and ISAs compare to your mortgage rate and aside from this, what's the most efficient way to pay off your mortgage?

*Edit: your LTV after remortgaging (assuming no repayments) would be c. 60%. As this means that most of the best mortgage rates will be open to you, I'm not sure that I would want to sell shares to overpay.

It_Aches

Hi edinburgher - thanks for your thoughtful comments, I've been enjoying your diary . Apologies if I left out a few things, wasn't sure what to include or not - let's call it first post nerves...

Actually your Edit really gets to the crux of the matter and the part I'm most insecure about - cashing in shares to overpay - although I checked my figures and only £18k of the 50 will be shares (not in an ISA - heldin my company's broker account), the rest will be cash from ISAs and other savings accounts.

To answer your specifics: current rate is 4.9% and has been fixed for last 4.5 years - the rates I've been looking at for a 75k mortgage are around 2.5% fixed for 2 years or a little higher fixed for 3. 75k mortgage would mean committed payments of circa £430/mnth and 125k mortgage payments (ie I dont use the 50k) approx £700. Wife doesnt have a pension - so that's another valuable point I've learned from MSE the fact I can do somehting about that.

So, I'm nervous about my ability to continue my current earnings beyond the next 2 to 3 years - this therefore drives me to want to reduce my mortgage thus reducing the consequences if I simply packed it all in one day (effectively would be financial suicide of course).

Guess I'm looking for the best use of the resources set out in my first post to get rid of the mortgage or to get it to a level where I could cope with it on a massively reduced salary, in as small a timescale as possible - if that means less efficient use of resources in the short term compared to what is possible if I was thinking longer term then I think I have to accept that.

edinburgher

If you're really wanting to take it back to basics and cut the mortgage right down, may I ask why you're not just selling all the shares in your broker account?

Probably the most basic solution would be to cash in everything bar 3-6 months expenses in cash once the ERC goes and then pay down the reduced mortgage as you can.

Also, you can take a lower term (for example, 7 years) to speed up paying off the remainder, you'd be paying over a shorter period and would still be free to make the 10% OPs).

If your main priority is clearing the mortgage quickly, I wouldn't be thinking about using a lump sum from your pension (as that's at least 15 years away for you). While your pension is a good figure, it has to last 2 of you for possibly 30 years... I think the people you've been reading about have been dramatically feeding their pensions for some time with the lump sum in mind.