Remortgage on longer term?

bownyboy

Current situation
House value approx £600k
A&L mortgage 3.99% 5 year fix ends June 2014
Estimated mortgage remaining in June 2014 will be £100k

I've been overpaying for 3 years during fix but this year it really hit home that I need to save and invest more for old age .

I've seen some great tracker rates of BOE +1.5% and assuming these are still around in 3 months, am thinking to take one out and extend mortgage to 25 years halving monthly payment to around £420.

Money saved and current overpayment would go into the S&S ISA to ensure is fill up allocation for the year. Reducing monthly payment means should anything happen job or health wise I'd have less to find each month.

This is a real mindset change for me. But after reading lots of investment blogs and books, I'm confident it's a much more sensible approach with more flexibility.

Anyone else got any thoughts? Am I missing anything out?

Wh05apk

Generally borrowing to invest in equities is not a good idea, as very risky.


Possibly less risky could be investing in a BTL property, at least you would have something to show for it if everything crashed.


Failing that, why not concentrate on clearing your mortgage, then divert everything to savings in a few years time once repaid?

claret_mike

I would't consider looking to save until debt free completely. It would be wise to have an emergency fund but thats it really.

If you were unable to pay for mortgage, your on a rocky road so get that paid off.

Consider worst case scenario - lose all income - markets heavily depressed and u need the money?

Investments should be seen as 5 years plus, your mortgage has 7 years to run, not worth the risk for me. Maybe look for an offset mortgage if you want to have peace of mind that you can access capital in an emergency as well as repay your mtg.

Stratus

Your plan sounds good to me. You should comfortably exceed base rate + 1.5% from an equity investment.

Further advantages are:
1. Diversification (you can invest in a range of assets - BTL concentrates your money in already overpriced property) and
2. Flexibility (you can easily access your money tied up in equities by selling them - you can't recover money paid into your mortgage so easily)

There is greater risk with this approach than simply paying off the mortgage but equally there is a potential for greater returns, particularly with borrowing rates so low. Many people are not up for such risks; some, like you, clearly are.

claret_mike

1 - Completely agree, re diversification.

2.... You only get out what they are worth when you need them so fingers crossed that markets are doing well.

If you need advice on the investments, you will have charges and annual costs to consider. So yield reductions need to be considered.

You also need to consider what if BOE increases over next 7 years? Will the capacity for paying same amount into investments be available or will this reduce as interest costs increase on mortgage?

We have seen a strong 12 months of FTSE performance, this will not last, so as I said earlier, you need to consider the medium to long term view.

What are your plans when you are older - will you seek to downsize? Too many variables/unknowns to say which route is best for you but applying general financial planning rules, I would always recommend you pay off your mortgage before risking your capital elsewhere.

Thrugelmir

By extending the term you are merely exposing yourself to the future cold winds of interest rates.

I would maintain the mortgage repayments at the current level at least.


How much do you overpay by a month?

Do you currently contribute to a pension scheme?

Yorkie1

claret_mike wrote: »

I would't consider looking to save until debt free completely. It would be wise to have an emergency fund but thats it really.

However, this route means that you start the saving much later on, thus losing the compounding effect from the early years.

Thrugelmir

Yorkie1 wrote: »

However, this route means that you start the saving much later on, thus losing the compounding effect from the early years.

Albert Einstein — 'Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.'

hcb42

Extending to 25 year mortgage for £100K is depressing!

The other old age plan is of course the house, and opportunity to downsize.

guymo

Thrugelmir wrote: »

Albert Einstein — 'Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.'

… but mortgage overpayments benefit from compounding too. Surely the question of whether to smash mortgage debt or make investments is simply one of interest rates and risk tolerance?

claret_mike

£420 x 300 months = £126,000- having checked these figures it looks like the op has used mse calc and used 2% as Apr, which it will not be. It will be more like 4% on rough calcs which makes the payments slightly higher by £125 and total repayable in excess of £158k

Current repayment date is in 7 years where £100k is fully repaid. There will be heavy interest savings. Could you make returns to really outweigh this?

This leaves the dilemma of do I pay this additional interest which could increase in future if BOE returns to 4-5% level or do I get it paid off in 7 years and if interest rates rise i will have 18 years of compound interest on a larger monthly saving amount and potentially in a better savings environment.

To me the latter makes more sense and with unlikely rate reductions as employment rates drop, the risk of increasing rates in next 18 years is very likely.

Also if income is lost after 7 years at least they can keep a roof over their heads