How should I pay off my mortgage?

peterg1965

Who is your mortgage with? Why can you not change mortgage product with the same provider at the end of your current mortgage deal? You should be able to get a decent fixed rate for at least 5 years if that is the way you wanted to go.

Mita

Great - thanks Atush and Peterg,

Coincidentally, p/t job is now offering pensions so fingers crossed I qualify for it. I have already applied so should hear soon.

Sorry to be so dense but I'm unsure what 'drawdown for income' means?

Current mortgage is with the Woolwich. Given that my employment income is so low, do you think I'd be eligible for a repayment/fixed rate mortgage? If I am, then that sounds like a good option.

Linton

Mita wrote: »

Sorry to be so dense but I'm unsure what 'drawdown for income' means?

When you come to take your pension you have two options. One is to buy an annuity where an insurance company commits to pay you an amount for as long as you live, so they are taking the risk that you live to a ripe old age, or you take control of the money and pay yourself a taxable income, the amount/year being limited to prevent you running out of cash before you die. The latter is drawdown.

jamesd

Mita wrote: »

The mortgage term is only for two years and finishes at the end of May this year

Maybe it's just two years of a deal rate, then going to SVR for the rest of the mortgage term? If it's really the end of the term, not just of a deal period, you do have to do something more aggressive about it. If it just goes to SVR then it instead is just about what interest rate you end up on for the rest of the duration of the mortgage term.

Mita wrote: »

thus my questions about whether to pay off the mortgage or to reduce it. I was concerned that when it comes to renegotiating a new mortgage that:
a) Interest rates would be a lot higher
b) Given that my employment status is different, renegotiating would be more difficult.
c) An offset interest only mortgage might not be in the offing (for the above reason). I took it because it was the best deal at the time and all the financial pages were advising that offset interest only mortgages were a good deal.

With your income from self-employment and savings and investments you won't be able to get a mortgage anywhere else for this value. You probably can't even get a mortgage anywhere with that income level. No harm to ask in the mortgage section here but expect to be told that it's just not possible for any useful mortgage size.

You are almost certainly stuck with this mortgage provider as the only standard mortgage provider you can get, but lifetime mortgages would be available if needed. Since you're on interest only now the most common change would be bad for you, to repayment for all or some of it. However, it is often possible if there is a plan to extend the mortgage term, something that you should discuss only near the final end of the term with perhaps a year remaining. Term, not deal period. In your case the plan would be to use the income from state and work pensions to repay once they start, a nice safe plan for the mortgage lender.

Lifetime mortgages - often called equity release mortgages - are a useful tool sometimes because they are intended to be repaid at death so you don't have term restriction. Which means you can repay after the state pension starts. But their interest rates are higher than standard mortgages, so best to keep a standard mortgage while you can and keep this as an option only at the end of the full mortgage term.

So the actual mortgage term, not just the deal period, is important. Your mortgage lender is obliged to try to find solutions until the real end of the term, not just the end of the deal. So long as you keep up the payments, they aren't going to be able to take that money from you, so you can rely on it to generate income.

An offset mortgage is good for your situation because if the interest rate becomes higher than expected investment returns, you can just switch the money from investments to offset account and eliminate that portion of the mortgage interest cost. But without losing access to the capital, so you can still draw on it if you need to.

Similarly, interest only is good because it keeps your mandatory spending low, but still lets you accumulate money in the offset account if you like, that you can then use to repay eventually. But unlike repayment deals, you're not forced to pay the higher level, it's just a choice and you retain access to the money.

Please say more about your pension. Is it a work defined benefit pension, like final salary types? If so, what is the normal retirement age (NRA)? What's the pension payment if you take it early compared to at NRA? What is the trade off between income and lump sum? If it's defined benefit it'll almost certainly be far better to wait until NRA and use borrowing or investment drawing on capital to live until then, because the reductions for taking a pension early tend to be poor deals. Similarly, the deal for taking lump sums compared to income tends to be bad, which is why I'm asking about that - it tends to be substantially worse than using the higher income to do things like living and repaying a mortgage, then stepping that up when the state pensions start.

jamesd

Mita wrote: »

PS Apologies but I don't understand this section:

"To give you some idea, you should be able to take 4-6% of your capital as income using investments and pension income drawdown and have it be quite sustainable, with low or little drop in value, depending on just how much is taken. The non-pension portion would be tax free within a few years. You could deliberately have it drop to boost income until the state pension starts."

For money inside or outside a pension it is normal for those who retire or who just need an income to use a mixture of investments. Depending on the long term risk of capital depletion it's safe to take between 4% and 6% of the capital value as income each year.

These investments include a range of things to get up and down value variations appropriate for the risk tolerance of the person investing. They would typically include equity income funds, commercial property funds, corporate bond funds and equity funds. Maximum income requires accepting a drop in a bad year in the 20-30% range but it's possible to choose mixtures that go down only 10% or so in a bad year, at the cost of reduced income - it's a straight trade of more ups and downs for more income. The downs recover but people dislike seeing the down times. People's tolerance for the down bits is called their risk tolerance. Picking a suitable one so the person can sleep at night in a bad year is a key part of making investment decisions.

When the investments are in a stocks and shares ISA there is no tax to pay on this income. When the investments are inside a pension it's normal taxable income when it's taken from the pension.

With a personal pension you use investments to provide income using something called "capped income drawdown", typically called just income drawdown or capped drawdown. More formally it's called an unsecured pension, with annuity purchase being the secured pension alternative. This is not applicable to final salary or other defined benefit pensions, which produce their guaranteed income in a different way. But we don't yet know what type of pension you have.

In your situation I'd be thinking of taking 6% or more income from investments and accepting capital value drops over time because your problem is in part to boost income until the state pensions start.