Trying to pay off mortgage - interest only ideas?

peterg1965

James, thanks.

So you are suggesting a 60:40 split between S&S ISAs and my PPP? £300 a month each to a S&S ISA and then £400 Net to the pension which is £8000 per year Gross. What is a good rule of thumb for historical pension investment returns over the last 10-20 years?

I have just emailed a couple of IFAs to take some advice (free I hope, using the unbiased voucher) to see what they advise.

jamesd

Well, not 60:40 except by accident. Maximum possible ISA contributions - up to 583 per person per month this year, 600 per person next year. Any extra above the ISA limits to the pension. Then review the ISA or pension choice in five years.

Since you have 1,000 a month before tax relief, that'd be 583 a month into your ISA and 417 into your wife's this year. And nothing to the pension since the ISA limits are high enough to use it all.

Even at 20% annual growth the total ISA fund value would only be 100k in five years so it would be easy enough to move it all to the pension over a year or three if that looked desirable.

If you need advice on selecting investments, perhaps see if the IFA would go for say 300-600 cash up front, 0% initial commission for the fund purchases in the ISA plus annual renewal commissions from the fund AMCs. Service to include sector allocation, at least annual rebalancing and fund selection advice with review if the manager changes. The IFA would probably only get something like 50 total in annual commissions in the first year so it's not likely to start out profitable enough to interest an old model IFA without an initial fee. Looks a lot better after a few years and a self-owned NMA IFA might well be happy to take the business at a quiet time.

The IFA may not be able to do 0% initial commission on the funds - might have no choice but to charge a few percent and offset fees with it.

matisse

I agree with James on the S&S ISA. If you're going the investment route then you need to go the whole hog and commit to it by using your whole 7k ISA entitlement. Putting using a cash ISA won't give you returns that much more than just paying down your mortgage directly.

Our mortgage broker has suggested we pay the difference between a repayment and interest only into a cash ISA each month to build up a safety net should we hit any financial crisis in future, as it may be better to have the money in our savings than reducing the capital. He suggests we can then pay off lump sums on the house itself at a later date (i.e when remortgaging for a better deal). As long as the ISA rate is greater than the mortgage rate, I can't see a downside and our broker believes that a National Savings ISA will always be higher. What do you think?

jamesd

The broker has a good idea except that there's no reason to pay off lump sums when remortgaging if the savings rate is above the mortgage rate.

There is one other interesting option. Intelligent Finance and some other lenders do offset mortgages with linked cash ISA. With one of those mortgages you can keep your cash ISA allowances building up instead of losing the accumulated years when you remortgage. If ISA rates are above mortgage rates, you keep the money in an ISA outside the mortgage. If mortgage rates are higher, you move the money to the ISA that's linked to the mortgage. When you reach 100% offset you start to move the ISA money to external ISA accounts.

It's also worth considering using the stocks and shares ISA allowance instead of the cash ISA allowance. Or a combination of the two. Funds have consistently grown faster than savings over the years so for a long term plan this is probably going to leave you better off.

meme_3

ailuro2 wrote: »

I think that your plan sounds very similar to the old style endowment mortgage

ailuro !

You make me feel so old.... an endowment was a new thing when we borrowed money to buy our first home.

Moniker

a year or so agao faced with a shortfall in our endowments I found some help on the following (US) website:
http://www.mtgprofessor.com/Default.htm

The Mortgage Professor is a professor of finance at Pennsylvania University. I found the advice and the calculators very useful (despite the US vocab and allowing for differences in the US market). I used it to fix our mortgage at 4.94% with the Nationwide last year and make maximum overpayment so we should be mortgage free in July 2011. This article on the MP's website might be useful to you too:
http://www.mtgprofessor.com/A%20-%20Early%20Payoff/Does%20a%20fast%20payoff%20make%20sense.htm

Good luck whatever you decide to do.

Redmerlin

Just to give you a measure - as an amateur investor buying unit trusts for PEP's and ISA's . I have achieved the folowing returns on investments across 11 unit trusts UK/international. (On a buy and stick with basis - the spread should average performance)

Investment circa 17k invested in ISA /PEP's 98/99 just before the stock market dip, - after that I stayed clear becuase of the big losses I made in 2000 - 2003.

Overall (compounded ) return for 8yrs investment 6.8% ! Now worth 28k

Last yr 18%

Last 30 months 18%

Last 5 yrs 11.5%

General opinnion is FTSE gains 11% per year on average - I would not dare to calculate returns based on any more than 11%. Then what if the next dot com crash comes , i.e mortgage debt then 6-7% looks more healthy as this is the real figure I got

My mistake was to stop investing - if I had invested 7k every year - the return would be closer to 11% - not the 6% I now get in the cash ISA's

I hope this helps

But any return greater then 11% in your calculations is hope which is not a strategy!

regards

redmerlin