Interest Only Mortgage

DrowninginDebt

Advice please on paying off an Interest Only mortgage.
Apart from my original repayment mortgage, I also have a remortgage of £22,500, on Interest Only, with 2.5 years to run. I have just converted this to a new fixed term interest rate of 2.14% for 2 years and intend to make the maximum overpayments of £2500 per annum as I am concerned that, after 2 years, my debt will stand at around £17.5k with only 6 months to run!! I was declined converting it to repayment as it would take me into retirement age.
How am I best trying to get rid of this interest only mortgage?
Any advice appreciated!
Cheers!

Beckyy

Could you increase your repayment mortgage (at least by some) at the end of the fix to repay some more?

Do you mind me asking our age, repayment mortgage figure and house value? It may help others give some good advice.

jamesd

When would you reach retirement age? Surely they haven't declined converting from interest only to repayment over a 2.5 year term and insisted on you staying interest only and clearing it in 2.5 years instead?

What is that retirement age?

Assuming that your retirement age is over 55 the first thing you should do is stop throwing money away on overpayments and start making payments into a pension instead. At any time from age 55 you can take out a 25% tax free lump sum from a personal pension and from 6 April 2015 can take out the remaining 75% whenever you like, added to your taxable income for the year in which you take it. What this means is that people who are basic rate now and when taking money out make 6.5% on their money just for running it through a pension first, even if they don't invest it anywhere. Best to avoid going into higher rate income tax when taking it out.

People who are higher rate tax payers make more and even more if they are basic rate when they take the 75% out.

If you take out more than the 25% tax free lump sum using the flexi-access drawdown after 6 April 2015 your annual limit for personal pension contributions including work defined contribution pensions is reduced from £40k to £10k. If you are already 55 you can avoid that by putting at least one pot into capped income drawdown this tax year. That lets you take out the 25% tax free and the GAD limit amount each year without triggering the drop. The GAD limit percentage depends on age, its' likely to be around 6-8%. You can switch to flexi-access drawdown to get the rest out when the £10k wont' matter to you.