The Interest Only option

ixwood

You don't overpay the mortgage, you overpay the investments.

jamesd

homer_j, yes, you do need to either pick a product with sufficient overpayment options or do it when remortgaging, if you're going to do it by overpaying instead of investing.

homer_j wrote: »

What if stock markets crash? You cannot gurantee any surplus and there is an equal risk to there being a 25% shortfall. This will result on extendending the mortgage term and either waiting for investments to realise the correct value or having to transfer onto repayment.

I can't guarantee a surplus but there is not an equal risk of there being a 25% shortfall. To only just repay the mortgage takes a return of 5.5% over 25 years. To have a 25% shortfall takes a return of 3.52%. Someone who has only achieved those low returns after ten years should be thinking about a repayment mortgage: they aren't getting a worthwhile extra return. Those are very low returns for investments when you consider that the most popular UK equity income funds have achieved four times the 25% shortfall return.

Now add the 100 extra I suggested and it takes a return of 4% to just get a small excess or 1.89% - below inflation - to have a 25% shortfall.

If you get 7% return with that expected 27% excess you need both a market drop of 21% at the last moment and the imprudence of not having moved any of the money to cautious investments over the preceding years. You also need to have ignored the fact that you had an expected surplus of 7000 after 20 years and could have paid off the mortgage then if you were worried. If you've shifted half of it to cautious investments the market drop needed to have a shortfall rises to 42% and that's not something you're likely to see. If you're doing it as I tend to suggest - 10% of the investment value over each of the last five years - it takes a drop of 50% or so. Take a look at the worst bear markets and you'll find that only one - the start of the 1930s - did that, while the rest were in the 35-48% range. That one worst case was a drop of 85%, which is part of why there's no guarantee: something historically bad could happen again.

But now you can see why I suggest shifting 10% a year in the last five years to cautious investments: it's protection against nine of the worst ten bear markets we've seen.

That protection is greater if you've been getting higher returns than 7%, because 10% of the investments each year is a higher value. Same if you're doing as I suggested and adding an extra 100 a month.

LittleYoda

James

Thanks for this post.

This certainly is "thinking outside the box"

Fantastic way of going about things!!!!!!

jamesd

LittleYoda, glad you found thinking about the bad cases interesting.

It's also worth remembering that I was writing about a fixed end date. If you write down your desired 25 year end point then remortgage for 25 years each time your mortgage doesn't end at that 25 years from the start end point so you have the flexibility to wait. That's a good idea because a massive market drop is likely to coincide with economic trouble and that could lead to reduced availability of mortgages. Free protection from the deadline, if you're remortgaging anyway.

It's even more interesting if you're doing what's often suggested in the pensions section: using the stocks and shares ISAs for retirement investing. Then shifting 10% of the investments a year can easily leave a pot big enough to pay off the mortgage in the cautious investments.

I also completely ignored wage inflation and the fact that you're likely to be able to invest more over the years.

homer_j_3

My point was that the ONLY way to gurarantee your mortgage to be repaid at the end of the term is repayment. Interest only presents a risk and you are going to be presented with 3 outcomes:

1 - You have sufficient monies invested to pay off the mortgage on time
2 - You have sufficient monies to pay off mortgages ahead of time
3 - You do not have sufficient monies to pay off the mortgage at the end of the term.

Your plan would take serious dedication and an attitude to risk that many would not have.

My 25% loss comment was off the cuff as I was going to work but my point was what I have said above - no guarantees.

Your plan probably works - not really sat down with the calculater but I know that you will have done the math. However, I am not a financial adviser, although qualified, I do not give advice in this respect but do know that Stocks and Shares are only suitable for a particular audience.

The OP's question - is sitting on a property and paying interest only a good plan so I can realise any increase in equity 25 yrs down the line a good idea? The answer is if you want a guarantee of having any equity to realise then NO. If you want to take a calculated risk then possibly yes.

Having a suitable investment plan sat behind you is the only way to stand a god chance of nuring that by going on interest only you can lower the risk factor.

jamesd

homer_j, yes, if you want a guarantee, repayment is the way. That's the mainstream approach and one that I expect a majority of people to prefer, even though everyone with a personal pension is taking this sort of investment risk with that part of their retirement income.

As you note, the original poster was planning on no repayment vehicle except property sale and downsizing. Clearly the original poster is willing to consider significant risk. Adding investing as a repayment vehicle is substantially less risky than the original plan.

Hopefully my post explains why the risk of not having the money is quite low. But that's not and never can be no risk.