Re-mortgage Advice - Extending Term

freddiegold

I am seeking some advice on my next re-mortgage and whether to extend the term of repayments.

I bought my house in 2008 for £200k, for which I borrowed £150k. Initially I could only get a self-certified mortgage, which was interest only and lasted for 3 years at over 7% (yikes!). Since then I've had two fixed rate repayment mortgages. The fixed period of my existing mortgage with Natwest is due to end on 31st July. At that point I will owe £87k and the house is now worth about £350k, so approx 25% LTV.

For the past 4/5 years I have been paying £1060 a month on my fixed rate deal (2.8%) as I wanted to pay it off quickly. The mortgage term has 8 or 9 years remaining.

Actually, I have been renting my house out for the past 4 year (with Natwest's permission) so I have not been paying it off myself. The rental income has done this. During this time I have lived overseas but am planning on returning to the UK in June when my tenants leave. My living costs now are tiny in comparison to UK living and I have managed to save quite a lot, but I feel I need to reduce my mortgage payments for when I return.

Also, I turn 40 in April and I have no pension or other investments. I am the director of my own company. I need to put this right and start paying into a pension, pronto.

Should I go for the maximum term (i.e. 25 years) on my next re-mortgage? I like the idea of massively reducing the monthly repayments, thereby leaving room to start a pension. My plan will be to put aside money and then make a sizable over-payment each year, but if I have a bad year financially then I won't. Essentially I want to reduce my monthly outgoings and give myself a bit more flexibility.

Does this sound like a good plan?

AnotherJoe

In general it's seems reasonable to me, as you say, you've left it late to start a pension but it's not too late, you've got say 20 or so years maybe longer depending when you decide to retire and focusing on a pension should now be your main financial priority.
Initially I thought that 25 years would be too long because it would lock you in to waiting until you were 65 before retirement but that's wrong, because say you decide to retire age 60. At that point what's left on your mortgage would be very small anyway plus you can halve it because that's what inflation will have done. So, say in 20 years time the maths says you'll owe £10k, well in real terms in today's money that will be £5k. Add to that, you'll have the tax free sum from your pension you can use to pay off whatever's left.
So I'd say yes your plan is mostly sound,but don't do the overpayments, focus that money on savings and in particular pension, because time and inflation will take care of what is a small mortage and you'd be losing out on tax relief, in that if you earn £100 then in essence you can either put £100 in your pension or pay either £80 or £60 (depending if you are high rate taxpayer) off your mortgage.

freddiegold

Thank you for your reply Joe.

Interesting that you suggest I do not make any overpayments, but what you said makes sense. I understand that my focus should be on starting a pension before it's too late rather than being a mortgage-free wannabe.

AnotherJoe

Paying off your mortgage rapidly is a hang back to years ago when interest rates were much higher than they are now. Add in the loss of higher rate tax relief, the loss of time of pension investments growing, the removal of time for inflation to whittle down the mortgage,, and financially it can be incredibly expensive to focus on mortgage.
Now, to be fair there is the financial independence having your mortgage paid off, and to some people that piece of mind might be worth the loss of a much better pension (though actually I doubt it for most if they did the sums) but in your case you will have a relatively small mortgage whose removal say ten years earlier won't make any realistic difference. But in the meantime it's deprived you of a much better pension.
There are many in the mortgagefreewannabe forum making what will be a massively expensive mistake and worse encouraging others to do the same, and it's a great pity that MSE encourages this, given ultimately its money losing not saving. Right, I'll get off my soap box now.

Thrugelmir

AnotherJoe wrote: »

the loss of time of pension investments growing,

Sounds familiar. That's right, many people piled into endowment policies due to the superior returns on offer, a few used pension schemes. The outcome , a huge shortfall. Life is cyclical.

enthusiasticsaver

In general the plan is a good one as interest rates are low at the moment and you have some catching up to do on pension provision and in the main investments will rise by more than 2.8% in the long term although this is by no means guaranteed. However there is no guarantee rates on mortgages won't increase either and there is a lot to be said for peace of mind in knowing the house is paid off.

Using the standard percentage basis you will need to put 20% of your income into a pension as you are not starting until age 40 (usually halve the age you start investing as a very basic startpoint). However preparing for retirement is not only about investing for future income but minimising future outgoings so getting the mortgage paid off by the time you retire is definitely something to aim for at least. So extending the term to 25 years means you working until 65. Is that something you want to do?

I think I would hesitate with the either or and maybe do a mix of both. You should definitely start paying into a pension for the tax relief and the fact that you are running out of time to build one up but I don't think I would go from 8/9 years to 25 years on the mortgage. Can you not increase the term by say 10 years so it is still paid off by 58/9?