Pros and Cons to using Mortgage Capital repayments into an SCAVC or AVC just before retirement

jamjar92

A few months ago me and few others were discussing AVC's and senarios ways to boost the pot.

Certainly in the year before retirement, its generally considered good to increase as much as possible contributions into the AVC pot which would be taken as part of the TFLS (from my DB pension, and standard LS+AVC).

With this TFLS I will pay down the remainder of the mortgage this is going to happen, in fact the AVC element as it stands now would do that now at the projected own amount at retirement age.

So senario, the 12 months before retirement date, convert the repayment mortgage into an interest only mortgage, and use the capital to boost the AVC pot, in additional to what you already contribute and any additional you may do in the last 12 months.

Given the rates are low at the moment, I can see this as big boost given the tax saving (in the AVC, BRT or HRT) , and if in SCAVC the NI in addition.

So forumites based on the senario below, questions.

1. Whats are the Pros and Cons as you see it.

2. Has anybody already done this, would you do it again, is anybody planning to do this currently?

3. What interest rate (mortgage) would you see this as counter productive?

4. Is 12 months the right period, would you go longer say 18 months?

Some thought it was good idea, other too risky, I said it was to be invested in low risk, or cash funds where the AMT is 0.65%, inflation would not really affect it, there would be little capital growth as the boost would come from NI and/or Tax saving. You are using the AVC to payoff the mortgage anyway, you would pay more mortgage interest for a bigger deferred TFLS in 12 or 18 months time,

marycanary

Hi, I intend to do a variation of this method later this financial year into LGPS AVC. 

I have an offset mortgage with the ability to borrow more. I have kept a small balance on the mortgage, covered by savings,  just to keep it "live" for this purpose. I intend to borrow so that, with some savings I have, it will use up all remaining Annual Allowance and previous year's unused carry forward. The limit is the amount of unused Annual Allowance and salary level. I'll do it at the last moment in case my circumstances change.

The only downside I can see is if there is some delay in paying the pension which would leave you short of fund. To mitigate this risk I intend to keep a reasonable amount of cash in savings and to obtain a 0% credit card.

I would be interested if anyone can see any potential problems I have missed.
MC

cloud_dog

As a short term thing, assuming you hold it in cash (or cash like) then the risk is pretty low.

Are you sure your lender will allow you to switch to interest only, especially at this time?  They may see it as indicative of increased risk to them, i.e. you struggling to meet commitments.

We've been doing as you suggest since took out the mortgage, originally via S&S ISAs and more recently by salary sacrificing everything down to NMW in to the AVC (will be used to repay the mortgage and as the source for earlier retirement... Different approach to yourself).  To support the reduced salary income we are drawing down from the S&S ISA investments.

Because of the significant savings benefit of using SS and as a (previously) HRT payer I am less concerned with the small fees etc associated with doing this.

jamjar92

marycanary said:

Hi, I intend to do a variation of this method later this financial year into LGPS AVC.

I thought of an offset, I have 2 year left on current fix, then another 5 year fixed before I need to decide, if I remortgage could go for this type.

jamjar92

cloud_dog said:

As a short term thing, assuming you hold it in cash (or cash like) then the risk is pretty low.

It would be low risk or cash fund

cloud_dog said:

Are you sure your lender will allow you to switch to interest only, especially at this time?  They may see it as indicative of increased risk to them, i.e. you struggling to meet commitments.

Has Mary says, maybe in few years convert to an offset, or remortgage with broker explaining the senario. Mine originally was an endownment and converted to a repayment, maybe should head over to the mortgage forum and read up about offsets mortgages.

cloud_dog said:

Because of the significant savings benefit of using SS and as a (previously) HRT payer I am less concerned with the small fees etc associated with doing this.

The interest charge would be less than the tax and NI gains, i agree.

Thrugelmir

You'll struggle to find a lender offering interest only mortgages currently. For a 12-18 month term expect to be on a high interest SVR if you do find one. . 

jamjar92

Thrugelmir said:

You'll struggle to find a lender offering interest only mortgages currently. For a 12-18 month term expect to be on a high interest SVR if you do find one. . 

This is only in planning for me, got 15 years left on current mortgage term (replayment), but retiring sooner than that, hence using lump sum to paydown the balance. A lot of things can change between now and then. This purely a fact finding mission, and to get other peoples views/comments.

sg1000

I'm doing this at the moment.  Have bought a second property as a holiday home (not let out).  Interest only mortgage at 1.83% for the next five years.  Saving AVCs at £1000 (from gross salary) per month at the moment and should be able to pay this off from the AVCs in ten years, or sooner, depending when I decide to retire.  The tax savings for me as a higher rate payer makes sense...I think :-)

jamjar92

Thanks. I think I will look into converting to either a 50/50 mortgage (capital/interest only) or offset one, which I could do at the send of my current fix. Still treat it as capital repayment, ie still paying the internet and the capital, and then 12-18 months use that as a drawdown, while increasing the AVC pot payments, so get a 33% or 42% boost in tax just before taking TFLS of 25% to pay it off.

Let hope the rules do not change too much before I get there!!!!

MallyGirl

I have been using the flexibility of my offset mortgage to support putting £40k a year into both mine and husband's pensions (both sal sac). We had always paid into pensions but not enough to support early retirement so it got ramped up significantly a couple of years ago. We are 53 and mortgage is due to be repaid in full in 5 years - it did rise for a while but is on the way back down again now. If there is an outstanding balance in 5 years then we could use a bit of TFLS although I suspect we might remortgage nearer to the end onto a nice low fixed rate for some cheap borrowing once we don't need the flexibility any more.
DD has made it through the A level debacle and is off to uni for a 6 year course in October so it will take a while to see how our finances work out as empty nesters.