Interest Only Repayment Vehicle - Lump Sum from DB Pension?

edinburgher

We're exploring whether or not an interest only mortgage would work for us and I'm starting to work on a (hopefully) credible repayment plan in advance of speaking to a broker.

From the published criteria that I've been able to find for a couple of lenders, most will consider either 25% of pension value or 25% of a pension midpoint value (which I'm assuming is the potential end value of the pension using the middle growth rate shown on an annual pension statement)?

I have two defined benefit pensions (a small Nuvos one, preserved) and one with Strathclyde Pension Fund. To the best of my knowledge (not sure re. Nuvos), both of these pensions will allow me to commute up to 25% of the accrued benefits as a cash lump sum. I've no wish to actually do so (commutation rate looks very poor), but will lenders consider these potential cash lump sums as part of a repayment plan?

Thrugelmir

Do you already have an interest only mortgage? As the options are somewhat limited. 

tim_london

Disclaimer - I'm not a MA - just someone who recently looked into interest only mortgage.  

In general, interest only mortgages are not advisable on these parts, especially using pension because the lump sum payment should be there to setup your life for retirement.  

Lenders are way more stricter for interest only payment mortgages now, in general you'll need over 100k earning and the business plan are scrutinised more.

Looking at the wordings of those who does support it, for example https://www.halifax-intermediaries.co.uk/criteria/mortgage/default.aspx - I think the hidden caveat is that you'll still need to demonstrate that you have sufficient income to cover the interest only monthly payment AND evidence that you are putting enough into your pension (either via salary sacrifice, civil pension scheme or net income payment into pension pot) to cover the equivalent part of the equity payment.

Again word of caution, you are essentially:

• Need to way more wealthy enough for a repayment mortgage and then some to qualify.
• Choose not to get a repayment mortgage, pay more interest (due to no amortisation interest reduction) in the hope that your pension investment gain would cover the extra interest loss
• Gambling the fact that when your repayment is due at the end of interest only term, your pension pot value is what you are expecting it to be right now, and that the markets haven't tanked like it just did.
• Happy to sacrifice a large portion to all of you 25% tax free lump sum age 55+ from pension pot to cover mortgage and you don't need it for anything else (elderly parents?  children falling sick or need financial help? setting up a small biz for retirement hobby?)

edinburgher

Thrugelmir said:

Do you already have an interest only mortgage? As the options are somewhat limited. 

We do not. We're in the position where we have a very small house in a desirable catchment area. Plan would be to use IO to save quickly for an extension and then remortgage to repayment.
In terms of affordability, we're borrowing roughly 50% of what lenders will typically consider.

@tim_london - I appreciate your thoughts, but we're considering this with our eyes open, as a short term measure. We have 5 pensions between us plus 2x state pension, so won't starve in retirement, even with a 25% cut. We started investing in pensions in 2007-08, so have seen the best and worst of equity markets

Thrugelmir

edinburgher said:

Thrugelmir said:

Do you already have an interest only mortgage? As the options are somewhat limited. 

We do not. 

I'd suggest you contact a mortgage broker to ascertain what options are available to you. Some 96% of new mortgages are now on a repayment basis. Very different to a decade or so ago. 

edinburgher

Thrugelmir said:

edinburgher said:

Thrugelmir said:

Do you already have an interest only mortgage? As the options are somewhat limited. 

We do not. 

I'd suggest you contact a mortgage broker to ascertain what options are available to you. Some 96% of new mortgages are now on a repayment basis. Very different to a decade or so ago. 

I have done, hoping to hear back in the next couple of days. Nothing ventured and all that.