Pension planning - use of offset mortgage as contingent credit line for SORR

gm0

Aside from the challenge of accessing mortgage credit as self employed / variable revenue or drawdown pensioner. 

Are there any positive experiences with offset mortgages as a "contingent" credit line for part of the sequence risk cash buffer on growth assets held for pension investments.

Working assumptions.  A low LTV loan say 25%. A 20 year term to 75 or 15 years to 70 - whatever gets through the checks for a 55 year old.
Starts out fully offset until used for my building renovation works - or more likely it lies unused (if income supports works as expected which it should other than in a prolonged correction scenario). 

Chose offset lender + deal for no nasty T&C, length of lowish interest rate fix/low spread to base rate and arrangement / exit fees and porting
Offset (Interest only).  Net payment basis - i.e. interest on outstanding less offset savings (the borrowings) - so typically = 0 until drawn down.

Back in the pension space inside the wrap or TFC in ISA - part of what would have been held back at near zero return against SORR part can go back into the investment asset pool where it will enjoy whatever inflation hedging, returns and volatility are enjoyed by the chosen main portfolio and its chosen mix.

Scenario 1 - Not used - If the offset savings account is not needed then it doesn't cost that much to setup and it sits in the desk draw while it runs off.  Interest is not paid as money is not borrowed (fully offset) bar the fees.  The repayment plan is to give it back at the end.

Scenario 2 - Used - If it is needed in whole or in part - the cost is the agreed borrowing rates and the mortgage rate "debt" builds over the 0-5 years 
Arranged upon terms now - cost of the say - 5 years contingent income - is *known* now either in absolute terms or as a base rate+X or an SVR (less attractive) and more importantly it is already secured.  Repayment plan is better times later which refill the tank. Or property downsizing repaying the mortgage.  It's just an option on a cashflow taken from a secured charge on the property asset and the timing of the property disposal is decoupled.  For a fee and a (possibly) known interest cost.
Importantly it is not a credit screening decision being made at a future moment of potentially even greater difficulty when drawdown income has become unattractive from asset sales.

Does this idea work as part of pension strategy and planning if you own a property.  

It seems a very mild leverage of that asset as a contingent cashflow source - not borrowing harder against the property to invest in more equities and shift the asset mix and not equity release where you "sell" the property asset. 

If this doesn't work why not ?   Thoughts / Any success stories with this approach

Thrugelmir

Finding an interest only offset mortgage maybe the biggest challenge. 

gm0

Thrugelmir - Agree repayment is easier to find. Coventry. Accord. Barclays all show product in theory.

For Interest Only - Scottish Widows do one (brokered) - with a slightly weird offset credit mechanism reading their document.
I based on 250k in order to play with the calculator. 

Interest due calculation is at a fixed 30.42 days per month. £748 @3.59% for constant payments post discount period
Savings offset balance amount x actual days in month x interest credit creates offset credits applied two months behind.
Can't be at more than outstanding balance (well you can but you get no extra credit for it).
So in the arithmetic fully offset scenario it bibbles about with long and short months. 
Slightly over offset (not credited but some kind of rollover) and slightly under.
So there is a risk of about £100 annual interest appearing mostly in April because February is short - but the day count x amount interest credit rollover rules may smooth some or indeed all of that back out. Somewhere between £0 interest and a worst case £101 annually from a quick spreadsheet.

Other fixed facility costs

Product + arrangement fee for the version you pick (£0 for some for products - interest rate packages). Broker fee where applicable as intermediated.  And you pay £300 for the first months discounted interest + maybe more depending upon in month completion date - which you don't avoid even if the payment goes straight to the offset account which is a supported scenario.  This is a declared product feature. The example mortgage I looked at didn't have a fee so that's not so terrible. £300 for a ten year 250k 20 year credit line. Plus 3.59% annual interest applied as daily interest if and when the funds are drawn down for property renovation scope creep or per original post SORR protection income substitution.

What the when you actually apply underwriting criteria are I do not know other than the LTVs for these deals to show up at all are very low. All gone by 35% - 40% - so it looks like the concept is possible if you are able to scramble through the underwriting checks on income types amount and regular expenditure etc. etc.

jamesd

gm0 said:

Does this idea work as part of pension strategy and planning if you own a property.  

Yes. I currently have most of my cash in an old fully offset interest only offset mortgage.

Looking at retirement interest only mortgages may also be useful but I haven't noticed any offset versions.

Wade Pfau looked at this with the US equivalent at Academic Acceptance for Reverse Mortgages in Retirement Income. It's also possible to use the leverage to buy low after a drop though it's necessary to remember that some big drops have charts that resemble stairs descending into a basement over a couple of years.

gm0

jamsed - been here long enough now that I am somehow not surprised it's you that has one.   Meant as a compliment. Have found a lot of your posts and answers around drawdown strategy and SWR thought provoking and helpful in clarifying options.

I too had a repayment offset mortgage - C&G/Lloyds back in the day when 0.5% spreads to base rate were a thing. Happy times.  They totally cocked it up when I redeemed it.  Imaginary interest off to the debt collection agencies. Two lots of legacy IT interacting and the person chasing is not either of them and you are not a customer any more so we can't talk to you.  And yes we know it is imaginary but the "other" needs to cancel the debt and tell us to tell the collection agency.  Since I work in that technology world people just laugh and say it's karma having a joke with me for past sins. Fair enough.

jamesd

I do try to find and use advantages. Key for my mortgage plan was possible repayment via pension. Since my pension contributions used salary sacrifice with 50% of employer NI contribution I was getting close to 40% combined income tax and NI benefit overall, perhaps a bit higher. That's a lot of help towards mortgage capital repayment.

It's most likely that I'll look to replace rather than repay for the Wade Pfau reasons.

If you are bored someday you can look back to my first posts in 2006 to see a less well informed me.

DesG

I have one (interest only, offset) from FD, does what it says on the tin, I won't mention that most of it is in P2P lest James has a canary I decided that having a paid off house while still working was just not efficient, gotta get that leverage uplift!

michaels

DesG said:

I have one (interest only, offset) from FD, does what it says on the tin, I won't mention that most of it is in P2P lest James has a canary I decided that having a paid off house while still working was just not efficient, gotta get that leverage uplift!

I went for IO instead of offset as I was 'certain' I could earn more in risk free savings accounts than the 1.9% the 5 year fix (5% early repayment fee) would cost me.  Of course rather than putting the capital in a 5 year bond paying 2% I shared it between instant access accounts paying on average nearly 3% - happy days, 3k profit in the first year.  Fast forward 24 months and one global pandemic and suddenly the funds are earning 1.3% and the whole deal is costing rather than making a profit