Mortgage Free: The final countdown

mark55man

Hello - Just signed up to Julicorn's MFW OP thread, but I felt I wanted to create a diary for this aspect of my financial life.  Sorry for the thread title - @FootyFanDan and I were having some music banter over at the DFW diary's and I just thought it was a great idea for a thread title (pun included)

Situation: As of the start of 2021 I have £103800 mortgage outstanding on a 2.1% fix rate mortgage to 2025 with the term ending one year later at 2026. I'm embarrassed to say that during an early remortgage in this property I extended the term, and now I'm older, wiser and a bit better off I'm trying to repair the damage, but my Building Society has a 10% OP cap and repaying that would only bring my MF date forward to late 2025.

So my cunning (and possibly over complicated) plan is to build up a matched "Mortgage Neutral" pot that I can use to drawdown from (and exhaust) to make the mortgage payments over the normal lifetime of the mortgage.  So there were a number of choices for that pot:

• Savings account
• ISA
• Pension

As I am over 55 and therefore able to access pension (be careful there are consequences for taking DC pension money while still working) I  chose that for the following reasons:

• When I have met my MN target I will be very close to retirement therefore, I will get a tax benefit in repayment as I will get relief as a higher rate tax payer on savings, and will withdraw the money as a basic rate taxpayer - this alone gives me a 4 month MF Date advantage
• By using my work scheme to save, the additional pension contributions (OPs) I make will be partly matched by additional contributions from my employer (free money) - which gives me a 3 month advantage
• By using cautious investments (I am quite experienced) over the 6 year pot duration (despite the title I am not in the "lose some" camp with this pot), I expect returns 2% in excess of the interest rate, but given the short investment period this only gives me a 2 month advantage

So putting all the above together - my plan, that I will document monthly here and in my signature, is whilst reducing my mortgage using normal repayments I will build up this cautious "ring-fenced" pot in my DC pension funds. I have ring-fenced it by selecting a couple of funds which I will use only for this money - a cautious multi asset fund and a short term bond fund.   I will tweak the reporting over time but broadly - it will be monthly as I'm not going to be OP more frequently than that. So Report #1 for Jan 2021 

• OP Made Jan 2021 £1792 (Monthly pension contribution + fraction of 2020 surplus)
• Total OP made £1792
• Current MN Pot Balance £1792 
• Available for OP at BRT(20%)/HRT(40%) - £1434/£1075
• Amount I could have OP'd traditionally - £987 (no employer match, withdrawn @ HRT(40%))
• Mortgage Balance after reg payments upto Jan 2021 £102300
• Gap £100900 / £101300 (98.5% / 99% to go)
• Predicted Mortgage Neutral Date - Jun 2024  (Date I need to stop paying into the pot )
• EDIT: Predicted Mortgage Date as of End May 2021 - is June 2023

 
As a final challenge, I am additionally going to try and bring my MN Date forwards to the end of 2023 2022 - by making additional overpayments (over those OP already planned) into the pot.  These payments will be as a result of achievements - pay rises - bonuses or other savings - especially in the second half of the year when my parallel DF journey has ended (just a few months to go on that one).

Thanks for reading this far - happy to be challenged on any aspect of this thinking

EDIT - Updated thread title and text  to reflect new target of 2022 

EDIT 2 - Dec 22 - New target build a cash pot for the last year payments (18K)
EDIT 3 - Jan 23 - same target but a different - Cash Only - way of looking at it
EDIT 4 - Jan 24 - New MFW actually making OP - finally got onto the PLAN

savingholmes

Hi Mark - slightly confused. When are you planning to retire? Are you paying into a SIPP or similar where you can take 25% tax free?

mark55man

Hi SH - sorry for confusion - my retirement will be late 2023 / 24 (as per my DFW diary) - but the mortgage will run on, it will just be paid using withdrawals from my matched MN pot.

I'm (conservatively) not assuming that I can use any of the 25% tax free for the mortgage pot as I see that as part of my non mortgage retirement element - ie my decision was rather than OP the mortgage now I would add extra into my work pension (SIPP like) to both get the salary sacrifice benefit, the extra contribution and (hopefully) the tax differential all working in my favour.  However I already had a plan for non mortgage retirement costs which included some use of 25% 

 

ohdearhowdidthathappen

Hi Mark, saw the link from your other diary and thought I'd look at this new thread
I'm completely clueless re pensions and offsetting etc, so I think I'll find this very educational. 
2023 sounds so close!  Must be nice to have it within touching distance

mark55man

Thank you - I will try to entertain, but the topic is a little dry, and is so dependent upon individual circumstances.  However although this is not belt and braces state pension type planning, most of the levers I am using, - company contributions, tax bands are (currently), possibly tax free lump sums, are  available to anyone working - although tax band leverage only available to those earning at a Higher rate in employment, but expecting basic rate retirement. 

@ohdearhowdidthathappen - I recall you are in the NHS at the moment, so these might not be available to you in quite the same way, and you might not benefit from the employer contributions (but you do benefit from an excellent scheme - plenty of NHS threads on the pensions board - about the excellent value in buying extra years).  If this appeals you can always set up additional personal arrangements, just a bid more adin, but the benefits are the same. For me the trick was:

• being old enough to draw the pension without wait (although if you are building up a pot over time that's not critical), but this does feel like an end game play
• the existence of some leverage in the tax bands (for now, and I don't think that will change quickly) and
• free money from my work. 

Additionally, I was surprised that over such a short period, aggressive growth assumptions did not make a lot of difference to the MN date - therefore I am happy to be pretty cautious.  I believe these levers protect my money enough so that should the investments fall over the period I have a built in safety margin.   All of the above are vulnerable (to a small extent) to political change, but the worst that would happen is that I will have a pot of savings from which I would be able to make more traditional (unleveraged as it were) OPs.   

mark55man

Having tweaked my spreadsheets, here is my report back for January.  I will do this at the start of every month as that's when the normal Mortgage payment goes in (reducing the balance) and when my extra contributions (OPs as it were) are made

My starting OP Mortgage Neutral Pot from 2020 was £1.7K, and I have made additional inputs of £885 so far this year. Including investment growth of £146 my total MN contribution this year is £1032 for a total MN pot of £2732.

My mortgage balance is now £102K, meaning I am £99K away from being Mortgage Neutral.  Current target for Mortgage Neutral is Oct-24. This date is when the pot will match the mortgage balance, but that's not quite the whole story as I need to withdraw the money so the full repayment date will be a little later (esp as I am limited by my BS to how much I can repay)

Adding the investment growth and Assuming HR Tax on withdrawal - This represents a £220 (8%) improvement over using post tax money to make OP (which I can't do).  If I can withdraw the money at Basic Rate this represents an improvement of £770 (28%).  If I can withdraw the money tax-free this represents an improvement of £1320 (45%). 

savingholmes

Good luck with it all Mark. You strike me as the type to achieve what you set out to.

mark55man

Thanks SH - I know its not the norm to do it this way, but the numbers are talking to me!!  Plus finally in my life, I find this way the money never even hits my bank account, so no temptations not to do it - I have struggled with this

Just rereading the posts I think I prefer the more narrative style of reporting than the bullet list format I did in my second post, but might mix and match periodically as I find it can throw extra light on the position 

savingholmes

Narrative is easier for readers too

mark55man

Having tweaked my spreadsheets, here is my report back for February. 

My starting OP Mortgage Neutral Pot was £1.7K. My pot is now £3.3K representing total additions and OPs this year of £1552.   My mortgage balance is now £101K, meaning I am £98K away from being Mortgage Neutral.  Current target for Mortgage Neutral is Sep-24. This date is when the pot will match the mortgage balance (assuming tax free withdrawal), but that's not quite the whole story as I will most likely be taxed at BR when I withdraw the money so the full MN date will be a 3 Months later (and actually paying it off will be limited by my BS to how much I can repay)

savingholmes

Congratulations. That's a lovely amount into the pot!