Repayment Mortgage Vs IO + Pension

superjuz

Hi, I'm due to remortgage in August. Will have £165,000 outstanding over 23 years. I currently pay £720 / month at 1.79%. At an assumed 4.5 % rate from August that will jump to £961.

What I am considering is a switch to an I/O mortgage and putting the "surplus" into my pension. (roughly £500 on mortgage + £220 pension to keep monthy at £720)

Just quickly running the figures it seems a no-brainer - unless I'm missing something obvious?

I'd benefit from keeping the net payment at £720/month and the income tax saving on the pension contribution, also, depending on performance, should be able to pay off the mortgage, with the tax free lump sum - as soon as I reach pensionable age, I'm 42 now so assuming 56ish? - rather than the mortgage finishing when I'm 65.

I'd then have 10 years to re-load the pension pot at my will, rather being subject to market variations.

What am I missing, guys?

Thanks.

ElwoodBlues

You'd need a pension pot of 660k to be able to withdraw 165k lump sum. Your £220 a month is only going to be 50k in 15 years (plus appreciation hopefully). So unless you already have a huge pension pot or you've got other contributions in addition to the 220 pcm, it sounds like a 660k pot in at 57 is optimistic?

Pension age is rising to 57 in 2028, and could get increased further before you get there. There are musings of the govt reducing/doing away with the tax free 25% lump sum as well. And they might remove the option of allowing further contributions after taking it.

So I would consider spreading your options - get a repayment mortgage on the longest term possible (should be able to go to at least age 70). Meanwhile put spare cash into your pension in anticipation of (hopefully) being able to withdraw the lump sum. That way you're covered for any pension goal posts being moved. Then at 57, you'll still have 13+ years of mortgage left to clear with the lump sum.

dunstonh

Just quickly running the figures it seems a no-brainer - unless I'm missing something obvious?

Pension mortgages were a fad in the late 80s to early 90s.    None of them worked though as people generally didn't pay in enough and the early part the new millennium saw losses over a 10 year period which spooked people and saw them move to alternatives.

I'd benefit from keeping the net payment at £720/month and the income tax saving on the pension contribution, also, depending on performance, should be able to pay off the mortgage, with the tax free lump sum - as soon as I reach pensionable age, I'm 42 now so assuming 56ish?

Several issues there:
1)
23 years of £275 gross @ 3.5% a year is £116,355.
Tax free cash is 25% so you can draw £29,088
That is a long way short of the the target £165,000

2)
Next is the fact that the minimum pension draw age is rising to 57 in a few years time and then 58 later on.   Basically, it is 10 years less than the state pension age.     So, you would need to borrow for another 2-3 years.

3) you are 42.   42+23 years is 65.    If you go to 58 with the calculation you are only talking 16 years.  That gives you a pension fund of £70,643 which gives £17,660 using the 25% TFC.

What am I missing, guys?

Reality

You are nowhere near on your figures.  You would need to pay around £2400 per month into the pension to use the TFC to clear the mortgage at 58.

superjuz

Thanks for the replies, sorry, I should add some more details. I currently have around £93k in the pension pot, my employer contributes 10 percent of my salary, and me, currently 5 percent. 

My basic salary is around 40k. 

4000 + 2000 + 2640 = £8640/year in contributions (plus income tax) 

If, by the time I reach pensionable age it’s moved up to 60, with medium growth, I don’t think I’d be far short of the required £600k pot? 

superjuz

I guess it’s a straight shoot out between mortgage interest rates Vs pension performance, but with the income tax saving I think there would need to be a helluva swing to lose out? 🤔 does anyone have the capability of doing a spreadsheet to see that crossover point? 😬🙏

MWT

superjuz said:

What I am considering is a switch to an I/O mortgage and putting the "surplus" into my pension. (roughly £500 on mortgage + £220 pension to keep monthy at £720)

Just quickly running the figures it seems a no-brainer - unless I'm missing something obvious?

There are usually several posts on this board each month from people who though this was a good idea 20 years ago and now find themselves staring at the end of the IO mortgage and a serious shortfall in their pension funds...

You are gambling that you will still be getting the same pension contributions from your employer over the next 15-18 years and that you'll be able to keep up with your contributions to the pension as well.

You are also depending on their being no significant drops in the fund value around the time you have to take the 25% tax-free lump sum, and you are also gambling that there will still be the option to take 25% tax-free, and also that you'll be able to refill that gap by still earning at the same level with the same contributions for 10 years beyond the point when you take the lump sum...

Further, have you actually found a lender willing to offer an IO mortgage with a pension fund as the repayment vehicle on the basis of a £40k salary? ...

superjuz

MWT said:

superjuz said:

What I am considering is a switch to an I/O mortgage and putting the "surplus" into my pension. (roughly £500 on mortgage + £220 pension to keep monthy at £720)

Just quickly running the figures it seems a no-brainer - unless I'm missing something obvious?

There are usually several posts on this board each month from people who though this was a good idea 20 years ago and now find themselves staring at the end of the IO mortgage and a serious shortfall in their pension funds...

You are gambling that you will still be getting the same pension contributions from your employer over the next 15-18 years and that you'll be able to keep up with your contributions to the pension as well.

You are also depending on their being no significant drops in the fund value around the time you have to take the 25% tax-free lump sum, and you are also gambling that there will still be the option to take 25% tax-free, and also that you'll be able to refill that gap by still earning at the same level with the same contributions for 10 years beyond the point when you take the lump sum...

Further, have you actually found a lender willing to offer an IO mortgage with a pension fund as the repayment vehicle on the basis of a £40k salary? ...

There's unquestionably an element of risk to reward involved. The ability to maintain the contributions would still be a factor with a £950/month repayment mortgage. I've been with my current employer for 18 years so am as confident as anyone can be that I will be able to maintain the contributions.

I haven't looked into lenders yet, this is all very hypothetical at the moment. Santander, my current lender, do seem to be offering an I/O switch almost at the click of a button. What other repayment vehicles would a lender consider? Does potential inheritance count?

40K is my basic salary, I've not considered O/T or any bonus which would be included for a mortgage application, along with the addition of my wife's salary and decent amount of equity, I'd be reasonably confident of finding a lender.

If the government did pull the 25 percent tax free lump, well, that would be just my luck...    

MWT

See if any of the brokers here have additional comments, but it is fortunate that you are currently with Santander as they are probably one of the easier lenders to get an IO product from, and no, potential inheritance isn't a vehicle you can use, but since you have now mentioned your wife and her earnings, along with 'a decent amount of equity' that should help.

Talk to your lender and see what they say, just be careful to keep a close eye on your pension fund growth and the rules around the lump-sum withdrawal as there is a lot of time between now and when you will be able to do that and things can and do change...

You should also consider taking financial advice since you are committing a significant portion of your pension fund to cover the mortgage so well worth making sure that doesn't leave you wanting in another 20-30 years...

superjuz

MWT said:

See if any of the brokers here have additional comments, but it is fortunate that you are currently with Santander as they are probably one of the easier lenders to get an IO product from, and no, potential inheritance isn't a vehicle you can use, but since you have now mentioned your wife and her earnings, along with 'a decent amount of equity' that should help.

Talk to your lender and see what they say, just be careful to keep a close eye on your pension fund growth and the rules around the lump-sum withdrawal as there is a lot of time between now and when you will be able to do that and things can and do change...

You should also consider taking financial advice since you are committing a significant portion of your pension fund to cover the mortgage so well worth making sure that doesn't leave you wanting in another 20-30 years...

Thank you, your time and replies are very much appreciated

MWT

superjuz said:

MWT said:

See if any of the brokers here have additional comments, but it is fortunate that you are currently with Santander as they are probably one of the easier lenders to get an IO product from, and no, potential inheritance isn't a vehicle you can use, but since you have now mentioned your wife and her earnings, along with 'a decent amount of equity' that should help.

Talk to your lender and see what they say, just be careful to keep a close eye on your pension fund growth and the rules around the lump-sum withdrawal as there is a lot of time between now and when you will be able to do that and things can and do change...

You should also consider taking financial advice since you are committing a significant portion of your pension fund to cover the mortgage so well worth making sure that doesn't leave you wanting in another 20-30 years...

Thank you, your time and replies are very much appreciated

I just took a look at the Santander Intermediaries information (easy to Google for it...) and they do not accept pensions as a repayment vehicle, but they do accept sale of the property, so you may want to consider how you present your plans when you talk to them...

dimbo61

Good luck  with getting a residential Interest only mortgage