Is this a good idea or am I missing something?

BlueRidgeSmoky

I have a small mortgage that has just over 15 years left to run. Currently on a fixed rate (2.09%) that finishes January 2024. Obviously expecting a significantly increased interest rate when fixed rate ends.

I need a new boiler and a replacement door and window (all being installed in the next few weeks) and have saved enough to pay for these. However, I have been offered additional borrowing from my current lender, which will cover the cost of these, at 0% interest for 5 years, with a 15 year term to match my existing mortgage.

 I’m thinking that I could take the additional borrowing to pay for the improvements and use the money that I’d planned to use to pay for them, leave it earning 5.25% until January then use it to pay a lump sum off my existing mortgage to offset the effect of the increased interest rate.

This means that in January I will owe no more than I do now (actually slightly less due to repayments over the next 6 months) but about 35-40% of it will be on 0% for the next 5 years.

I plan to retire in a little over 5 years and will use the tax-free lump sum from my pension to pay off the mortgage at that time.  I will still have an emergency fund (the boiler/door/window money is not my entire savings).

It seems like a reasonable plan to me, but am I missing something that makes this plan not a good idea?

grumbler

Borrowing at 0% for 5 years and paying it back as soon as 0% ends is always a good idea regardless of all other factors in your post. 
If this extra loan is a part of your mortgage and you want to pay it back earlier, in Jan, make sure that it goes towards the main mortgage, not the 0% part of it. 

simon_or

I agree with grumbler. Any 0% loan that you'll pay off in full at the end of the promotional period is a good idea given the savings rates on offer at present.

What bank is this, offering a secured loan at 0% for 5 years to their borrowers? I've been with all the banks you can think of over the past many years but never been offered one myself!

themanfromportobello

BlueRidgeSmoky said:

I have a small mortgage that has just over 15 years left to run. Currently on a fixed rate (2.09%) that finishes January 2024. Obviously expecting a significantly increased interest rate when fixed rate ends.

I need a new boiler and a replacement door and window (all being installed in the next few weeks) and have saved enough to pay for these. However, I have been offered additional borrowing from my current lender, which will cover the cost of these, at 0% interest for 5 years, with a 15 year term to match my existing mortgage.

 I’m thinking that I could take the additional borrowing to pay for the improvements and use the money that I’d planned to use to pay for them, leave it earning 5.25% until January then use it to pay a lump sum off my existing mortgage to offset the effect of the increased interest rate.

This means that in January I will owe no more than I do now (actually slightly less due to repayments over the next 6 months) but about 35-40% of it will be on 0% for the next 5 years.

I plan to retire in a little over 5 years and will use the tax-free lump sum from my pension to pay off the mortgage at that time.  I will still have an emergency fund (the boiler/door/window money is not my entire savings).

It seems like a reasonable plan to me, but am I missing something that makes this plan not a good idea?

WOW! That seems an unbelievable offer! Never heard of that before. Snap it up!

Beetroot_24

simon_or said:

I agree with grumbler. Any 0% loan that you'll pay off in full at the end of the promotional period is a good idea given the savings rates on offer at present.

What bank is this, offering a secured loan at 0% for 5 years to their borrowers? I've been with all the banks you can think of over the past many years but never been offered one myself!

It sounds like the Nationwide Green Additional Borrowing to fund energy efficient home improvements.

pjcox2005

grumbler said:

Borrowing at 0% for 5 years and paying it back as soon as 0% ends is always a good idea regardless of all other factors in your post. 
If this extra loan is a part of your mortgage and you want to pay it back earlier, in Jan, make sure that it goes towards the main mortgage, not the 0% part of it. 

Fully agree with this.. as long as you have the will power and financial management to do that and not touch the savings.

BlueRidgeSmoky

Beetroot_24 said:

simon_or said:

I agree with grumbler. Any 0% loan that you'll pay off in full at the end of the promotional period is a good idea given the savings rates on offer at present.

What bank is this, offering a secured loan at 0% for 5 years to their borrowers? I've been with all the banks you can think of over the past many years but never been offered one myself!

It sounds like the Nationwide Green Additional Borrowing to fund energy efficient home improvements.

Yes, that’s right 

BlueRidgeSmoky

Thanks everyone 
Just wanted to check that I hadn’t missed anything 

TheAble

It's a fair plan but taking out extra borrowing against your home is adding risk, for all it's at 0%. You may lose your job. You may end up spending those savings on something unexpected. The stock market may collapse before you get the chance to take your pension lump sum. And you are close to retirement. Were it me, I wouldn't do it just to make a few extra points of return.

If you must borrow, maybe take out a 0% credit card instead? At least then you're not securing the debt.

BlueRidgeSmoky

TheAble said:

It's a fair plan but taking out extra borrowing against your home is adding risk, for all it's at 0%. You may lose your job. You may end up spending those savings on something unexpected. The stock market may collapse before you get the chance to take your pension lump sum. And you are close to retirement. Were it me, I wouldn't do it just to make a few extra points of return.

If you must borrow, maybe take out a 0% credit card instead? At least then you're not securing the debt.

All fair points, which I have considered and originally I had thought about a 0% credit card but the longest term would be around 2 years.

The risk of losing my job is so low as to be negligible. 
I genuinely cannot think of any potential scenario where these savings would need to be used for something else (I have a separate emergency fund) and even if it did, the interest rate on the mortgage is likely still lower than any other form of loan.
Local Government Pension not affected by stock market.
If I retire in 5 years it will be 7 years early/before my SPA, but I could still access a SIPP to cover the mortgage balance.

Total mortgage debt will only be about 8% of LtV. 

‘A few extra points of return’ equates 25-30% (for the first 6 months) / 35-40% (from January) of the total mortgage balance being interest free for the next 5 years in a market with rising interest rates, which is significant to me.