Interest only mortgage and repay the capital from AVC pot

SarahB16

Hello

I’m looking to sense check my thoughts on the following please.

I am considering the possibility of moving house in a few years (currently I’m mortgage free as I have paid off my mortgage).

I would be grateful for your thoughts on this scenario please bearing in mind I am in the LGPS pension scheme (currently contributing) and pay AVCs (via salary sacrifice of £1,000 gross a month) and am a higher rate tax payer.

Let’s say in order to purchase the new home I need to take out a mortgage (anywhere between c. £75k to £150k) my thoughts are it would make more sense to take out an interest only mortgage and then repay the capital at the end of its term from my AVC pot when I take that at (most likely) age 65.

I’m aware of the calculation that would limit the maximum amount that could be taken as a tax free lump sum too which I would need to be mindful of:  ((20 x LGPS DB pension) + AVC pot) x 25% = tax free lump sum. 

The alternative is to reduce the AVCs I make each month and take out a repayment mortgage however as those repayments would be from my net salary this doesn’t make financial sense for me to do.

I know, in due course, I would need to speak to a mortgage advisor and I’m aware of the reputation interest only mortgages have but in the above scenario this does seem to be the less expensive option for repaying the mortgage and of course I would need to continue with my AVC contributions and ensure they are on track to repay the capital and have savings as a back up for any shortfall too. 

Grateful for opinions on the above scenario please.  

Thank you 

QrizB

Pension mortgages were quite popular back in the 80s/90s. It can work.

Here's a short article with brief pros and cons:
https://www.godirect.co.uk/mortgage-repayment-guide/pension-mortgage.php

I'm sure a bit of Googling will turn up longer discussions of the idea.

Dazed_and_C0nfused

Are you avoiding higher rate tax (and NI) on the whole of the £1,000 sacrificed?

El_Torro

Your AVCs give you a guaranteed income / lump sum? I'm not very familiar with LGPS pensions, which is why I ask. If the benefit you get is guaranteed and the numbers add up then yes, the most likely outcome is that you'll be better off doing this than taking out a repayment mortgage. Some things to consider:

You don't know what interest rate you will be paying on your mortgage between now and when you retire. This adds uncertainty.

Rules surrounding pensions could (and probably will) change in the coming years. The changes may make what you plan to do less viable. 

jamesd

There's nothing wrong with your plan. It's a sensible way to handle the mortgage by exploiting the very useful tax free cash handling in LGPS.

SarahB16

Dazed_and_C0nfused said:

Are you avoiding higher rate tax (and NI) on the whole of the £1,000 sacrificed?

No, I'm not avoiding higher rate tax on the whole £1,000 sacrificed but I do save NI on the whole amount. 

Dazed_and_C0nfused

SarahB16 said:

Dazed_and_C0nfused said:

Are you avoiding higher rate tax (and NI) on the whole of the £1,000 sacrificed?

No, I'm not avoiding higher rate tax on the whole £1,000 sacrificed but I do save NI on the whole amount. 

Still sounds pretty tax/NI efficient compared to paying 30-42% tax & NI on it then paying the mortgage on a repayment basis.

SarahB16

El_Torro said:

Your AVCs give you a guaranteed income / lump sum? I'm not very familiar with LGPS pensions, which is why I ask. If the benefit you get is guaranteed and the numbers add up then yes, the most likely outcome is that you'll be better off doing this than taking out a repayment mortgage. Some things to consider:

You don't know what interest rate you will be paying on your mortgage between now and when you retire. This adds uncertainty.

Rules surrounding pensions could (and probably will) change in the coming years. The changes may make what you plan to do less viable. 

The AVC contributions are invested in funds and as I get older can move them to lower risk funds.  Investments can go up as well as down as we all know but the AVCs provide a tax free lump sum.  Tax and NI savings going in (via salary sacrifice) and tax free lump sum when taken (likely for me to be at 65) subject to the calculation in my first post.  

Thank you for your reply. 

SarahB16

Dazed_and_C0nfused said:

SarahB16 said:

Dazed_and_C0nfused said:

Are you avoiding higher rate tax (and NI) on the whole of the £1,000 sacrificed?

No, I'm not avoiding higher rate tax on the whole £1,000 sacrificed but I do save NI on the whole amount. 

Still sounds pretty tax/NI efficient compared to paying 30-42% tax & NI on it then paying the mortgage on a repayment basis.

That is exactly my thinking too. 

Hoenir

Have you compared interest only mortgage options to repayment ones. 

Bostonerimus1

You are mortgage free now, so I'd avoid taking out another one again. Why take on debt now that you are out of it? Do the AVCs, don't take out another mortgage and avoid paying anyone interest and having to use a large chunk of your capital to pay off a debt and take the risk on future investment returns and house prices. I would look to mimimize risk and avoid more debt.