Interest only mortgage and repay the capital from AVC pot

SarahB16

Bostonerimus1 said:

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. 

Everything you have said is at the forefront of my mind too.  I'm just looking at scenarios and options at the moment. 

I do have some savings (S&S ISA, premium bonds and savings deposit account) but they are not growing that significantly at the moment due to my AVCs and if the difference between the new purchase price versus the net sale proceeds from my current home could be funded from my savings I am considering paying the difference/shortfall with my savings but then that leads me to think should I reduce my AVC contributions to increase my savings so I don't need a new mortgage but at the moment that doesn't feel like a sensible thing to do due to the tax and NI savings I receive. 

I feel like I should run scenarios - shortfall of £50k, £75k, £100k, £125k and consider the best way to fund this, i.e. new mortgage or from savings.   

QrizB

Bostonerimus1 said:

You are mortgage free now, so I'd avoid taking out another one again.

That's easy to say but OP is thinking of moving house and will need an additional £75-150k to do so. Unless they're sitting on a big pile of cash, they're going to have to take a mortgage.

Bostonerimus1

QrizB said:

Bostonerimus1 said:

You are mortgage free now, so I'd avoid taking out another one again.

That's easy to say but OP is thinking of moving house and will need an additional £75-150k to do so. Unless they're sitting on a big pile of cash, they're going to have to take a mortgage.

I would examine the need for a bigger mortgage in the first place. It might be unavoidable, but should be questioned. Then I would still want to avoid interest only mortgages because of the risk and maybe having to spend a large amount of capital right before retirement or sell up and move.

jamesd

There's no real need to spend capital just before retirement when retirement interest only mortgages are available. Nor is it particularly bad to do so when extra money has been put into a pension specifically to provide for that payment.

Not having a mortgage is nice but I'm five years into retirement and haven't paid mine off even though I could at any time. There's just no need and I have no interest in providing an inheritance so even dying with a mortgage and investments is fine for me.

Hoenir

jamesd said:

There's no real need to spend capital just before retirement when retirement interest only mortgages are available. Nor is it particularly bad to do so when extra money has been put into a pension specifically to provide for that payment.

Not having a mortgage is nice but I'm five years into retirement and haven't paid mine off even though I could at any time. There's just no need and I have no interest in providing an inheritance so even dying with a mortgage and investments is fine for me.

The "endowment era" was no different. Everybody thought that investments would perpetually outperform debt. Then the Nikkei blew up. Never recovered. The house of cards came tumbling down. Hence why now around 97% of new mortgages are underwritten on a repayment basis. Lesson learnt. 

Cowster

As you approach retirement I think I would be living off the ISA / savings and putting more in the AVC to reduce the 40% tax on your wage even more.  

SarahB16

Cowster said:

As you approach retirement I think I would be living off the ISA / savings and putting more in the AVC to reduce the 40% tax on your wage even more.  

Yes, ideally I will do that however I also need to consider how much I will need to fund the years from when I retire to when I take my DB pensions and AVC pot at (the likely age of) 65.  If I retire at 63 then still a couple of years to fund which I'm currently thinking will be from my small DC pot and some of those ISA/savings that you refer to in your reply.  I will also need to consider possible mortgage interest payments up to 65 too. 

There are a lot of unknowns at the moment which is why I refer to them as scenarios and I appreciate your reply, thank you.  

SarahB16

Hoenir said:

Have you compared interest only mortgage options to repayment ones. 

Interestingly using Money Supermarket* and assuming a £100,000 mortgage over 10 years and comparing an interest only mortgage with a repayment mortgage the interest only repayments (which include £100k of loan capital) come to c.£161,583 (or £121,583 if I assume the £100k loan cost me £60k net as paid via the AVC pot) versus c.£128,830 for a 10-year repayment mortgage.  Both figures include the £100k of loan capital that needs to be repaid.  

Therefore the saving on the interest only mortgage is less than I thought but carries more risk.  I have used very broad assumptions as I have assumed the £100k loan capital (paid from the AVC pot) has cost me £60k but it would depend on the tax and NI savings I have made when/if I needed to take out a mortgage.    

Thankfully this isn't a decision I need to be making any time soon and I would need to run any calculations again but it may be that if I need to take a mortgage out the repayment mortgage would not cost that much more but would come with much less risk.  

Depending on how large the mortgage repayments are out of my net salary there may still be scope for some AVC contributions.   

* Yorkshire Building Society used in both scenarios with an initial 5-year fixed rate of 3.99%.   

Bostonerimus1

jamesd said:

There's no real need to spend capital just before retirement when retirement interest only mortgages are available. Nor is it particularly bad to do so when extra money has been put into a pension specifically to provide for that payment.

Not having a mortgage is nice but I'm five years into retirement and haven't paid mine off even though I could at any time. There's just no need and I have no interest in providing an inheritance so even dying with a mortgage and investments is fine for me.

Yes, you can always remortgage and people have different circumstances and personal preferences. My preference is to be debt free and paying off my mortgage to reduce my costs in retirement was a big part of my plan. By reducing my need for income I reduced the potential effects of sequence of returns risks. Looking at how a plan can fail is probably more important than seeing how it can succeed and I looked to minimize my failure possibilities. Now I'm retired it's great not to have any debt at all and to be somewhat decoupled from interest rates and stock market returns because my need for income is quite low. I also want to pass on assets rather than debts to my heirs. So I would never consider an interest only mortgage, but others will be different.

jamesd

Hoenir said:

The "endowment era" was no different. Everybody thought that investments would perpetually outperform debt. Then the Nikkei blew up. Never recovered. The house of cards came tumbling down. Hence why now around 97% of new mortgages are underwritten on a repayment basis. Lesson learnt. 

You seem to have learned the wrong lesson. Endowments at maturity generally still succeeded in clearing the mortgage in spite of two significant issues:

1. Growth assumptions several percent higher than now from a book market period
2. Payments into the endowment lower than a repayment mortgage relying on that growth with most never adjusting their contributions upwards but instead keeping the money saved

While mortgages are typically repayment now, mine is an interest only offset mortgage with pension and investments repayment strategy. But it's not unduly stressful for reasons similar to our questioner and their possible new mortgage:

A. the income multiple was below 1.5.
B. substantial other investments for retirement are being made, providing lots of safety margin.