Interest only mortgage and repay the capital from AVC pot

jamesd

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.  

There seems to be a more efficient way: use those savings to make the maximum possible pension contributions as age 57 approaches to maximise the gain from pension tax relief.

jamesd

SarahB16 said

assuming a £100,000 mortgage over 10 years 

Best to get the mortgage for as long as you can.

One of the risks of investing is finding markets down badly at the time you need a large lump sum. Having extra time available is one way to mitigate that risk. So is having bonds, the investments not the savings accounts. You can also gradually reduce risk and increase bonds to cover the need.

A possible substitute for interest only is a repayment mortgage with a term until age 85 so that repayments are low.

I went with a life of mortgage deal to avoid the need to remortgage, potentially when unemployed. A bit of risk reduction.

QrizB

SarahB16 said:

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. 

You've assumed zero investment growth over the period which is safe but not necessarily realistic.

£100k over 10 years is 833 a month. If you can manage an average 2% growth (absolute, not real growth after inflation) you can reduce it to 770 a month, £92400 total.

At 5% growth it's 660 a month, £79200 total.

jamesd

QrizB said:

You've assumed zero investment growth over the period which is safe but not necessarily realistic.

£100k over 10 years is 833 a month. If you can manage an average 2% growth (absolute, not real growth after inflation) you can reduce it to 770 a month, £92400 total.

At 5% growth it's 660 a month, £79200 total.

For context the UK market hasn't been a great performer but has historically delivered a bit above 5% plus inflation.

Still, it is good to pay in more than necessary and facilitating possible early retirement or more income in retirement is a happy upside.

jamesd

Bostonerimus1 said:

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.

Indeed. Since I still have my interest only mortgage five years into retirement when I could pay it off I'm plainly comfortable with having debt.

My own need for income is quite low too.

But for our questioner the early retirement goal also tends to suggest that investing far more than just the mortgage repayment will be happening, with drawdown too and likely derisking for both events.

QrizB

jamesd said:

... pay in more than necessary and facilitating possible early retirement or more income in retirement is a happy upside.

Agreed! You've also got ten years to monitor how your fund performs and adjust payments up or down as needed.

Bostonerimus1

jamesd said:

Bostonerimus1 said:

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.

Indeed. Since I still have my interest only mortgage five years into retirement when I could pay it off I'm plainly comfortable with having debt.

My own need for income is quite low too.

But for our questioner the early retirement goal also tends to suggest that investing far more than just the mortgage repayment will be happening, with drawdown too and likely derisking for both events.

Yes, there are psychological and risk attitude factors in carrying debt - along with the numbers. I think part of my avoidance of debt was set at an early age by parents who both remembered the 1930s and came from working class Methodist backgrounds where debt was definitely frowned upon.