pension/LISA in lieu of principal?

Gilb

Hello,

I have just started a mortgage, but a couple of things has just occurred to me

1. an MSCI world tracker fund is very likely to outperform savings over the time horizon of a 25 year mortgage
2. stocks and shares can be bought with an effective 25% addition (in the case of a LISA) and 66% by adding to my pension.

The above is making me question the opportunity cost of paying the principal of my mortgage.

I'm just wondering

1. would "I'm maxing out a Socks and shares LISA until I'm 50 which will likely (assuming 7% interest) have 110% of the mortgage balance (assuming I don't overpay any of it) by the time I'm 60" be a credible plan to a bank if I where to get an interest only mortgage?
2. would a likewise pattern involving adding the money that I would otherwise pay as principal into my pension so I could pretty much cover some via cash-free withdrawal or even via my estate be a credible plan for a bank?
3. would presenting a likewise payoff plan convince my bank to increase the length of my current repayment mortgage? (or could I just keep setting the repayment period to 40 years until the end of the fix)

*edit: correct "principal"*

Mark_d

In my view, for the reasons you've realised, it makes sense to delay repaying the capital on your mortgage for as long as possible.

I took out an interest only mortgage (several years ago) with Halifax on the strength on making very significant pension contributions each month.

I am currently on a repayment mortgage due to the difference in interest rates available when buying my current place, but I'm now intending to switch to interest-only at the end of my fixed-rate period.  My understanding is that lenders want much more security rather than just a commitment to saving the money.  I will need to show that my ISA portfolio is worth more than the outstanding balance on my mortgage.

I suggest you talk to a mortgage lender or broker to find out how you can get an interest-only mortgage.

Hoenir

The Financial Services Authority - Mortgage Market Review: Responsible Lending  completed and published 2010. Provides a comprehensive overview of why interest only mortgages are uncommon products these days. 

Financial disasters happen when the last person who can remember what went wrong last time has left the building. 

ACG

If you plan on using savings/investments, you need to evidence that you are paying into savings/investments prior to starting the mortgage application. Some lenders might want to see 6-12 months worth of payments. 

However, interest only mortgages have tightened up a lot in the last few years. There are not as many interest only lenders or products and so they do cost more.

hugheskevi

You describe a pension mortgage, so you can start by googling that term for more information. Note that you are discussing not repaying the principal, not the principle.

Using a pension to repay mortgage is very tax efficient and in principle a good idea. It is a balance between tax efficiency, investment volatility, and liquidity of funds.

It is something I started off doing, changed course as eventually repaying mortgage became both trivial and also financially the best thing to do, and now I am once again doing it after buying a more expensive property. The closer you are to minimum pension age, the easier it is to manage.

Personally, I kept the borrowing and repayment entirely separate, simply taking out a repayment mortgage over as long a term as possible to be repaid from income. I generally paid the minimum, and took out additional borrowing when taking out another mortgage at the end of fixed terms. Meanwhile I entirely separately saved into a pension.

It would be worth considering whether saving into LISA is best if you have higher rate tax relief available. Even if you are using all your higher rate tax relief, if you think you will have unused higher rate income in the future it may be better to save into a stocks and shares ISA instead, and later use those funds to finance pension contributions in the future.

Also consider the sums involved as you reach the years immediately prior to minimum pension age. If most of the value of your property is invested to cover the mortgage, as well as your pension for retirement, you are likely to have considerable sums invested. The volatility on that may be difficult to manage, as even small ups and downs may well be multiples of your income.

Another difficulty may be the Lump Sum Allowance which restricts the amount of tax free lump sum you can take. That is probably likely to remain frozen in cash terms and wither over time, but it could be reduced. The amount of tax free cash available has been reduced from £450,000 in 2010 to £268,275 currently. You need to be aware of what policy change risk you would be exposing yourself to.