Change Mortgage to Interest Only to Invest the Capital Repayment Element

BarleyGB

I would appreciate some advice about the benefits/risks of changing my mortgage to Interest Only (which my bank offer subject to conditions) for the remaining 13 years, instead of paying the bank I will invest the £1500 (per month) capital repayment element 

Current Situation - balance is £240000 (50% LTV), ive got about 13 years left currently.  My very low 5 year fixed rate ends in December, I anticipating a remortgaging for a approx 3.75% increasing my monthly interest payments by about £500 (which I can afford)

Proposal - My long term investment returns from SIPP, S&S ISA, DC Pension are 8-11% a year, so theoretically investing the capital element of my mortgage (£1500 per month) should generate a return of around 3%+ more than id be paying in interest.

Potential Outcome - Calculator.net indicates that incremental investments of £1500 a month with a 7% annualised average gain should generate a final balance of approx £374,000.  Thats compared to £240,000 I would owe the bank at the end of the term.  A notional gain of £134000.

Pension Tax Relief - Id propose to pay the money into my SIPP, im a higher rate taxpayer so there's a 40% tax relief to consider, so the overall gain could be even higher.

Risks / Mitigations -  Markets underperform (Ive only got to achieve 4% average growth to make this worthwhile) Market crash (ive alternate sources of funds, DB Pension, BTL equity)

What are your thoughts on the above, its certainly not risk averse but ive a reasonably high appetite for risk.  Are my calculations correct, are there any other negatives/risks I should consider?

A compromise option could be to change mortgage to 50% Interest Only, leaving 50% as Capital Repayment

Isthisforreal99

The most obvious pitfall is how are you going to get an interest only mortgage on what seems your residential property. They are not availabke on demand.

BarleyGB

A further consideration is that im planning to retire in 2-4 years time.

Ive already decided not to clear the mortgage from investments/assets at retirement and likely let it run till end of term. This is on the basis that ill gain more by keeping the £240000 invested.

I would only get the 40% pension tax relief for another 2-4 years while I remain employed and a higher rate tax payer. Im not fully sure of the rules but believe after ive started drawing pensions ill only be able to contribute up to £10000 a year to my pension so the £1500 a month would have to go into S&S ISA or a partial amount to my SIPP

Isthisforreal99

If it was as easy as you think it is, we would all be doing it.

BarleyGB

Ive spoken to my bank, Interest Only is an option with using the property as the security, subject to a £300,000 equity buffer. Im slightly shy of the required equity but would quality for changing £150,000 to interest only currently. Part of my retirement plan included selling the property at some point (or change to BTL/sell).

£150,000 interest only changes the notional gain to £83000, plus any pension tax relief benefit

etienneg

https://forums.moneysavingexpert.com/discussion/comment/81861563#Comment_81861563

Having taken any flexible income from a pension, you can pay up to £10,000 into a pension only if you have this much in earned income (including, I think, income from property rental). If you are at this point no longer employed, the limit is £2880 net (£3600 gross).

jimjames

https://forums.moneysavingexpert.com/discussion/comment/81861593#Comment_81861593

Most people wouldn't want the risk but it's essentially what endowment mortgages were

Albermarle

For non earners ( pension income does not count) the maximum you can add to a pension is £2880, and £720 will be added in tax relief.

Regarding the bigger plan, I would maximise pension contributions whilst still working, at least enough to take full advantage of 40% tax relief. The amounts actually involved will depend on how high your salary is /How much 40% tax you pay. The 40% tax relief would largely mitigate any risk from converting your mortgage to repayment only.

Otherwise it would be interesting to know what you plans are for the future for the money. If you are accumulating money for its own sake, then I am not sure I would be taking the risk with the mortgage, as the possibility of a long drawn out downturn in the markets is always possible. On the other hand if you have definite future objectives that would need high funding, such as second home on the Cote D'Azur, then the risks would be more for a good reason.

Bostonerimus1

Wow, the plan to go interest only is super risky and foolish IMO. You need to consider all possibilities. So what will the OP do if there is a 50% fall in the markets that takes a decade to recover?

poseidon1

You are not going to find much support for your proposal since my impression is the vast majority of forumites are very conventional where mortgages on their homes are concerned, ie to pay off as soon as possible and preferably no mortgage going into retirement.

I do not follow that mantra.

Being single, no dependants I abhor vast amounts of dead capital sitting in the home unutilised. Therefore I have had interest only mortgages for 20 years, until I was forced to redeem a couple of years back when the final term finished, and my gross income ( in retirement) did not quite reach the required qualifying threshold.

Now have a smaller capital repayment mortgage which will be switched to equity release when next move home. The released capital will add to my investments to boost spendable income on my expensive indulgences.

Interest will be allowed to roll up and increase the equity release debt, since I have considerable IHT exposure which will worsen when DC pensions become taxable after 2027, so a mortgage also forms part of estate planning.

If your personal profile is similar to my own (single, no dependants), and you have a reasonably high appetite for risk, then I can see no issues with your plans, especially given your diverse asset base and income sources.

retiredbanker1

What is your current salary?

A minimum of around £75,000 sole alary is required these days before they even look at your proposition.

You may also find that a mortgage employee with a bank will have a very different opinion of risk to that of an underwriter who will say yes or no.

If it goes wrong and you complain that you were given 'wrong advice' - well they might think it not worth it for them reputation wise.