Change Mortgage to Interest Only to Invest the Capital Repayment Element

BarleyGB

https://forums.moneysavingexpert.com/discussion/comment/81863399#Comment_81863399

I agree, we seem to share the same outlook. I’d describe myself as an experienced investor, I’ve also been self employed, run a business and spent much of my career in Financial Services.

You’ve eluded to the financial sophistication of the average person (possibly low), then the financial sophistication of those who that frequent these forum (certainly higher than average). All suggestions should be taken with a pinch of salt. Ultimately it’s your own decision.

I think I’ve settled on a compromise, I.e not to leverage the whole outstanding mortgage but to look move £150,000 to interest only (assuming the bank accept this). I’m going to discuss it with a couple of people I know and take a few more days to think about. For me the upsides (extra capital accumulation, optimising pension tax relief before and during retirement), having an higher amount in tax efficient ISA/SIPP, are very appealing. Pension building is only one half of retirement preparation, the other is effectively minimising tax.

For those asking the purpose of this, it’s mainly to optimise my post retirement tax position. Feeding an extra £150,000 into Pension/ISA plus pension tax relief and hopefully growth over 13 years will offset £400,000 of BTL equity which I’ll realise as I sell 3 properties in the next 5-13 years. If I don’t sell the residential property (my house)I’ll use the BTL equity to clear the remaining mortgage. If I continue on capital and interest payments to the residential property, I’ll have much larger chunks from BTL equity in non tax efficient accounts for longer. Lastly assuming an average outcome it should hopefully net some gains from investment growth, though there are of course risks I could lose money.

Bostonerimus1

Tax planning is a more legitimate reason for debt leverage than some nebulous desire to grow wealth. However, the idea that using debt leverage strategies displays a level of financial sophistication is amusing. You could also describe it as hubristic and lacking a grasp of risk vs reward - I'm reminded of the "Long Term Capital Management" disaster. For most people who have relatively simple finances and lack the experience to manage risk the potential downsides are probably best avoided and so the forum dogma of paying off a mortgage is best followed. Of course remaining in hock to a bank through a mortgage or equity release is the opposite of financial independence.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81863399#Comment_81863399

Yes, I have come to realise that many posting in these forums ( with certain exceptions) are those with little by way of experience or sophistication in financial matters generally, which can be somewhat frustrating , when it comes to more complex matters that these same individuals may unwisely expose themselves to such as trusts

I think you just have to accept that the large majority of the public are very uneducated/uninterested in personal finance matters, including many who have a good income/professional jobs. Or even worse they have a little knowledge gleaned from social media and a mate down the pub, and we all know a little knowledge is dangerous. At least if they come to the forum, someone maybe able to point them more in the right direction. It might not be sophisticated in many cases, but every little helps as they say.

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/81863894#Comment_81863894

My belief is that people don't need to be very sophisticated to successfully manage their personal finances, They need some common sense, basic maths and the ability to follow a few rules. Debt leverage might, or might not, work for the OP. But for most people K.I.S.S, should be the rule of the day and keeping debt to a minimum and paying it off asap is part of that.

sweeter_strudel

I'm from the school of "don't pay the mortgage off early" but only because I've always been in the school of "shovel as early and as fast as you can into PEPs/ISAs and pensions".

I'm now mid 50s, retiring this year and have three properties in the more scenic but cheap parts of the UK. I have one (tiny - "biscuit money") sized DB pension and am one of the first of the next generation who will only have DC pensions to rely on.

....I realised on starting my first ever proper job, as a well paid STEM graduate, that I would never be retiring comfortably, and definitely not early, relying on only the company's DC pension. Luckily one of my hobbies was stock market investing ( my Dad was an influence there) .... I decided to dedicate more time and effort to it that day I signed my first work contract.

Bought a flat with a mortgage in the early 90s (just after 15% interest rates and the UK leaving the ERM) and when the cheap fixed deal finished after 5 years I had a choice of paying it off in full from my investments or to remortgage onto another cheap deal - I reckoned I could beat the mortgage rate by (spending time and effort) stock market investing. Over the years ever since I've remortgaged numerous times and done a mix of repayment and offset loans.

I got a red "Underperforming Endowment" letter in the early 2000s which was like a red rag to a bull - I was furious - and decided to up my time and effort spent on stock market investing - made somewhat easier by the arrival of the Internet and online trading....

I still have one mortgage cos I still like the idea of using the bank's money to feed my ISAs and avoid 40% tax via my pension. Basically using leverage.

My most recent remortgage (about 50% LTV) was shortly after Truss's 49 Days. I didn't like the idea of being locked into painfully high capital repayment mortgage rates, so went to a slightly more palatable interest only, and put the matching cash as if it was repayment mortgage, into an ISA. I set myself a personal challenge of paying off the mortgage within the three year term, just from my matching cash investments. Just over half way through I'm ahead of target growth - thank a US president and a timely focus on gold investments.

If you aren't willing to put in the hours to look after stock market investments and don't have the cushion of being very employable in a well paid field, then this strategy is not for you.

If you can cope with investing in a S&S ISA and are sensible enough to buy low cost tracker funds I would suggest a 50/50 split to investing versus paying off the mortgage.

If you don't know what S&S stands for pay down your mortgage as fast as possible and have the security of owning the roof over your head.

.....and with all three strategies be lucky and stay healthy.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81864704#Comment_81864704

Interesting post, but just want to put some context to your comment about pensions.

I'm now mid 50s, retiring this year and have three properties in the more scenic but cheap parts of the UK. I have one (tiny - "biscuit money") sized DB pension and am one of the first of the next generation who will only have DC pensions to rely on.

Apart from people working in the public sector, normally only those working for larger companies in the private sector, would have had a DB pension, and sometimes only the staff/management, even before most of them got closed. Those working for smaller firms would have normally only had a DC/Money purchase scheme, if they were lucky enough to have a workplace pension at all.

In fact many Millions of people had no pension at all building up ( DB or DC ), until auto enrolment came along.

LHW99

If you aren't willing to put in the hours to look after stock market investments and don't have the cushion of being very employable in a well paid field, then this strategy is not for you.

And if you were brought up in a household where there was very little spare money or certainty of regular income, you would often be one to avoid taking on much debt for any purpose.