Unusual approach to mortgage

maxaxe

I'd like to buy a house with my partner (aged 32/33; first time buyers). Financially, I see the advantages as:

• mortgage interest and house running costs less than market rent rate (hopefully)
• hopefully appreciating asset with no capital gains taxes
• tax free income (rent a room scheme)
• increase in inheritance tax free allowance (we have a young daughter)
• try to use pensions to repay mortgage (with associated tax benefits)
• cheapish borrowing (I'm optimistic that global equities will rise by >6% anually in nominal terms over the 30-40 year time horizon of a mortgage).

We are fortunate in that we have around £100k in our LISAs for a deposit, which also caps our purchase to £450k. I think there is a sweet spot around a 10% loan to value ratio, giving us around a 4.5% rate?

The first preference is to take out an interest only mortgage to maximise our borrowing amount and duration (remember, this is predicated that borrowing is cheapish). But they are onerous in their terms, depending on lenders, typically requiring >£75K annual income, >25% loan to vaue ratio and unreasonable assumptions about what I will do with my pension upon recieving the mortgage.

Instead we would like to take a 2 year fixed term repayment mortgage. At the end of the term, remortgage to a 10% loan to value repayment mortgage, again fixed for 2 years, with cash in our pockets. Repeat for many years, each time taking cash out if the property has increased in value.

Amortised, the amount of capital repayment may only be 15%-20% of the total amount paid to a lender over the 2 fixed years. As an added bonus, this would allow us to effectively move cash from out LISAs out before we turn 60 without the 6.25% penalty?

Does anyone else agree with me/is already doing this? For this, where do people think the sweet spot for loan to value ratio is? Is it a problem to remortgage from a say 25% loan to value ratio to a 10% ratio, taking cash?

What are some risks/things to bear in mind doing this? Off the top of my head:

• risks of equity performance and volitility in global equities
• remortgaging typically only allows terms to a certain age so repayment mortgages will spike in price over time
• the risk of not getting a sufficiently good rate/deal when remortgaging (30 year sonias and gilts seem less than 6% at the moment)

MWT

as an added bonus, this would allow us to effectively move cash from out LISAs out before we turn 60 without the 6.25% penalty?

If I've understood this part of your plan correctly it will not work, you can only avoid the penalty when you use the LISA as part of an initial purchase, you cannot use it as part of a remortgage.

Also you seem to be using LTV the wrong way around, 10% LTV on a £450k house would be a mortgage of £45k leaving you to put down a deposit of £405k …

maxaxe

My bad on the terminology for LTV ratio, I guess I meant 90% etc.

Regar

maxaxe

My bad on the terminology for LTV ratio, I guess I meant 90% etc.

Regarding the LISA, my intended meaning was to use the full £100K LISA to take a 75% LTV mortgage on a £400K house (for example). After 2 years, if I remortgage on a 90% LTV ratio, I should get around £60K with equity of around £40K in the house. In this sense I have moved some money from the LISA into my pocket before turning 60 and without paying a penalty. Does this make sense?

Altior

I'm not sure you can get additional borrowing to invest it (without fibbing), and you'll always likely be paying a higher interest rate than necessary. With no real idea of what the rate might be.

I can see the overriding intention, for me the best way to go about it is to have the term as long as possible, giving you the lowest monthly repayment. Invest spare income into places where it can be liquidated if needed (for example, very high interest rates). Anything can happen with stock markets, my preference would be to use a mix of cash and equities (again, rate dependent). I think you ideally want to be always reducing the capital balance to some extent.

Jemma01

Sorry it's early in the morning and I'm not sure I missed it. At what point are you planning to pay your mortgage? By the age 60, how much money would you owe on the mortgage? How long are you planning to work for? What do you anticipate the monthly payments to be when you approach 60 with potentially 8 years left lenders are prepared to remortgage for before standard retirement age?

Does your calculations reflect on how difficult it might be to get a mortgage at a later age with a decent rate? or even keeping a job in this volatile market?

MWT

https://forums.moneysavingexpert.com/discussion/comment/81925994#Comment_81925994

It wouldn't be 'additional borrowing' if they remortgage to a new lender, but then you have the costs of doing that to take into consideration.

I can see doing that once to get say £40k out, but doing this repeatedly feels like it would be relatively expensive in the long run and is depending on growth in value in the property market that is far from certain.

maxaxe

https://forums.moneysavingexpert.com/discussion/comment/81925994#Comment_81925994

From this, I gather you need to tell a lender what you plan on doing with the cash if you remortgage onto a higher LTV ratio? If a holiday/new kitchen/flash car were acceptable reasons to remortgage at a higher LTV ratio, then surely my reason of investing in a pension would be acceptable too?

maxaxe

I have some idea of the rates that I expect on average over the next 30ish years. I can look at 30 year sonias and gilts and assume my rates will be maybe 0.5% higher.

maxaxe

https://forums.moneysavingexpert.com/discussion/comment/81926014#Comment_81926014

Planning to pay off mortgage as late as lenders allow it, to maximise the advantage to me, so maybe 75 or later if specialist lenders allow it.

If I follow the plan, and assuming that my partner and I can get a 15 year mortgage at 60, then mortgage will be around 90% (rates depending) of the value of the house when I'm 60. Monthly repayments will increase as remortgage terms shorten so this plan won't be viable for ever. Perhaps switch to a 75% LTV interest only mortgage around this age/when we can no longer afford the monthly repayments?

I plan to tell the mortgage company that I will work to 75. But asking a 32 year old when they will retire is mostly like asking how long is a piece of string. I will work at least to the point where I can afford to pay off the mortgage.

My calculations do reflect somewhat about expeced future rates, as far as we can tell for now. Historical global equities returned around 10% nominal since the end of WW2. 30 year sonias and gilts seem less than 6% for now. Of course they can change.

If my partner or I became permanantly unemployed (death or illness), then that would blow a hole in this plan. But I suspect almost all mortgages are conditional upon continuous employment, so that's just a risk of borrowing so much money.

ACG

I am fairly sure there is nobody doing this.

A mainstream mortgage is exactly that, its for the mainstream person. What you want to do is not mainstream.

Have you spoken to a broker about just going interest only from day 1? Just because most lenders want 75% LTV and £75k income does not mean they all do. Chances are you will pay a premium, but taking out the faff and headaches of finding a new lender who will be happy to lend you the money to put into a pension seems like a nightmare.

There are lenders who will lend for anything legal. The problem is, your planning on putting money into a pension and there is then an argument about whether that crosses over into financial planning which opens up a whole new can of worms.