One way, or another... Minimum or maximum payments?

WindfallWendy

I'm making a ten year plan to retirement which will need to include getting the mortgage paid off. I'd really appreciate views on the options I see ahead, and other suggestions/pros and cons thereof which I may be missing.

The ultimate plan is in ten years we will move house to release equity, pay off whatever is left on the mortgage and buy somewhere that doesn't need a mortgage and hey presto, mortgage free.

Situation

We have to remortgage in Nov this year from our gorgeous sub 1% onto something probably closer to 5%. Repayments currently £1000/month. Future repayments expected to be between £1200-£2500 (don't feel we can go beyond £2500).

Mortgage outstanding: 240,000

LTV: 40%

Savings/cash: £180k

Option1

Pay most of it off in November with savings/inheritance, and managed a tiny mortgage easily for the next 10 years, whilst rebuilding savings.

I don't really want to do this as I have £100k in a S&S ISA which is doing quite nicely and compound growth makes it feel worth holding on to.

Option 2

Take out very long mortgage (30years?) to make minimum payment onto mortgage (£1200) and pay £1300/month into S&S ISA and in ten years use that, alongside the house sale to clear mortgage/buy somewhere else.

I think this would see us reduced the mortgage to £192k, with potential for the S&S to cover the remainder, and we'd be quids in on the sale /cash purchase for a new place.

Con of this would be all the interest we accrued by not paying as much as we could afford, and instead expecting investment elsewhere to exceed that.

Option 3

Take out very short, 10 year mortgage and clear it all by repayment. Any cash we get released then becomes problematic as it isn't in a tax free wrap around and we'd have to pay tax on interest for a year or two.

I think I have probably answered my own question by taking the time to set it all out like this.... Option 2 is my preferred route. But the interest being accrued on the longer lasting loan does make me feel a bit sick. But there isn't really any way to avoid that other than pay more off 😄

And ultimately it will all be paid off when we sell anyway. So maybe it doesn't matter.

Any thoughts or insights from the experts who are already on this road?

Thanks advance.

Markdavid1962

Lots of options and it is really a matter of choice. I aimed to retire at 60 and paid the mortgage off early, at 55 then carried on saving the mortgage payment in to another account until we could purchase a holiday house in Spain, retired at 60. I did the following.

Assuming you will be over 55 when you pay the mortgage off

Have you taken in to account over paying the mortgage each year, so save on the interest on the mortgage

You could also take a SIPP out and put cash in each month with the tax relief from the Government added, then at the required time in 10 years draw the 25% tax free out of the pension pot and put it towards clearing the mortgage, plus if you are a 40% tax rate taxpayer claim the additional tax relief refund

WindfallWendy

Hm, I had been pondering a SIPP but it felt overwhelming and would be taxed at the other end. But maybe we should look at that. We could then keep our existing S&S isas for other money.

Do you think £700/month (each) over ten years would create a worthy pension pot?

WindfallWendy

Does/can you get a SIPP that offer reassurance that the money going in will definitely be there in 10 years? I.e. is it more reliable in that sense than a S&S ISA?

E.g. £500 + 25% = £625

625x12 = £7500

In ten years it will be at least £75,000

....or could it have reduced in value? Because I guess the additional 25% makes the SIPP a great option. It would just be taxed coming out (subject to other income I received), right? (which if I keep below the income tax threshold and just spend from my savings at that point, isn't a problem...is it?.)

edinburgher

Keep in mind that it's unlikely that lenders would give you a 30-year mortgage if you're 10 years from retirement unless you have generous retirement provision planned. Based on your comments about pensions, it doesn't sound like that's the case (unless you have "gold plated" defined benefit pensions that don't require you to understand investing)?

WindfallWendy

Fair point - I just mean as long as they will give us. I'm 48, so if we are lucky, maybe we'll get 25 years.

I do have DB pensions and combined with inheritance and house equity, I think we'll be comfortable.