Redemption Penalty workaround

gil13

Rather arrogant way of putting it that. Suggest you go to bed and get some sleep.

Datasafe_2

gil13 wrote: »

Rather arrogant way of putting it that. Suggest you go to bed and get some sleep.

Thats not very nice is it?

Everyone has told you your plan isn't going to work. I suggest if you are too arrogant to accept the advice freely given, then just go and do it your own way.

jamesd

gil13, your plan to go interest only will work fine to reduce the monthly payments, at the cost of increasing the mortgage interest that you pay.

You'd effectively be borrowing each month the difference between interest only and repayment mortgage amounts and paying interest on it at SVR.

If your investments grow at greater than SVR then you will be better off than if you'd been using that invested money to pay the difference between interest only and repayment mortgage amounts. If your investments grow at less than SVR, you'll be worse off.

A guaranteed return on investments of SVR isn't wonderful but it's way better than gilts, say. But the investment to beat is BlackRock UK Absolute Alpha with it's greater than 9% return over the last year and excellent stability. If you used that for the repayment money and it maintains it's excellent results you'd be clearly better off by going interest only and leaving the repayment difference money invested.

Datasafe, it's an entirely sensible plan, so long as gil13 is comfortable with the possibility that investments will do less well than SVR. It's even possible today to buy effectively guaranteed investments (loss only if FTSE falls by more than 50%) that will ensure that gil13 makes a profit by not paying the extra repayment money unless the base rate increases by a few percent.

The plan costs gil13 money on interest on the mortgage capital payments but paying the mortgage capital costs gil13 money on lost investment returns. This is something that everyone who is using a pension or ISA mortgage presumably understands. Those are interest only with investments expected to make more than the interest cost from not repaying capital steadily.

It's really easy to think that it's daft if you only look at the mortgage interest and forget that to make the capital repayments gil13 would be taking money out of his investments and losing investment returns.

It's really unlikely that I'd choose to make any capital repayments if I was in gil13's position. I'd simply switch to interest only and leave the money invested, exactly as contemplated by gil13.

gil13

Thanks jamesd. And Datasafe I don't need your comments on the subject, you hadn't bothered to contribute and offer you perceived wisdom previously had you. You don't know me and I think your couple of lines of opinion are wasted effort. I was very happy with MarkyMark's original comments, if he didn't want to add anymore then he didn't need to, so the tone of his last post I felt was a bit of a let down. He said he was tired, I suggested he should perhaps go and get some sleep, a bit flippant perhaps in retrospect for which I apologise - but to him and not for your benefit datasafe. If you haven't got anything constructive to say then don't bother Datasafe, a lesson you might want to learn.

MarkyMarkD

The problem with this thread, gil13, is that it wasn't clear what you were trying to achieve in the first place.

If all you wanted to do was reduce cashflow for a few years, then your original idea was fine.

But that original plan would be achieved through an overall cost, and therefore it wasn't sensible. In fact, almost any plan which involves people keeping their savings and borrowing at a higher rate, rather than paying off the debt, is unlikely to be good value except in exceptional circumstances.

If you are asking a different question - which jamesd seems to be answering - of whether you can make a better overall return by having an interest only mortgage and investing the funds saved, then jamesd's response is fine. But I don't think many people believe that this is a sensible way to manage their mortgages nowadays, and it certainly won't work if you are going to invest in risk-free savings accounts.

I'm not going to simply ignore an OP's responses, if their responses seem to demonstrate that they don't get what I'm saying. All my final response meant was that you should re-read what I'd already said, and re-consider your plans.

If you want to go ahead with whatever strategy you personally believe is best, then that's obviously fine. Enjoy your reduced payments. And then recognise (maybe a few years later) that it cost you more in the long run.

BTW just to prove that I do (sometimes) practise what I preach, we have no ISA funds at all because we paid a huge amount off our mortgage last summer - at a point where there were no redemption penalties to do so. And we are also on an extended tie product, and paying a relatively high rate (albeit not as high as your SVR), so I am speaking from a position of relevant experience.

gil13

" We are on very low fix with ERC of 3 years (some quite hefty fees which I knew about and accepted, reason - started a family etc..) and was thinking about how we could keep our monthly payment down over the next three years rather than a sharp increase"

In reply to your first assertion. Thought that was pretty obvious, but perhaps you didn't get what I was saying. You may have thought I was re-asking the same thing, but maybe it was because some of the replies I was getting led me to that. I think we'll leave it now, good luck on rebuilding the ISA's.

MarkyMarkD

But you've got the money.

Keeping down payments makes sense when you've got a new family, etc, etc., but not when you've got the money to meet the payments required.

Cutting payments, but at greater cost, simply isn't money-saving. Hence all my comments.

I won't be rebuilding the ISAs; I'll be paying off the mortgage instead. But thanks for the wishes regarding that!

jamesd

MarkyMarkD, having the money or not is irrelevant.

We're not discussing whether gil13 is in financial trouble and about to default on the mortgage or not. If that was the case and gil13 was deliberately choosing to default, it'd be a different discussion.

gil13 can entirely sensibly decide that paying the interest rate difference between SVR and the mixture of cash ISA and investments returns is a good deal. Even if just cash ISAs were used, the SVR might be say 1.5% higher on just 229 a month for three years. The total cost with cash ISAs only? Something in the range of 190 Pounds for all three of the years combined (229*36 / 2 to get average balance * 1.5 * 3 ignoring compounding for simplicity).

I'm not about to be very unhappy with someone choosing to pay 190 over three years to avoid paying 229 a month more for those three years.

Beyond that there's the question of whether to use savings and investments to pay off more mortgage capital.

Paying off the mortgage capital is not money saving if the investments are doing better than the mortgage cost. You're simply wasting money by paying off the mortgage in that position. Many people, apparently you included, prefer the greater certainty and lower returns of paying off the mortgage, even though it's making them worse off and may be eliminating flexibility by locking the money up in the mortgage where they can't get to it in an emergency. That's fair enough. But that does not mean that those who do otherwise are wrong. They simply are willing to look beyond interest cost on the mortgage and see that paying money off the mortgage is losing them the money that it could be making them on their other investments and the flexibility to handle life's problems.

MarkyMarkD

My mortgage is flexible and I can (and do) draw down at will.

Whilst I have ditched my cash investments and paid them off the mortgage, I haven't done so with any equity-based investments and I continue to make those investments. So I've over-simplified my situation, because it boils down to the essential point - there's no point keeping cash lying around, whilst borrowing at a higher rate than the cash is earning, unless by doing so you improve your flexibility. And if that's the case, we are having a different debate, which is about flexibility rather than value for money/money saving.

You continue to talk about the investments doing better than the mortgage cost, but the OP hasn't said whether the investments are entirely cash based or diversified to provide a greater long-term return. I am guessing that they are in fact cash-based in which case they won't make the necessary return to match SVR.

You say you aren't very unhappy with someone "wasting" £180. Other posters on here would almost die at the prospect of "wasting" that amount of money.

jamesd

gil13 did specify savings and investments, so it appears to me that gil13 is writing about the two as different things. gil13 clearly does gain in flexibility for paying that money. There's the possibility of another child and his wife not working as well as the usual risks of unemployment and sickness. If his mortgage allows drawdown even while unemployed I agree that it it might make sense to overpay the mortgage rather than keep all of the lower rate cash savings.