Offset mortgage - is plan feasible?

hugheskevi · 18 July 2018 at 8:35PM

I'd be grateful for any comments/thoughts anyone may have on a possible future financial plan I am considering. I've set out details below - I'd be very interested if anyone with greater knowledge of mortgages than I have can see flaws in the plan or suggest improvements. I'm comfortable with all the financials, my concern is that the mortgage aspect will not be viable. Thanks in advance.

My position:

Current house value=£500,000
Current mortgage (fixed rate to April 2020)=£55,000
Cash/liquid investments (excl pensions) net of all other debts other than mortgage=£83,000
Age 40
Plan to retire around age 43
Can access one of my pensions at age 50, will provide modest income (between wife's pension and my pension, £25,000 p/a)
Plenty of other pension assets, but can't access them until age 55 (with risk of pension policy change making this potentially 58)

The problem
If I retire at age 43 I will have about enough assets to last through to age 55, but would have to work longer to be certain of having sufficient assets and to cover risk of pension policy change meaning I cannot access pension funds to age 58.

Potential solution
I am wondering if taking out a Lifetime Offset Tracker Mortgage might be a good way to increase flexibility, as well as being tax-efficient by using additional pension savings. I think I would need the Lifetime element as I would be unlikely to be able to get any remortgages after leaving work due to inadequate income, although after age 50 this may be possible due to having some pension income (between myself and wife it would be about £25,000 p/a).

I would take this out in April 2020 when current fixed rate mortgage ends. I have not researched particular mortgages in detail, but the sort of thing I would be looking at would be this mortgage from Barclays or this mortgage from First Direct.

The plan would be to fully offset the mortgage initially, and then in later years (as I approach age 55/58) if required I could use the offset savings to supplement income and only pay the (relatively low) mortgage interest rate on the funds taken. Then I would repay the mortgage balance using remaining offset funds plus funding from pension assets.

Possible issues
(1) I plan to go traveling after leaving work, probably for 2-3 years. Having the offset mortgage would mean I rent out the house, so would need to obtain consent-to-let (if consent-to-let limit was 2 years I would return in that period). I would ensure I left to go traveling after the minimum period required by the mortgage T+Cs before consent-to-let can be applied for.

(2) When I return, I plan to move house to another area. The new property would be lower value than my current house, probably about £400,000 at today's prices. Hence I would need to port mortgage (and at that point would have no income, at best I would be on unpaid leave from current employer, although I would have no plan to return to work).

sal_III · 18 July 2018 at 9:08PM

Not the most appropriate title. Lifetime mortgage is something completely different.

edit:
I would just work 3 more years to 46 and make sure to be mortgage free on retirement. This should also cover the gap from 55 to 58 you are afraid of, by shifting the spending of your savings from 43-55 to 46-58.

AFAIK most mortgage lenders are not happy with 100% offset mortgage.

Also pretty sure you are supposed to notify the lender if your change jobs or quit work altogether, so another potential setback.

Also you mentioned unpaid l;eave from your employer. It must be some very nice guy to keep you on their books for 2-3 years sabbatical.

jkwer521 · 18 July 2018 at 10:22PM

My long term plan includes a similar approach, and I have been considering the same lenders (FD and Barclays), so I would be interested in any comments.

The first thing that strikes me is that you appear to have net liquid assets of £28k. Will this, plus an additional 3 years work be enough to take you to age 50?

The other question I have is whether you would intend to increase your mortgage when you move to offset just before retirement? If so, what reason would you give for the increase?

As mentioned, my overall plan is similar. I would take out the maximum mortgage with maximum term available. There would be no point in paying off the mortgage entirely because it would be the same as going 100% offset and would reduce flexibility. The lender may not be "happy" but as far as I know that is a risk they take by allowing you to offset, and I wouldn't expect them to be able to close the facility on that basis.

My reasons are that it allows greater flexibility and you are essentially borrowing against assets in your pension. Part of my plan was even to draw money from the mortgage to use some of my ISA allowance in the couple of years before being able to draw money from my pension.

jkwer521 · 18 July 2018 at 10:34PM

Also, I don't think you need to tell the lender if you change jobs or stop work during the term of the mortgage on your current place.

However, you may have a problem porting the mortgage to a new property, as they may want to re-assess your finances and, at that point, they may also notice that you have kept the account 100% offset and that they are not making any money from you.

FD, for example, say that if you port the mortgage, it would be subject to "financial status" and "our normal assessment criteria"

https://www1.firstdirect.com/content_static/pdf/offsetmortgage_tandc.pdf

hugheskevi · 18 July 2018 at 10:48PM

The first thing that strikes me is that you appear to have net liquid assets of £28k. Will this, plus an additional 3 years work be enough to take you to age 50?

Yes. In addition to net liquid assets there will be £100,000 (less expenses) arising from move to cheaper property. I'll be targeting something like £30,000 - £40,000 p/a plus extra for the years of travel which will more expensive than normal annual expenditure. So that will also be using some non-pension funds for age 50-55 (maybe 50-58) period too.

The other question I have is whether you would intend to increase your mortgage when you move to offset just before retirement? If so, what reason would you give for the increase?

I'd aim to borrow whatever I could subject to Loan-to-Value and income multiple restrictions. Probably something like £200,000. Unless I had reason to expect it to be an issue (I would probably use a broker given the slightly unusual arrangement), the reason for borrowing more would be flexibility of offset arrangement, so as to have funds available in case of things like redundancy, sickness, unforeseen expenses, etc, with intent to use additional funds to offset balance initially.

However, you may have a problem porting the mortgage to a new property, as they may want to re-assess your finances and, at that point, they may also notice that you have kept the account 100% offset and that they are not making any money from you.

Not being able to port is one of my key concerns. It is likely (but by no means guaranteed) that I will leave my employment on unpaid leave, so if there were to be any re-assessment of finances I would be arguing I have a job which comfortably covers mortgage payments. In worst case, I could even go back to work for a few months to get an actual income.

zagubov · 18 July 2018 at 10:58PM

jkwer521 wrote: »

Also, I don't think you need to tell the lender if you change jobs or stop work during the term of the mortgage on your current place.

However, you may have a problem porting the mortgage to a new property, as they may want to re-assess your finances and, at that point, they may also notice that you have kept the account 100% offset and that they are not making any money from you.

FD, for example, say that if you port the mortgage, it would be subject to "financial status" and "our normal assessment criteria"

https://www1.firstdirect.com/content_static/pdf/offsetmortgage_tandc.pdf

This is true for FD. Their rates are competitive but they are very picky about who they accept. You will have a long telephone interview with them and if you make any changes expect to be put under the microscope.

Becoming an overseas landlord of a British property will need good planning and use of a trustworthy letting agent. Plus, how many people's permission would you need? Your lenders, your insurers? Will your tenants run any business from home?

jkwer521 · 19 July 2018 at 1:30PM

If I were in your situation, I would consider moving house before retiring. I think it's easier to increase a mortgage at the point of purchasing a new property and it would also mean you don't have to port.

The issue still remains around consent to let, but that would be similar either way.

hugheskevi · 19 July 2018 at 5:13PM

Becoming an overseas landlord of a British property will need good planning and use of a trustworthy letting agent. Plus, how many people's permission would you need? Your lenders, your insurers? Will your tenants run any business from home?

Yes, I'd use a fully-managed service of a local letting agent. The property is a free-hold house so no unusual permissions would be needed. It is in a residential area so would not be expecting any business-use.

If I were in your situation, I would consider moving house before retiring. I think it's easier to increase a mortgage at the point of purchasing a new property and it would also mean you don't have to port.

Agree that would be better, but I will be moving from a house in London to a large and very rural and isolated property in west Wales. Obviously it will be a lot more straightforward to let the London property.

I think my choices are between:

(1) Just sell house, go travelling, buy house on return. Pros:simple. Cons: least efficient, will need to work longer than necessary to build cushion against uncertainty.

(2) Plan to let London house. Pros: most efficient. Cons: (i) will be landlord and don't especially want to be (but quite familiar with obligations and responsibilities), (ii) possible issues around consent-to-let but probably okay, (iii) key risk about porting which will remain unknown until too late, only mitigation is if I leave employer on unpaid leave enabling me to return with income, even then there are no guarantees.

There is also the consideration that the rental yield over 2 years will be substantially above the return from selling house and leaving money in a deposit account. When combined with unpaid leave option which would, in the worst case scenario, enable me to just work a year or two later on if necessary, it may be enough to justify taking an uncertain path that if it works, great, and if not I just end up having to work a bit more after getting back from travel. So perhaps it isn't as much of a risk as it initially appears.

zagubov · 19 July 2018 at 10:24PM

Spending multiple years abroad, other things to consider, if you've kids, their entitlement to post-school education funding (FE/HE rather than sixth form), maintaining your UK address for NHS access. These may have cut-off points (or may have in the past). I'd do some research.

hugheskevi · 20 July 2018 at 9:24AM

if you've kids, their entitlement to post-school education funding (FE/HE rather than sixth form),

No kids

maintaining your UK address for NHS access.

I've traveled overseas for 1+ years previously. I used parent's address and they opened any mail for me. This time I will probably use a virtual mail address (parents getting on a bit now), where a company give you an address and will open, scan and e-mail any post you receive. Redirecting everything maintains a credit record (although most things will have been closed so not much of a record, just bank account and a couple of good overseas credit cards), although you drop off electoral register for a while.

Having virtual post along with things like WhatsApp/Skype, etc, for texts and calls, roaming in EU, local SIM cards for data all along with e-mail, there is not too much difference between being in UK and traveling.

AdamAJP · 10 May 2019 at 1:26PM

We're on one such mortgage and although we have savings - they are all in stock & shares ISA's and high interest accounts as the saving from putting any cash in the offset (we never have) would be less than the money we could earn on the ISA investments.

Hope that helps a little?

Offset mortgage - is plan feasible?

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