What is the right strategy for clearing an interest only mortgage by the maturity date?

[Brendan Burgess]

I moved this from a thread where Miles reported getting €16k redress on his BoSI mortgage and he plans to pay it to reduce the mortgage balance

Basic information
37 year Interest only mortgage taken out in 2006, so maturity date 2043
Interest rate 1.25% tracker

In case anyone is wondering, we will be paying the refund amount 16k off the mortgage. We considered investing but just need to reduce the loan.

I would be interested in hearing your reasoning on this.


As this is an interest only mortgage @1.25% , by paying €16k off it, you will reduce your annual repayments by €200 or €17 a month.

With 14 years to go, it might be worth investing this. You never know when you might need this over the next 14 years.

Why do you "need to reduce the loan"? If you are thinking of trading up, it might be handy to have the money available as a deposit.

If you are not, then maybe put it into a pension scheme.

Have you a plan in place to repay the mortgage in 2043? I see a few different strategies.


A) Make a monthly capital repayment so that the full mortgage will be cleared in 2035. Advantage - certainty. Guaranteed tax-free and risk-free return of 1.25%

B) Invest the "capital repayment" in an equity fund and hope that it will be sufficient clear the mortgage. Advantage - it should return more than 1.25% and you have access to the capital if you need it for some other purpose e.g. trading up.

C) Half and half. Pay down half the capital repayment and invest the other half.

D) Invest until 10 years before the maturity date. Pay down the mortgage with the investment fund and clear the balance over the remaining 10 years by monthly repayments.

These all assume that you have no other investments which you could cash in in 2036. If you have, then it seems clear that contributing to a pension or investing outside a pension would be better.

Brendan

 

[Winter Miles]

Current amount outstanding €420,000 (the 16k redress has not yet been lodged)

For this 1st 6 years of this mortgage we were in significant financial difficulty. I worked in the real estate industry for 10 years up until 2008. I had invested most of my earnings in to property and had amassed approx. €2m worth of mortgage dept across 5 properties. How the banks gave me (I was in my early twenties) the money is another debate altogether.
As a result of the GFC / property crash, my earnings and employment essentially dried up. I left the industry and re-started my career in financial services at entry salary level. 12 years later (today), I am still not earning what I did for 6-7 years in the boom, but I am getting close. My wife has moved to part time work while we raise our 3 kids.
I had to restructure mortgages on 4 of the 5 properties. I could not afford the mortgages nor the tax bill each year. By 2011, I had sold 2 of them but at a cost of €35,000 due to negative equity. I sold the 3rd one in 2017, 10 years after I had purchased it for £300 more than what I paid for it. (apartment near London £195,000) This property washed its face incl Tax for that decade. It caused me a lot of heartache and the only winners were the Revenue, agents and solicitors.

So today, we have the family home and an apartment which is at 70% LTV. The apartment will be full owned in 14 years and its worth about €250,000. Rental income is €16,000 and is on a 1.1% tracker. Thankfully have no other loans, dept or credit cards. We own our 2 very modest cars.

What is our paydown strategy? Trust me, I have lost sleep over this. Given what we have gone through, we are taking a reasonably conservative albeit, mixed approach.

We have about 10k in savings as a banker. This sits in the credit union for emergency.

We are saving an additional €800 per month that when it gets to €5000 or €7000 we deposit it off the mortgage capital.

I have a share scheme in work that guarantees the saving and offers shares at a reduced amount on inception. Currently, the share price is up 60%. I am putting €550 into this each month. After 3 years (2 yrs left to go) I’ll have saved €19,800. I will get this back regardless of share price. If it is still 60% up, Ill get a return of €31,680. Don’t know what to do with this yet. Ill see what I get in 2 years. Once this investment is complete, I will look to reinvest the €550 into a longer term fund to hopefully get a better return than the 1.25% - advice on where to go to arrange this would be welcome.

Between my employer and my own contributions I pay €850 into a pension each month. The Pot is about €80,000 now and I’ve 23 years left until retirement (65).

My wife is in the public sector since 2000 and makes €200 AVCs each month in addition to the public sector pension.

The above strategy will get us close to having the full amount paid off. I think if my earnings increase or my wife goes back to full time, that we will split the additional income into the €550 / equity fund and into our pensions.

 

[Brendan Burgess]

OK, so is this summary correct:

Husband's age: 43 - so 23 years left working

Interest only mortgage balance: €420k - Maturity date 2043 - so 22 years to go.

While it's interest only, paying €10k a year capital off it - So 22 years @ €10k = €220k (Without adjusting for interest or any change in the repayment.)

Apartment €250k
Mortgage €175k - 14 years left to go
Net equity: €75k
Very profitable investment

Savings €10k + €16k redress

 

[Brendan Burgess]

If the apartment increases in value by 3% a year over the next 22 years, it will be worth €480k which would clear the mortgage on your home.

So paying down the €420k mortgage on your home is simply not a priority for you at this stage.

You will be retiring at around the time your mortgage matures, so you will have a tax-free lump sum with which to reduce the mortgage.

While you and your wife are paying tax at 40%, you should both be maxing your pension contributions each year. This is a much higher priority than paying down your mortgage.

 

[Brendan Burgess]

If you have cash left over after maxing your AVCs you should invest it in some equity fund and should not pay down your mortgage.

It is likely that you will get an after-tax return in excess of 1.25% over the next 22 years. So, financially, this will be better than paying down your mortgage which is the same as investing it at 1.25% tax-free and risk-free.

But it's important to have cash as well.

€420k @1.25% = €400 a month mortgage repayments or €5,000 a year.

If you have a share portfolio of €25,000, you will have 5 years repayments just in case anything happens - e.g. if you or your wife lose your job or want to take time out.

But it's also possible at some stage that you might want to move home. Having a lump of cash as a deposit could be very useful. If you have used up all your cash to pay down your mortgage, you will have to sell your home to move home. You probably think you are in your forever home, and you may well be. But plans change. People split up. If you have a load of cash, you might be able to buy a second home.

There is another small kicker. It's unlikely , but it's just possible that it might suit your lender to give you a discount to repay your mortgage early. The bigger your mortgage, the more you will save. I must stress that I don't expect this, but it might happen.

All in all, cash gives you great flexibility as long as you are sensible. If you think it might burn a hole in your pocket, then pay down your mortgage with any cash left over after maxing pension contributions.

 

[Brendan Burgess]

This is the right strategy now with 22 years to go.

But you need to review it every 5 years.

For example, let's say house prices fall over the next 12 years and the sale of the apartment may not be enough to pay off the mortgage, then you should probably take a very conservative approach. Set your savings and investment against your mortgage and overpay it to get it down.