Mortgage Holiday over!

Our 3 month mortgage holiday is over and back to being a mortgage slave! Let’s hope the holiday doesn’t destroy our credit rating! What are the wider impacts of this and what does it mean for someone looking forwards to Financial Independence?

For a bit of background; I decided to take a 3 month mortgage holiday back in April because I recognise that in some ways paying off the mortgage is waste of money. The original post is here. With interest rates so low, the money saved on the mortgage (around 1.75% for us) can be easily covered by investing in stocks (VWRL yields around 2%). 2% ain’t much you might think and the carry trade is only worth 0.25% but money invested in April is worth a lost more now in August as you can see from the VWRL chart below. The money that we didn’t use to pay the mortgage actually grew for us by about 25% which adds up to over 2 months mortgage interest – a nice little gain for relatively little pain (spread out over the rest of our mortgage term)

But do you know what, it’s not the mortgage interest that bothers me but the capital. We paid around £200 a month in interest and £500 in capital repayments on our house and that £500 is a drain on our cashflow for the next 20 years or so – by which time I’ll have access to my SIPP and 25% tax free lump sum.

So the mortgage is easy to pay – £200 a month is less than it would cost to rent a room in our city – and even the capital is not too bad but at £6,000 a year, it’s a sizeable chunk of our future cashflow. If we looked at not working again and living off our pre-pension / or FIRE funds then we’d get maybe £20,000 a year to live on. Take £6,000 from that and you are left with penury! Repaying a £150,000 mortgage at £500 per month is 300 payments or 25 years! In 25 years I’ll be in my 60s, able to access my pensions and that take advantage of the 25% TFLS & LISA – so postponing repayment until then makes sense. A 3 month mortgage holiday has not really made a huge difference and if it’s harmed our credit rating then maybe it was a mistake but I’ve made my decision and stand by it plus we’ve come out of it with more a nice stock price gain.

Mortgage solutions for Financial Independence

So what’s the solution for young retirees? Assuming you don’t want to pay off your mortgage (some people do though). Our mortgage is modest and savings good but paying off the mortgage would severely dent our pre-pension funds. Waiting for that 25% tfls would be great and it might clear the mortgage – especially if I top-up the pension with £6,000 a year in what would be capital payments. One solution is to just pay the bloody mortgage off like you said you would when you took out that mortgage in the first place! Mmm… ok, we’ll call that Plan A.

Plan B would be to “extend and pretend” and when our current 5 year fix rate ends in 2 ½ years we could re-mortgage for a larger amount over a longer period of time. That extra equity that we’ve earned could be then either MEWed – spent on a cruise, new car and fun – or MEWgaged – take out a bigger mortgage and put the money into ISAs or the pension to pay off the mortgage in the future.

Plan C would be a nice Interest Only Mortgage which would suit our needs because we are not morons (unlike many who look them out back in the day) but eligibility is tough and you don’t get lifetime offsets without them being more expensive.

The risk with Plan B & C is that you need to prove you are employed/receive an income to get the mortgage, so when your teaser rate comes to an end you could end up on the Standard Variable Rate just like these idiots who think the world owes them something for 0% equity. Note to all – if you can’t afford the house you live in, and haven’t paid any of your mortgage off in almost half the bloody term then maybe you shouldn’t be occupying property you can clearly not afford.

Equity Release for Retirees

But the rise and rise of equity release will happen as older homeowners are asset rich but income poor (poor savings rates, low dividends and poor annuities). Tapping into their hard earned house price inflation is the only logical solution.

Life in Perpetual Debt

If older people have never paid off their mortgages or plan to try equity release, the yoof of today are in an even worse position. Student loans are a gross intergenerational injustice and the assumed advice these days is that you’ll never need to pay off your student loan because University was a waste of money in the first place. Depressing.

Money Saving Madness

Recently Martin Lewis famous from Moneysavingexpert (love him or find him tedious) was appalled that the government should remind people how much student debt that they have. Martin who rose to fame by spouting wisdom like “don’t just pay the minimum payment on your credit card debt” is now not very happy that the government would tell students how much they owe – they are misleading graduates. Student loans aren’t meant to be repaid, instead you live with the “graduate tax” which most will never repay.

I’m not saying I’m in favour of university fees (quite the opposite) but haven’t we been through the whole debt vs. deficit thing before? I think that if you are smart enough to go to University, you should be smart enough to understand the terms of your debt agreement. I only ever paid the minimum on mine except for the last 12 months when I was due to get a large bonus at work and wanted the cash then and now instead of paying off the 0% interest – I think it saved me about £65 in the end which might not sound like much but it’s the sort of calculating penny pinching that can make you richer over the long term. That’s savvy in my book. When it comes to life in perpetual debt, what’s the difference between never paying off your student loan, never paying off your mortgage and then retiring on a geriatric interest only mortgage and dying with nothing? The only saving grace is that at least in our position we’ve saved and with those savings comes options which not everyone has. So paying the mortgage is a storm in a spreadsheet for us.

Thanks, GFF

24 Comments

  1. The mortgage question is an interesting one, particularly with interest rates so low. It’s a nice conundrum to have; work at paying off the mortgage or invest that money instead. I guess if interest rates were up in double digits for mortgages then it would make your choices much more clear cut.
    There’s still plenty of people out there on i/o mortgages with absolutely nothing in place to clear them. The relief you hear in their voices when you switch them over to repayment and give them longer to pay the money back tells you all you need to know about the worry these types of mortgages can cause. As far as being stuck on the standard variable rate is concerned, that shouldn’t be an issue. Certainly you couldn’t switch lenders and so wouldn’t be able to shop around for the best rates, but they’re not allowed to just leave you on the SVR. If there’s no increased risk to the bank and you just want a new interest rate then you might have to jump through a few hoops, but you should be able to get a new rate.

    Liked by 1 person

  2. Changing lenders might be problematic. FIRE is difficult to explain to lenders in a way that makes you sound attractive to them as they only really understand more traditional income. Sticking where you are but just getting a new rate really shouldn’t be an issue. As you say though, plenty of time before you need to worry about that.

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  3. I seriously contemplated a mortgage holiday. At the time, I didn’t actually need one, and moved on as couldnt be bothered organising it. Then only a week or two later the banks basically said they would use it in their decision making. How much so? I guess we will find out in not too long when people begin to renew their mortgages.

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  4. Why complicate the plan; just your brief was enough for me to want to shot myself. Here today gone tomorrow. I own my house, and worry only about yearly tax of $1000 us. 3 bed and two bath on about 1/2 acre, and about a 1/4 mile to the beach. What I am saying why play a game when you never know when you may need cash or run into a PANDEMIC

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      1. I can see it is of great interest; you playing in the numbers game like playing the board game Monopoly. Life is where you fined happiness. Even with a holiday…. no matter where you are no matter where you go… your always there. Happiness is only found in the heart. Best David

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      2. May I say, “many of our metaphorical expressions develop from our perceptions of the body”

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      3. I’m so sorry… I don’t mean to up-set you or your readers. Are you in England?

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      4. Thank you for that… Scotland hey, well I hope all is well out that way. Braving the heat here in the Air conditioning of Florida, USA.

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  5. For some the decision to clear the mortgage is an emotional one over the figures that the trusty spreadsheet can provide. I own one house and 50% of another as tenants in common with my partner. The first house is now rented out on a consent to let with 9 months remaining (interest only fully off set mortgage). The second house was bought outright with cash . When the consent to let ends I’ll need to decide whether to fully pay off the mortgage, re-mortgage on a BTL basis, evict the tenant or have a chat about him becoming a lodger instead.

    Mortgage providers generally aren’t keen on people using the basis of the 25% tax free pension figure as their repayment vehicle. Pensions can go bust, lose significant value, be allocated as a divorce settlement or the tax free lump sum may be removed by future legislation.

    Logically I’d have made much more money by getting a mortgage on the second house and investing the cash instead. However, I was happy to forgo the potential investment return in favour of knowing the property was all paid off. It’s not always just about the numbers.

    After taking a month unpaid leave due to an absence of child care (thanks covid) I’m now contemplating stopping work imminently. Leaving a well paid (relatively secure) job during the current economic times would be considered madness by many but it’s a decision I can live with even when modelling the potential investment loss from drawing down some savings and not having employment income to invest. It’s not always about the numbers.

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      1. Thanks, it’s nice to have options. The present me is thanking the past me for living below his means. However I’m sure the future me will curse the present me for quitting and missing out on the employment / investment income. Present me is currently sat on a conference call for the latest daily IT disaster and wondering why I’m continuing to torture myself. Hope it all works out for you too.

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  6. When the mortgage on my first home came up for renewal I chose an interest only offset for the same “extend and pretend” reason you outlined.

    This was before 2008 when interest only offset mortgages were more available. I initially foolishly advised the bank that I was going to use the extra funds for investment purposes. Curiously the bank did not like that particular idea so I waited a week and then advised them the extra funds would be used for an extension and they agreed.

    First Direct have been pretty good to me but I’m going to have to make some significant decisions about that house pretty soon. The crazy situation is that it may actually pay me more if I evict the tenant in 9 months time, draw out all the fully offset funds and put them to work in the stock market instead. Putting the property onto a BTL mortgage would be more expensive and the rent then wouldn’t be worth the hassle. Paying off the mortgage would result in a significant amount of funds tied into the property and pretty inaccessible.

    Perhaps I could convince the tenant to become a lodger and use the rent a room scheme instead. Time for a new tab in the trusty spreadsheet.

    Liked by 1 person

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