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.