After 20 years of playing cat and mouse with the London property market, maybe I needed a big dog to get me into home ownership.
But I never thought it’d be the boss of a major bank.
It was Spring 2017, and I was visiting an ex-girlfriend. As usual, I was singing her new-ish flat’s praises. My ex knew I’d wanted to buy my own home forever. She’d seen me go dreamy in Habitat. She’d caught me scrolling through Rightmove like a home alone teenager discovering PornHub.
She’d also suffered many long explanations as to why I hadn’t bought my own place in London – despite my living here through most of a 25-year property boom.
I could have bought, barely, somewhere dodgy, in the mid-1990s, I’d begin, but I got greedy for a nicer first purchase in a better area… but then I couldn’t buy because I had just gone freelance… then prices doubled in what felt like 12 months… even so, I almost did buy in 2003… but then I pulled out on fears that London really was ludicrously overvalued and the whole financial system was bonkers… and after that I wanted the money to invest…
On and on I went. All true on one level. Waffle on another.
My ex’s attitude: “If you want a home of your own to live in, buy one if you can. It doesn’t matter if it’s the right time – you’ll make it work – and it doesn’t matter if prices go down – they’ll go up again. In the meantime, you live your life.”
I’d heard this many times. My dad said much the same when I left university. Battered by two decades of astronomical price rises and the absence of the sustained crash I’d expected since the early 2000s, I no longer saw such sentiments as naive and anti-historical. I now saw them as pragmatic. Maybe even worldly wise.
Even so, I continued, we had to consider that –
She interrupted my 50th explanation of some issue or another I had.
“You’re a smart guy,” my ex said, generously. “If you really wanted to buy your own place you’d figure out a way. So do you want to? Really?”
It was a fair question.
I didn’t have reasons why I couldn’t buy, even though I wanted to.
I had reasons why I wouldn’t buy, even though I could.
Let’s leave the laundry list of why I wanted to get my own place for that great unfinished article in the
sky drafts folder.
Suffice to say I mostly still thought it was an awful time to buy a London flat. But I really did want to own.
I’d had this as an aspiration for almost as long as a couple of my friends had been alive. It didn’t just feel like unfinished business. Much more delay and I’d be repaying a mortgage in my seventies. I wanted this monkey off my back.
Also, one of the few reasons why it was perhaps not a terrible time for me to buy was I knew the UK banks had lots of spare capital and wanted a return.
This might not sound like a big deal. However in two of the three times I’d almost bought before – the mid-1990s and 2008 and 2009 – the opposite was true. They were good times to buy property, but they proved impossible times for me to get any financing.
I’d come to realize there was a tension here. I’d probably need to buy into-the-cycle, when banks were more willing to lend and my portfolio was riding high, rather than contrarily in a crash.
You see, my financial position was weird.
Yes, I had a decent net worth for somebody who’d stupidly missed the great London property lottery that had floated friends towards millionaire status for about the cost of my rent.
But my own money had mostly come from saving a huge proportion of my income for decades and aggressively investing it – two things seemingly unheard of by the average mortgage-granting banker.
What particularly bothered them was my income.
I’d earned well below the higher-rate tax bracket in my 20s and for much of my 30s. I’d then used VCTs to keep my take home income below the 40% band, before turning to big SIPP contributions when the pension freedoms came onto the horizon.
This all mattered because even those banks who’d look properly at the self-employed – and who’d squint a bit at the full accounts to see the potential as generously as possible – wanted to picture a hefty income coming in every month.
I’m no pauper – I count my blessings. But the fact is in a city where by 2017 the two-bedroom flats I wanted started at well over £500,0001 and banks lend 3-4 times income, I didn’t make the starting line.
A miser for ISAs
The obvious solution was to liquidate some investments and buy the flat with cash. However this was about as attractive to me as a two-for-one deal on enemas:
- At the time, in early 2017, I felt global shares were still pretty good value, not least compared to London property.
- Crucially, most of my investments were wrapped inside precious tax-free ISA wrappers that I was loathe to lose forever by liquidating.
- I was concerned about Brexit. I didn’t want to go all-in on Sterling by swapping my overseas shares and foreign earners entirely for London real estate – not when I foresaw many years of posturing and national foot-shooting nonsense ahead.
- Investing had become my passion. My liquid capital was “the water I swim in” I’d portentously said to a friend who suggested I sell my shares and buy a place. The thought of starting the snowball again from scratch was too depressing.
- I was vaguely discussing setting up my own active fund at this time (another story!) and as part of this I was using my portfolio as a proxy for a professional track record. My money would also need to be part of the seed capital we’d kick off with, at the least to show my commitment.
- Finally, I hate change!
My reluctance to sell shares was a tad ironic. I’d started my stock market investing in despair at the London property market, pumping my flat deposit into shares in 2003. Perhaps it was illogical to not want to reverse that trade.
What was logical though was wanting to keep hold of my ISA wrappers, which I’d built up with 15 years of annual allowances. ISAs are a fabulous perk for UK investors – still routinely underrated. Thanks to my ISAs, I could compound my wealth for another two or three decades mostly untroubled by the tax man.
Did I really want to trade this glorious tax shield away for leaky gutters and a dodgy boiler?
Maybe it’d have been easier if I’d expected big tax-free gains from whatever flat I bought. Finally enjoying the massive own home tax break that’s invariably taken for granted by homeowners was a sensible reason why I wanted to buy. However I saw near-zero prospect of windfall gains from London property anytime soon.
No, the ISA fortress was the one concrete benefit I’d gained from abstaining from buying property. I was loathe to give it up.
Forcing myself to try harder
So there I sat in a trap of my own making. My flexible take on what some keen types call Lifestyle Design had enabled me to work as I pleased, enjoy long walks on weekday afternoons, teach myself active investing, and amass a six-figure sum sufficient to buy outright a flat I wanted – all with only a couple of short stints in a regular office job.
But set against that I had only a small income by London standards to show a bank, and a horror of liquidating my tax shelters.
If it was the mid-1990s, it’d have been easy – I could have sold just a fraction of my ISA holdings. But my years of timid and querulous bumbling in the face of the London property cage fight meant I needed a small fortune to seal the deal.
My ex-girlfriend appeared before me like Obi-Wan Kenobi.
“Use the force,” she commanded. “Let it guide your actions”.
Perhaps I’m misremembering.
Oh yes, she thought I was a smart guy – or at least that was what she was saying now we’d split up.
I was a pretentious one, too, I pondered. Hadn’t I told an unfortunate friend that I was like a fish flapping about in a bank account or some similar tortured metaphor about my good sense with money?
If I really wanted to buy my own place then I could surely find a way.
For good or ill I did want to buy. And so the game was on.
I quickly established the traditional banks would not help me. Even the one I’d kept since my student days partly in case I ever needed a record of my long financial probity was no use. They had their procedures, and lending me ten-times my income wasn’t going to get through their sausage machine, even with a chunky deposit.
Some high-flying types, such as the blogger Fire V London, have used margin debt to buy a property. What’s more, he’d favoured a margin loan despite having a private bank account that, as I understood it, he kept around precisely for such DIY financial innovation.
Could I similarly consolidate all my investments with a broker that offered margin against my portfolio and then draw out a half a million quid or more to add to my deposit and buy a flat?
Well, perhaps, but I didn’t entertain the idea for long.
I hate debt, and I hated the idea of borrowing to invest.
True, borrowing to invest is what everyone effectively does when they take out a mortgage whilst investing elsewhere – even into a pension. That may well be a sensible strategy (particular in the case of a pension) and in practice lots of people rail against it while doing it themselves (because they compartmentalize their mortgage and their pension and ISAs into different buckets). But once you get beyond taking out a mortgage to buy your own home, the risks multiply.
As I wanted to keep my ISAs and stay invested while taking on debt, I would have to play the borrowing to invest game. But I wasn’t going to do it on margin, that was for sure.
What’s the difference?
With a mortgage, you repay monthly amounts as agreed with a lender when you arrange the mortgage. As long as you make those payments, the rest of your financial life is in practical terms irrelevant from its point of view (at least until you need to remortgage).
In contrast, margin debt is typically borrowed against a portfolio that’s marked-to-market. As shares in your portfolio fluctuate in price, the total value of the portfolio is recalculated (that’s the marked-to-market bit).
If shares go up no problem. But if your portfolio loses money then you risk breaching your borrowing limits. This is when you’re required to make a margin call – which involves topping-up the asset side of your ledger with fresh cash to bring down your ratio of borrowing to assets. At best this means you need to add more money, assuming you have it. At the worst, you – or even your broker, without your say-so – could be required to liquidate your portfolio at a terrible time, impairing your finances forever.
Such an approach might make sense for a sophisticated super high net worth investor who is also a high-earner and who likely has other borrowing avenues open to them if required (such as bridge loans) or an ability to sell other assets in a crunch (second homes, cars, jewels, Banksy paintings, and so on).
Nah, nah, that’s not me.
I wanted a mortgage – the safest and cheapest form of borrowing there is. And I wanted to fix it for a long period, so I would hopefully have time to regroup should any calamity strike.
Could I get one?
Stay away from my precious!
As I saw it, I was a super-safe borrower.
For a start I had at least 20% ready as a cash deposit. I’d been steadily setting aside a good chunk of cash into savings accounts, premium bonds and the like, and I’d also raised money defusing capital gains.
I believed this 20% deposit already gave a lender a lot of cover in a 5%-down world.
Then there was the fact that I was demonstrably good with money.
I already had the assets to pay off the mortgage from day one. I just didn’t want to sell them unless I had to. It was the proverbial opportunity for a bank to lend me an umbrella when the sun was shining.
Compare that to a traditional first-time buyer. They have a small deposit saved – or more likely these days donated by their parents – plus the promise of a salary. Their potential was in the future. Mine had already been realized.
I was also a bit self-righteous in that I believed my track record should count for something. How many first-time buyers in London go to a bank without super high-earning jobs, a partner, or a holdall stuffed with cash from the death of a loved one? Very few.
Clearly I would have to sit down with somebody to make my case.
My first serious attempt was with a broker attached to one of the estate agents in London. The agent was in her early 20s and didn’t seem to know much about investing. But to her credit she understood my desire to stay invested in the ISAs, asked sensible questions, and made promising noises about specialist lenders who would look at me favourably.
Of course, she said, you’ll then transfer all your invested cash to our own fund manager to manage when you get the mortgage.
They needed to be sure I wouldn’t make terrible investing decisions, you see, or spend the money once the mortgage was secured.
But but but… we’d been through all my paperwork. The agent saw I didn’t earn a fortune, but I had a relatively large amount of money. Didn’t this show I was (a) good at investing and (b) not one of life’s great spenders?
Why would I give my money to an expensive and mediocre manager to potentially throw my portfolio in reverse?
The agent made sympathetic noises but it was no good. I had found a human face to the computer says no.
Challenger blows up
I didn’t give up. I saw there was some flexibility out there, even if there might not be quite enough for me.
Perhaps I could cut out the intermediaries. I turned my attention to the challenger banks. I’d read a lot about how they aimed to do things differently – heck I was even invested in one – and I wanted to do something different.
Pretty rapidly I followed a chain that led me to a manager at one of the UK’s challenger banks who told me that yes, he thought what I wanted should be possible. He’d get back to me with the forms and we could get the process underway.
Only… the promised forms didn’t come. I chased him up but he was unavailable. An assistant relayed the message that the paperwork was being updated, hence the delay. The delay continued. I pressed, he evaded. Finally I pinned him down and he said he couldn’t do anything for me. However here was the number of their mortgage specialist and they could sort me out.
I called the number and was asked for a few details. No, they couldn’t lend me that huge amount of money. They could lend me four times my income or thereabouts. Maybe a bit more for affordable good behaviour.
I had gone through to a standard mortgage inquiry line. They had no idea who my contact was, and they didn’t really understand what I was asking for anyway.
We agreed it would be best if I hung up.
It takes a fair bit to annoy me to the point of feeling physically cross, but at this point I was hot-headed. I found my housemate sitting on his PC deep into Elite: Dangerous and bombarded the disinterested back of his head with an update.
“I should write to the bank’s CEO and tell him his publicity is full of it,” I ranted.
“Yes why not?” my friend said disinterestedly, as he traded his space ship’s cargo of bootleg liquor for a case of neofabric insulation at a way station at the far reaches of the Heart nebulae. “I bet he’d love to hear from an angry customer setting him straight.”
As it happened, I remembered an interview where the boss in question had claimed that he really did read all customer feedback. Was it worth a try?
A vision of my ex-girlfriend fuzzed back into view.
“Use the Force,” she intoned. “You’re supposedly a smart guy. Giving up instead of going all the way to commitment is exactly why it never worked out between us. Also for the record I didn’t really like dressing up. I was just trying to be nice, you perv.”
Screw it, I was going to do it!
I quickly found the chief executive’s email address and within a few minutes I’d sent a polite but disgruntled message.
I won’t republish it here as it contained a few personal specifics. In summary I told him I already had more than I was looking to borrow, that I didn’t want to sell down my ISAs but I could if I ever needed to in order to meet repayments, I had a 20% deposit, and incidentally, his people hadn’t read the memo.
It felt good to outline my case. At least I had tried, as I told my housemate.
“Yeah, well, you think you’ve got problems – I’ve got alien stowaways feasting on my illegal narcotics.”
It seemed a fitting epitaph to my wild goose chase.
Obviously I didn’t expect to ever hear from the CEO of the challenger bank.
Certainly not as soon as the next morning when – before 9am – I had a reply from his email account.
They’d let me down and he was sorry, he said. At the least I should be heard. He’d cc-d two colleagues who he was now directly asking to look into my case.
I googled. The two names were directors at the bank, and I don’t mean American-style Director of Being Third Intern. I mean proper directors who sat on the board and oversaw billions.
Before lunchtime one of them was on the phone with me. It was a super conversation – he was a friendly and urbane type – of the sort you see in serious movies about financial titans discussing corporate actions. Or maybe that was in my head, but he took me seriously. He not only understood my motivation regarding the ISAs, but said he’d done something similar for the same reason.
A few days later and I was in a meeting with him and the private banking specialist who’d been assigned to me on account of my unusual circumstances. This fellow was great, too, and I was frustrated at the end of it all that I wasn’t actually of sufficiently high net worth to keep him!
I’d worn a great suit for the meeting, and had duplicates of paperwork I’d prepared. This not only covered my current assets – evidence of what money was where – but included projections of how my assets might grow in three different scenarios over the lifetime of the mortgage. At this point the urbane director politely excused himself, I guess persuaded that he wasn’t putting his name to the fantasies of a nutjob – or at least that if I was a nutjob I was the sort you wanted to lend money to.
From there, the process was much like you imagine getting a mortgage would be if you were doing it face-to-face in the 1970s. The bank was diligent in its risk assessment, and when my first attempt at a purchase fell through we had to go through most of the 20-odd page questionnaires and illustrations again. My man laughed as he explained several aspects of the risk warnings in the light of the fact that I’d previously presented my own investing models to a director, but he went through them just the same.
I eventually did take some money out of an ISA to buy the place I wanted at the interest rate I was after, but it was only a small fraction.
Finally, six months or so after I started with the challenger bank and nearly a year after I’d decided to go for it and buy a place, the money was transferred and I finally bought my flat.
Home, a loan
I am very grateful to the bank for finally hearing me out, even if I think it’s crazy that they and the others found it so hard to initially make the space to do so. I suppose it speaks to how rare a situation like mine is.
The bank didn’t explicitly confirm it wanted any publicity about all this when I asked, which is why I’m not naming it. I imagine the CEO gets a lot of emails! I’ve recommended them to friends though.
There’s a post to be written about why I chose specifics of the (fixed rate interest-only) mortgage I did and I should also explain how having all this debt has changed my investing style (for the worse, in terms of returns, but that’s partly because I’m much more risk averse now.)
But let’s conclude for now in early 2018, with me taking ownership of my own place in the midst of the first sustained price falls in London for decades. (Property, eh? Can’t lose!)
Have I now made a habit of emailing bosses when I don’t get my way?
I have not. It was a very out of character action for me, as is usually required by the hero of any story in resolving their conflicts. (Seriously, just read your Joseph Campbell).
What I did do though is profusely thank my ex for kicking me up the backside. She was one of the first to have dinner at my new place!
- Compared to about £50,000 in the mid-1990s! Sigh. [↩]
Congratulations, your chutzpah paid off. Great narrative, looking forward to your post on the interest only, fixed rate mortgage choice.
Lovely story. I had similar issues when buying our house with cash. Most estate agents would take one look at the scruffy middle-aged urchin lurking outside with an equally battered bike and call security rather than invite me for a chat about my needs, budget etc. Equal incredulity would follow when I said I didn’t need to speak to a mortgage advisor.
If you don’t fit their norms, it is very hard to break through.
My two cents… like the story but.
Unless its freehold you technically wont own your house or land its built on.
I had an interest only mortgage a long time ago and it cost a lot.
Now I live cheaply in the north.
Look fwd to next instalment.
I’m sure your ex probably mentioned something about keeping private stuff private too lol.
More seriously. Its one thing that bothers me about web based companies, everything is automated, if you want to go slightly off piste, its nigh on impossible. If you manage to pin down an actual employee, you at least have a chance.
I’m a long time reader so I know how long you’ve wanted to buy a London flat – so well done!
I was in a similar situation but on a smaller budget. I was working in London, saving for FIRE/f*ck-you-money, but didn’t want a large mortgage. So my girlfriend and I quit our jobs, liquidated about half of our ISAs and bought a house for cash in lovely north Yorkshire.
I had considered looking into a similar solution to yours, but given that our newly self-employed incomes at the time were almost non-existent, I didn’t think I would have any luck (despite the fact we had 2 x the purchase price in shares). Perhaps I should have looked harder. Oh well, we love our house and rent it fairly frequently on Airbnb which allows us to travel (the money going into our pockets rather than paying the mortgage off), so there is that benefit. I’m probably getting a similar return to what the investment income would’ve been, so it’s not worked out too badly in the end.
Hope you’re enjoying your flat!
What a wonderful story and well done for persisting. The problem seems to be that everything is built around writing a computer program to automate everything. When you came along with a non-standard situation, the vast majority of banks would shudder, as their autimated systems cannot cope.
With ISA limits having gone up loads of late, there will certainly be more people with significant ISA savings, who will be reluctant to liquidate them fully. You would think that a smart lender would see an opportunity to lend to these people who may be capital rich, but relatively income poor. From the point of view of the bank, it is far less exposed to the risk of non-payment if the borrower can repay a huge chunk or indeed all of the outstanding capital owing. I guess that they are worried that there is insufficient income to pay the monthly amounts repayable, and that they will have to go through the administrative expense of foreclosing. Sure, they get their money back, but they want to lend it for many years and forget about it, not stop generating interest income because they the mortgage got repaid very early!
What could those ultra-safe mortgages be called? How about ‘back-to-back mortgages’ to show how the ISAs back up the mortgage?
By the way, I did not understand from the great article how you intend to make the monthly mortgage payments? Or did I miss something?
Your story reminded me of the time one of my parents died and I inherited lots of stuff in a foreign country. Eventually all the bureaucracy was completed. All I had to do was pay about £,2000 to £3,000 of money to the tax authorities there, and it would all be mine. Except that I did not have that sort of money! I asked the adminstator if the payment could be made from the eventual inheritance? Nope, came the reply. No point going to a bank, surely, as I had no job. I asked one friend for that money who turned me down flat as they did not trust me with their money! Thankfully, another friend gave me the loan with no hesitation. I repaid them within three months, with a generous present! Funny how even ‘safe bets’ can be too risky for some!
Thanks for the comments everyone!
I’m still earning and the monthly income payments are currently only £50 or so higher than the rent I was paying — but remember this is mostly because I am on a keen mortgage at a time of very low interest rates. One reason my returns have been curbed is because I’m now always keeping a few years worth of payments in bonds in case something goes wrong (one of several belt-and-braces measures I’ve taken to mitigate risk!) The next big event will be when I remortgage (I fixed for five years) by which time I hope to have rebuilt some ammunition to pay down the mortgage if rates have shot up (I don’t expect this, however – another reason why I thought it was perhaps an okay-ish time to buy).
I’ll probably not comment much more here on the mechanics of the mortgage / repayment plan / risks / whatnot, as I’ll just be repeating that future article. Cheers!
Would it have been possible to transfer your S&S ISAs into Cash ISAs and then use them as cash accounts for an Offset Mortgage? Surely that might give a bank or BS a feeling of adequate security for a loan, and then when you had established yourself as a reliable customer you could have transferred some of the money back into S&S ISAs.
Or perhaps kept the ISAs in cash and geared up your pension investments to give you your required levels of market risk.
This is a specific (and huge) case of a general piece of aggravation the financially independent will run into. From what he says TI is never going to stop working so it’s not so bad for him, since he will always have an income even once he is FI. I don’t really have an income, though I am FI, because I have the fond notion that once I don’t need the money I don’t need work 😉
All financial institutions dealing with the general public believe only one thing about you. Your income. At the start of your working life that’s not a bad assumption, as you start your working life with empty pockets and a whole lot of dreams. It’s not unreasonable to borrow against those dreams and your future stream of hard work.
Come to the party as an old git with a paid off house, a load of ISAs and a future income stream, but no current income stream, and they will laugh you out of the door. Banks, mortgage brokers, the lot.
I wanted to take out a partial mortgage against the new house while still owning the old one, to break the chain. No can do. I had the old house fully owned, which was on the market. I had shares in ISAs worth more than half the new house. I should have been a decent bet for a mortgage for the new house. About 50% LTV. Fuhgeddaboutit. It’s all about income, and my income was the personal allowance, ‘cos you don’t take out more than that from a SIPP if you have the time to get the lot out under the personal allowance before any other pensions cut in
The assumption is nobody on this septic isle has capital, and if they do then they can look after themselves, presumably. Like TI, I didn’t want to can that ISA, although I did use the flexible ISA provisions to borrow from it and repay in within the same tax year.
The takeaway, FIRE folk is a) think extremely long and hard about discharging your mortgage early. It has a fantastic feelgood factor, but a good offset (or flexible drawdown) mortgage is a wondrous thing. And b) take out all your mortgages and get your credit cards while you still have an income, and hang on to the blighters until you know pretty well for a fact that you will never have to borrow money again. ISAs, even half a house worth, count for absolute naught in establishing your financial probity or not.
TI was extremely lucky to swing this. Or extremely persuasive. Chapeau, sir!
Well played TI, I’m pleased it worked out for you.
I’ll echo ermine’s sentiment about the challenges of obtaining finance in the absence of a regular recurring earned income stream, irrespective of how full our treasure chest may be. This applies to remortgaging at the conclusion of a fixed term honeymoon period also, which proved to be one of the few headaches caused by my seasonal working pattern.
Devil’s advocate to a few comments being frustrated about banks not being so flexible with their lending.
Current regulations are quite rigid on the amount of capital that banks need to out aside for loans with a higher expected loss (which, like it or not, is the case with sporadic or low incomes). You can argue the maths, but the regulators set it and are usually quite tight on these edge cases.
Glad you got your case sorted but can imagine that they would need to book a charge on the units P&L that might well be underwater for your 5 year fixed rate window.
As a devil’s advocate to the devil’s advocate, back in the day there was the notion of a mortgage company taking a charge against the investment vehicle used to discharge the capital (as well as the property, which is still the case, you don’t own single brick of that house until you redeem the last instalment and title is transferred at the Land Registry).
This applied to endowments, I had to get a formal release from my mortgage provider to pursue a reinstatement claim. Back in the day we had PEP and ISA mortgages where the ISA was to be set against the capital redemption at the end of term, which would appear to be TI’s use case.
We used to be able to do that, and then came the razamatazz on the mid 2000s mortgage backed securities and liar loans. Previous generations got this roughly right without the runaway greed which ahs now turned into locking everything down. The rot set in when the requirement to have a parallel investment set against the capital over which the mortgage company held a charge was conveniently forgotten in the interests of making things affordable. Every time you hear someone talk about mortgage affordability you know they as stiffing the current borrower, who isn’t rich enough to afford a house, and they are screwing the next generation, because these loans will jack up house prices for the next generation by not eliminating people from the market who can’t pay.
TI was always going to be a edge case, but I might have found it acceptable to transfer my ISA to the mortgage company’s ISA over which they had a charge, accept transactions costs, higher charges and a lower return for six months and then redeem the capital into an ISA and investment selection of my choice. I never had a PEP/ISA mortgage but I presume they worked similar to the first financial institution TI approached in this story who actually gave him the time of day.
@TI – brilliant post, thank you!
And thanks for the namecheck. In point of fact, my private bank did provide a margin loan – in fact v much to their credit they suggested it proactively about a day or so after I first started to consider it and helped me build confidence it was a good plan. Theirs was more expensive than IB’s but saved me liquidating the portfolio and I thought it was a fair price to pay for the ‘thought partnering’ (not advice!). Their margin terms are pretty good on an LTV basis too, just not on the actual rate! This notwithstanding, you have characterised my approach correctly.
I am a bit curious what the Prudential Reg Auth thinks about your story, as I thought they were the ones imposing the affordability limits. I assume exceptions are allowed, and you are one of them. In risk-adjusted terms, your bank is almost certainly making a decent profit out of you so fair play them.
I am a little surprised you have taken out a fixed rate but you will doubtless explain more in time. Looking forward….
@FireVLondon — Cheers! The mortgage is fixed because despite what some might think with a superficial look at my situation, I am very risk-averse (you may recall my worried comments about your now super successfully executed operation from time to time? 🙂 ) I want certainty over my payments in advance, and I don’t want to have to find another mortgage in a hurry. A fixed rate gives me certainty, when combined with a five year term. (A five year discount or tracker mortgage still leaves my vulnerable to wanting/needing to remortgage if rates shoot up, before the end of term).
I appreciate you’re talking about the letter of the regulation, but as I mentioned the affordability was rigorously assessed. Besides the fact that I could pay the mortgage off tomorrow from assets if I wanted to, the monthly payments (note: not repayments, I/O) are only a touch above a monthly rent I’ve paid for a decade, for example, and I have been making (for me) very large pension contributions for the past couple of years (close to max) that I could in practical terms suspend if required for a period. This is even leaving aside other options (e.g. I got a place where I could rent a room if really stuck for extra income, etc).
Still, with all that said I’d rather just leave well alone so please don’t drop them a line. 😉
Thanks for this: I needed it today! Currently stuck in a mortgage wrangle myself. My non-traditional set of circumstances inevitably triggers gloomy looks, the shaking of heads and the ominous warning, ‘The Underwriters won’t like that…’!
Ditto Ermine’s situation, wanted to buy a property that needed a refurbishment and hang on to the present home. Don’t want to incur unnecessary CGT or liquidate an ISA.
Would have liked to borrow about 200k , at about four times portfolio income ( at a little over 2% It’s not exactly a Hi Yield Portfolio ) with leverage of less than 10% it didn’t seem unreasonable…. on a loan to Value of around 45%
It’s an Alice in Wonderland world, Income that dies not appear on a tax return does not exist …. reinvested income in an ISA or a SIPP doesn’t count because it’s not been remitted to a bank account for the last three years plus.
All in all living with the aid of the legal tax breaks does not make you an attractive borrower, despite many efforts I was finally offered a mortgage of……£30k
Gave up the idea !
Well purely in the case of TI, I believe the challenger bank will be taking this loan on their balance sheet. There is a capital cost related to the risk of the loan, plain and simple. Current rules favour income over capital. Fair, or not, those are the rules set.
It’s fair game to blast banks after 2008 but think this is a case of the regulators being quite sensible. Might not fit perfectly with FIRE but there are always alternative lenders willing to jump up the risk curve. Just looking at Metro bank taking additional capital charges for poor risk weighting, I believe that there are looser standards at challenger banks which should be better reflected in their cost of capital.
TI got lucky with this one and applaud the chutzpah in emailing the CEO!
@Andrew, the rules for mortgages may be set in such a way that it “favours income over capital”, but that’s about the only way it does – CGT, dividend tax, IHT, interest on your savings are all taxed more favourably than income.
We’ve got a small offset mortgage and I’m now going to make sure we keep topping that up as long as possible!
Re: Ermine’s point on keeping an offset mortgage going rather than paying off early.
I have come round to the idea and am now more relaxed about clearing off the mortgage at or after 55, at least while interest rates stay at rock bottom. Plus we could have one more drop to come before they start climbing. Which will be a great opportunity to lock in a 5 year fix.
I did have a chat with my offset mortgage provider about my long term strategy to pay off, and interestingly I was told they don’t like relying on your 25% tax free PCLS to clear down offset mortgages. Which I was surprised by. How is that different (in terms of their exposure to risk) to having a smaller pension pot but proportionally larger amount in non-pension savings that you intend to dip into at age 55 to clear the mortgage? Just different labelling. Plus I could have my pension pot largely in cash and non-pension savings in risky stocks, so there is no consideration of invested asset risk.
My situation is complicated in that I am actually intending to remortgage and borrow more money to develop on land already owned, that should provide an uplift to property value over and above the extra borrowing cost. I am hoping this doesn’t trigger a “computer says no” from said lender, or I will be forced to go elsewhere. On the plus side I am still in my forties, employed, only have a small LTV ratio and the earning multiple should be OK. But I bet I won’t be able to remortgage like that in my 60s. I also intend making the next mortgage term past me hitting 55 – maybe to 60 or more just so I have options to stay leveraged in case I am still working and don’t want or need to tap into my pension.
I am keen to hear the rationale on TI choosing an Interest Only mortgage. Offsets are also technically interest only, hence the questions on repayment stragegy from lenders – even if you are repaying capital monthly, there is nothing to stop you borrowing it all back with a few key strokes and no pesky human interaction. Which has been incredibly useful to me on numerous occasions, but with power comes responsibility. Flexibility can easily morph into fecklessness for those lacking in willpower.
Very interesting to hear the story at last, @TI! Congrats on finding a way through to success 🙂
I was hoping to get this before I clicked on your link https://www.youtube.com/watch?v=eLVzoyc9zPo
(but no). Hm, wrong generation!
Ah, yes, frustrating one’s friends with the “50th explanation of some issue or another”…This all sounds horribly familiar (minus the dressing-up though). But since I’m older (I guess), not trying to buy at London prices, not particularly desperate for FI, and lack the chutzpah to tackle a CEO, I am probably going to have to swap most of the “ISA fortress” for the traditional Englishman’s castle. So what’s the sensible way to think about asset allocation while I’m still umm-ing and aah-ing? (One of my 50 issues…). For the past few years I’ve been about 45% shares, 15% bonds and gilts, and 40% cash, which has probably been sub-optimal but suits my “maybe I will, maybe I won’t” mindset (along with being unconvinced that bonds are better than cash). If I absolutely positively knew I was going to buy imminently, I guess I should shift the lot into cash, or the price of a house into cash, or maybe it’s the price of a house with a 60/40 split for the rest. But then if I don’t end up buying, I’ll be “out of the market” – if that matters. I guess it’s a bit like managing one’s pension fund running up to your retirement date (I recall the arguments for going severely risk-off) but without having an exact date in mind.
@Vacillator – well, I’d certainly wait until this Br*xit shitstorm is out of the way. And why buy when TI has, very accurately, called the top of the market? 🙂
I’ve been looking at an offset mortgage (with a bank that likes black & white colours) and while they say you can borrow it back, they’re quick to say “subject to conditions, yada yada”. Was your provider like that, but in principle more relaxed?
As a passive investor and mortgage broker I have found this thread very interesting; especially the sentiment that an investment portfolio income can’t be used to acquire a mortgage. This is untrue; I know a lender who will use 5% of a portfolio value as notional income for mortgage affordability. No need for income to be evident on bank statements or tax returns, just evidence of portfolio value. You are perhaps not the victims you think you are for having capital! The mortgage market is more innovative than you might think, despite the regulatory pressures lenders face. Just my view from the coal face.
Indecisive, yes it is the bank that likes black and white. Moving money from your offset mortgage account (only up to the agreed max mortgage amount of course) to linked offset current account online is carried out with no human interaction.
They have never asked any questions about why the money is borrowed back on these occasions.
They do however periodically review if you are on track according to your mortgage term and payment history, and if you are not paying down enough capital then will ask what your strategy is to clear the mortgage by the end of the term.
Agreed, I’d love an offset mortgage! Unfortunately it wasn’t an option.
The comments on this thread have been useful to me in reaffirming my belief that I need to be more cautious and keep lots of less volatile assets around ahead of re-mortgaging time. Notwithstanding @TheMortgageMan’s comments (which wasn’t my experience at all) it’d be risky to assume I’ll have much in the way of optionality regarding my remortgaging in three and half years time!
Fascinating story! Thanks for sharing. I can’t wait for the next article.
Just a five year fixed rate mortgage? And I bet it’s still at a positive rate? Get yourself over to Denmark. You can get a 10-year fix there at -0.5%. Paying the bank to borrow money is so last decade.
A great article. It reminds me of the time when a major high street bank wanted to charge me for making a funds transfer of all my savings to a competitor ( this was before the internet). I calmly advised them that I didn’t want to pay and I’d take the money in cash instead. Worried looks were exchanged by the staff ( as they didn’t have enough cash in the bank ) and I was invited to have a chat with the manager. After some discussions ( and a free coffee ) he offered me a special personal interest rate which matched the competitor I would have been taking the cash to. I cheerfully email the CEO if I’ve had a bad time with their company. I have no issue doing it as I clearly outline what went wrong and how it can be rectified.
@TI – how come the IO mortgage wasn’t an option? They exist.
Have you set up some sort of means of tracking whether you’re up or down on the mortgage position, something like a month by month comparison of interest payment vs portfolio value delta?
@ZX – is that actually true? Do you have an idea what affect that has had on Danish house prices?
If you’re going to pay someone to borrow money off you, how do decide whats affordable any more? What rationale is used to limit the amount borrowed?
Um, it is an interest-only mortgage? (Also please don’t post lots of separate two line questions/comments, that’s not really the Monevator vibe, as you know. 🙂 )
@TI – sorry meant to say offset not IO.
I need to be less hasty as MV comments are immediately set in stone, which is same reason I unfortunately left a few rather than a single comment here – I would have added to original otherwise. I got over excited, I apologise.
@The Rhino — Regarding my not getting an offset mortgage, I appreciate they exist. But as the 2,000 word article above explained in some (exhaustive!) detail I wasn’t exactly over-burdened with choice, strolling about the market and cherry picking exactly what I wanted. I had to write to the CEO of the bank just to get an audience, right? 🙂
I was a bit luckier and managed to get an offset at 1.5% without having to tap up any CEOs. have already mucked about a bit taking £s in and out to test it out. Shit gets real in Nov when I have to start paying the interest. Your comments on risk and liquidity approaching remortgaging time have been super useful in focusing my mind on future events planning. Spreadsheet being tweaked to keep score of how this experiment goes. My LTV where the V bit is liquid assets, not the property I bought, is approx 15%
@The Rhino Where did you find that rate?? I’ve been lining up an offset but ~3% is the best I’ve found (with the black and white bank, and high earning criteria)
I sold up 2 years ago and went to rent.
It is amazing that despite having proceeds of the house sale in excess of the rental property value outright, not having a ‘real’ job means you are treated a little differently who does have one, despite the fact they could be sacked the next day. It was a ball-ache, I hope that I never have to do it again (hopefully purchasing in the next couple of years).
I am in a very similar and fortunate position with enough in investments to buy the houses I am looking at outright. Obviously don’t want to do this as can fix a mortgage at 1.7% ish.
However, I can only borrow 4x my income and I am about 20% short on the (sensible) property price I am looking at, even with a 15-20% deposit. I am at the bottom of my earnings potential having graduated and started my first proper job in the last year. Also planning (with someone lined up) to rent a room in the house out which will pay roughly half of the mortgage + bills combined. If I buy in 2-4 months, house prices should have fallen/corrected and in 5 years I will be unlucky to be down on the purchase price. Finally, I read blogs like this, books on FIRE, use vanguard, drive a shed and live within my means.
Which providers should I be speaking to does anyone know please? Usual banks and brokers being unhelpful and I get the same ‘computer says no’ response. Cheers