This article on choosing the best mortgage rate is by The Dink from Team Monevator. Check back every Monday for more fresh perspectives on personal finance and investing from the Team.
The email from my bank practically begged me to pay attention: “Dear Mr Dink, it’s almost time to switch to a new mortgage rate.”
I’ve only renewed my mortgage once before. That time it dropped my monthly repayments by £70. So I’m excited by the prospect of more of the same.
Renewing a mortgage was not always pleasant. Speak to anyone who had a mortgage in the 1970s and they’ll tell you that. The 17% minimum lending rate some saw back then could be life-changing – if not life-threatening.
At 17%, my monthly mortgage payments would triple to £1,800.
Ouch!
My bank’s email also reminded me to be grateful to simply be on the housing ladder at all.
As a millennial, many of my friends are stuck in a cycle of not being able to save for a deposit. The high cost of rent is too high.
The average house costs around £300,000. Buying one requires a 10% deposit of £30,000. You need to be saving about £1,000 a month for three years to cover the deposit and associated buying costs. All while paying rent.
Ouch, again.
My mortgage history
We bought our house in 2016 for £172,000 with 90% Loan To Value (LTV) mortgage at 2.49%, fixed for two years. The monthly payment was £820.
In 2018 we switched mortgage and topped up. This got us into a better 75% LTV bracket. We fixed at 1.99%, with a £750 monthly payment.
Today in 2021 the house is valued at £220,000. The mortgage balance is £120,000. Our LTV has come down to 54%.
We didn’t overstretch ourselves in 2016. This despite the bank offering us five-times our salary and the standard advice being to get as big a house as possible to leverage house price growth.
Instead, we bought a modest house to give us more flexibility.
Sure, in a good year a £500,000 house might go up by over 3%. That’s £15,000 in extra net wealth! However, you don’t get to see that money until you sell. Even then, selling is a painful process that takes months.
A cheaper house also fitted our lifestyle back then. Our smaller mortgage was not a burden. At a pinch we could pay it with a single salary if we had to (albeit by living on bread and water.)
The money we would have spent on a £500,000 mortgage has instead been funneled into our ISA accounts. Those have done pretty well so far!
Should we pay off the mortgage?
At the start of my FIRE1 journey I wrote up a rough allocation, which I believe matches my risk profile.
My asset allocation manages my inner conflict between three competing tendencies – active investor, sensible passive investor, and wannabe crypto punk.
This is how I divide my assets:
- 60%: Passive ETFs
- 30%: Actively traded
- 6%: Cash
- 3%: Gold
- 1%: Crypto
This allocation enables me to sleep at night. I’ve stuck to it and rebalanced as required.
Now, after seven years of maxing out my Stock and Shares ISAs, we have enough to pay off the mortgage should we choose to.
It is tempting. But would it lose me money overall?
With a mixed portfolio it’s very hard to estimate what return you can expect over the next five years.
Compare that with using the money to pay off your mortgage. In this instance all the numbers required are known upfront. You can therefore calculate a certain ‘return’ on paying off some debt to the nearest penny.
To get an approximate idea, I turned to a compound interest calculator. I assumed my portfolio would return 4% over the five year term of my next mortgage fix.
Scenario #1: Pay off the mortgage
Let’s say I withdrew £120,000 from ISA to fully pay off my mortgage.
Obviously there would be no more mortgage repayments after that.
So I assume I will pay the freed-up £640 – which the mortgage would have been costing me each month if not paid off – into my ISA.
After five years – at that guesstimated 4% – I would have £42,431.
To recap, after five years:
Remaining mortgage: £0
ISA balance: £42,431
Net: £42,431
Scenario #2: Don’t pay off the mortgage
Alternatively, what if I left the £120,000 in my ISA (assuming again 4% return on my portfolio) and continued to slowly pay down my mortgage?
Five years after not paying off mortgage:
Remaining Mortgage: £86,992
ISA Balance: £146,519
Let’s say I then – after five years – used the ISA balance to pay off the mortgage – so £146,519 minus £86,992.
Net: £59,527
The financial difference
On these numbers I’d end up £17,000 better off by waiting another five years before paying off the mortgage.
This is my personal situation. It is based on that 4% estimated return from my portfolio. Different numbers would obviously change the final result.
My portfolio might well earn less than 4%. However I’d be willing to take that risk. I think 4% is fairly conservative compared to historical returns – and there’s also a chance I would earn more than 4%.
Paying off the mortgage completely will not give me a chance of reaching financial independence any sooner.
Having more money growing in my ISA just might.
LTV thresholds
Last time we renewed our mortgage we paid in a few thousand extra pounds to get us into the next 5% LTV bracket.
This money came from my ISA. I believe it was definitely worth it to reduce the monthly mortgage payments by qualifying for a better interest rate.
Since then, the recent house price boom has increased the value of our home by enough to get under the top 60% LTV for best rates.
Offset Mortgage
I’ve previously found it hard to see a situation where an offset mortgage would be useful to us. But based on my comrade’s enthusiasm on Monevator, I re-ran the numbers.
If I converted everything outside of my ISA – that is gold, crypto, and cash – to a savings account to offset against the mortgage, it could give me £10,000.
The bank would now calculate the mortgage against £110,000 rather than £120,000 – but at a higher rate of 1.39%
This gives me £40 a month cheaper mortgage payments of £600.
Honestly, the offset is more competitive than I thought it would be.
However, I’m happy to take the chance that my £10,000 left in mixed assets will grow enough to beat the £40 a month saved – and maybe by a lot more.
Again, something to decide based on your situation and risk appetite.
The best mortgage rate
I don’t get wound up striving for the absolute best mortgage rate. There is not a life-changing difference between most fixed deals I look at.
For the convenience of renewing with my current provider, I don’t mind paying an extra few quid a month. It helps that my current provider has consistently ranked at the top of the mortgage rate tables.
What you must avoid is ending up on an expensive variable rate.
Premier customers
Because of the large lump in my ISA, I’m a premier customer at my bank. This sounds great, but I really struggle to make use of any of the perks.
My bank offers a ‘5-year Fixed Premier’ account with a good rate. But the large arrangement fee means it’s not worth it on our small mortgage.
Lounge access at the airport, though, is brilliant!
What if we move home?
Well-meaning friends have told us we should not renew our mortgage if we intend to move within the next 18 months. Instead, they say, we should go onto the variable rate
We’ve lived in this tiny house through lockdown. With the prospect of working from home a lot more, of course we would like a larger home soon.
Our friends’ advice centres on the Early Repayment Charge (ERC). This becomes due if you pay off a fixed-rate mortgage before the term is up.
On our current mortgage the ERC is 1% of the amount repaid early, for each year remaining of the fixed rate.
However our mortgage advisor has assured us that most people can ‘port’ their mortgage when they buy their next house. So hopefully by doing so we can avoid any penalty payment when we eventually move house.
I’ve heard of another life event that this fee can nail you on. That’s if you get divorced and have to sell the house.
If in that situation you need to pay off the mortgage early you might be liable to pay a charge. So if your relationship is a bit rocky don’t sign up for a five-year fixed mortgage with potentially a near-5% ERC.
(Of course if your relationship is already shaky then explaining why you want to avoid a five-year commitment might itself lead to an interesting conversation…)
Exploring the fixed rates on offer
My bank seems to always be near the top of the mortgage tables. Handy.
I therefore started my search by creating a spreadsheet with all my bank’s fixed mortgage options, over two, three, and five years.
Once I decided what rate suited us best, I plugged it into a couple of mortgage comparison sites. Just to make sure it was fairly competitive.
I’m not going to share my spreadsheet. It’s a brilliant exercise to write one yourself. (Also, I’m scared of any liability or criticism that may be directed at my sheet!)
The deals in detail
These are the mortgage deals my bank offered me:
| Product | Fee | Rate % | Years |
| 2-Year Fixed Fee Saver | £0 | 1.14 | 2 |
| 2-Year Fixed Standard | £999 | 0.94 | 2 |
| 3-Year Fixed Fee Saver | £0 | 1.34 | 3 |
| 3-Year Fixed Standard | £999 | 1.09 | 3 |
| 5-Year Fixed Fee Saver | £0 | 1.34 | 5 |
| 5-Year Fixed Standard | £999 | 1.09 | 5 |
| 5-Year Fixed Premier Standard | £1,499 | 1.06 | 5 |
I then turned to the basic mortgage calculator at Money Saving Expert. I plugged in my mortgage debt (£120,000), mortgage term (17 years), and the interest rate of each deal.
This gives me a monthly repayment and a remaining debt figure (at the end of the term) for each deal:
| Fee | Rate % | Years | Monthly | Remaining | |
| 2-Year Fixed Fee Saver | £0 | 1.14 | 2 | £648 | £107,063 |
| 2 Year Fixed Standard | £999 | 0.94 | 2 | £637 | £106,853 |
| 3-Year Fixed Fee Saver | £0 | 1.34 | 3 | £658 | £100,761 |
| 3-Year Fixed Standard | £999 | 1.09 | 3 | £645 | £100,412 |
| 5-Year Fixed Fee Saver | £0 | 1.34 | 5 | £658 | £87,498 |
| 5-Year Fixed Standard | £999 | 1.09 | 5 | £645 | £86,992 |
| 5-Year Fixed Premier Standard | £1,499 | 1.06 | 5 | £643 | £86,931 |
Using the monthly repayment I then calculated the total paid over the period for each deal. This is the monthly repayment multiplied by 12 and then by the number of years, plus the arrangement fee.
Subtracting the remaining debt from the initial loan amount of £120,000, I get the amount that has been paid off the mortgage at the end of each product’s term.
Show me the money
In the table below, the ‘Total cost’ is then the difference between ‘Total paid’ and the amount ‘Paid off’.
Finally – based on total cost and the amount paid off – for each mortgage option I calculate the true cost for each £1 paid off of the mortgage:
| Monthly | Remaining | Total Paid | Paid off | Total Cost | Cost per £ | |
| 2-Year Fixed Fee Saver | £648 | £107,063 | £15,552 | £12,937 | £2,615 | 0.20 |
| 2-Year Fixed Standard | £637 | £106,853 | £16,287 | £13,147 | £3,140 | 0.24 |
| 3-Year Fixed Fee Saver | £658 | £100,761 | £23,688 | £19,239 | £4,449 | 0.23 |
| 3-Year Fixed Standard | £645 | £100,412 | £24,219 | £19,588 | £4,631 | 0.24 |
| 5-Year Fixed Fee Saver | £658 | £87,498 | £39,480 | £32,502 | £6,978 | 0.21 |
| 5-Year Fixed Standard | £645 | £86,992 | £39,699 | £33,008 | £6,691 | 0.20 |
| 5-Year Fixed Premier Standard | £643 | £86,931 | £40,079 | £33,069 | £7,010 | 0.21 |
(Please refer to the tables above for rates and fees for each product)
Looking across all of the deals, none of them are significantly different enough to have a life-changing effect on my finances.
It is scary when you work it out like this though. It’s costing me at least 20p for every £1 that I pay off my mortgage.
But don’t panic. Go back and reread the section ‘Should I pay off the mortgage?’ for some perspective.
What am I going to do?
Last time I renewed, I fixed for three years. I was sure that the interest rate would go up due to Brexit. But I was wrong.
This time I’m even more certain that interest rates will go up. So I’m going to fix the mortgage for five years.
But it doesn’t matter if I am wrong. I’ll sleep well at night having locked in a monthly payment – one that we can comfortably pay and have budgeted for.
However if interest rates do shoot up, I’ll be unbelievably smug for the next five years. That alone is worth the risk!
You can see all The Dink’s articles in his dedicated archive.
- Financial Independence Retire Early. [↩]
Interesting. I went for clearing the mortgage (actually bought without a mortgage – but much more modest place) back in 2012. I then put the money saved into my personal pension. Adding this large sum each month (under the shelter of salary sacrifice) acted as an accelerant to FI – especially given how S&S have performed since then.
Have you considered a part and part arrangement? This would allow you to split your loan into two separate mortgages (from the same lender). This approach can give additional flexibility. I used this approach years ago to lock in a fixed deal on part of our loan and retain the flexibility to overpay on the balance. Admittedly back then interest rates were much higher and the numbers may well be very different today.
Another way to frame the situation is to answer the question “If you could borrow £120K today at 2% today would you invest in the stock market or the property market?”.
However, the investment in your house has 2x leverage, a predictable risk profile, similar tax treatment (no CGT) and should at least keep pace with broad inflation.
I’ve just completed pretty much the same exercise and switched for a new lower rate, having reached the same conclusions about early redemption. I’ll revisit redemption in 2 years at a far more acceptable figure! Meanwhile, lower monthly cost!
Thanks for this Dink.
It makes perfect sense to my mind to do this if you can fix at a little over 1%. If we ever see mean reversion occur, and that is a big if, you may change your mind with the maths. Effectively, our mortgage was “paid off” in about 2009. It was an offset product and we didn’t clear the balance as it actually paid us interest at about 4% and the cash that was offset against it above the value of the loan was our emergency three months wages after tax stash. rates dwindled after 2009 and the stash got bigger and we closed the account early 2012. Hindsight is a wonderful thing, I should have kept it active as a margin loan facility to iron out a few of life’s major expenses, it would be due for settling next May.
Finumus’ post on using offset mortgages shows the potential in this flexibility and provided you keep a careful eye on your accounts, even your average monthly current account balance counts towards reducing the interest. Not a product for all, but useful in many ways.
https://www.purepropertyfinance.co.uk/news/a-brief-history-of-average-mortgage-interest-rates/
JimJim
Got about 55k left, was on course to pay off in the next 5 years but Last year we extended the term on our mortgage to the maximum allowed about 20years (the Mrs hits age 65 first) we are fixed @1.64% for 5 this reduced the monthly payments to the minimum, we then are adding the difference to what we were paying into sipps/ISA earmarked within a virtual trustnet portfolio tracking returns Vs 1.64%
When/if Mort interest rates are worse than the returns we’ll pay off the mort from the fire fund. Sure I’d like the feeling of not having Mort debt now but using a networth figure helps us visualise.
Another advantage for us to stick to the original mortgage provider is that they don’t to see financial figures when it’s renewal time 🙂 we’ll be fire well before the current redemption date and still paying the mortgage without jobs, weve also got a few years built up within the account should we need a payment holiday.
This timing of this post is incredible, I’m in a very similar position and been thinking about this all weekend.
The key difference is that I could not be without an offset mortgage! My strategy is to only pay off the interest and leave the capital side alone (£140k on house value £320k = 44% LTV). The rate is BOE BR +1.74% for life of mortgage, but really it’s not about the rate. It’s the flexibility to spend, save and move large amounts of capital around as you need to. You have access to all your capital and if you don’t spend it you don’t pay interest on it, it simply does not get any better.
10 years ago when rates were higher (3 – 5%), I focused on my offset savings account and it felt good to have enough to pay off the mortgage in 8 years rather than the 18 forecast. Then covid hit and rates dropped further as did local house prices and sales, so I used the funds to purchase two very nice BTL flats under valuation and popped the rest in our S&S ISA’s…. 12 months on these have all increased significantly. Not everyone is into property but I personally love the steady gains, monthly income and living options for me and my family in the future.
Now I’m at ground zero on paying off the balance of £140k (44% LTV) with my offset savings account, but my head is actually swaying towards re-mortgaging with another offset mortgage at a slightly lower rate of ~1.3% fixed for 5 years to release £52k of equity from the house in case of any opportunities that may arise in the stock or property market i.e. a recession.
To be honest I’m not convinced I ever want to pay off my mortgage, I think I’m happy to just live on an interest only basis (which feels like renting the house but cheaper), particularly where interest rates are low. If we do enter a period of high interest rates (+4 or 5%), there is no doubt I’d switch my focus to again saving in my offset savings account over investing in property and stock market, that’s the beautiful flexibility of the offset mortgage. Perhaps if I inherit a lump sum in the future or use a retirement lump sum I’d just put it into my offset savings account to ensure i’m not paying any interest but I can’t see the day when I hand that capital over to the bank, i’ll most likely downsize and go live in one of my BTL.
So it’s looking like I need to make a decision between:
1) Stick with current offset mortgage provider who have offered to let me extend the duration of my mortgage back to 25 years at life of mortgage BOE BR +1.74% (44% LTV) and forget about releasing £52k of equity as their current interest rate is too high BOE BR +3.19% for new borrowing.
2) Move to a new supplier on 5 year fixed offset mortgage at ~1.3% and release £52k of equity from house (60% LTV) and wait for the right property or stock opportunity to arise. It means I’d pay £2k less in interest charges risk free over next 5 years as rate is lower and fixed.
I’m just slightly concerned about option 2 over the long term as who knows what rates will be like in 5 years time, I would assume low but the days of 4 – 5% will have to return at some point and I like the comfort of knowing I have an existing deal which is at least tracking BOE BR for 25 years so no major surprises. I also really like the provider, First Direct are ace.
Sorry this turned into such a long post, it wasn’t meant to be initially however I just found it cathartic to get all these thoughts out of my head as I wrote. I’d love to hear some feedback and thoughts, I’m very aware of some risks and perils that I have mentioned in here due to length but I’m sure you guys will be quick to pick them up!
I have a new product starting in Sep, 5yr offset at 1.29% to replace current 2yr offset at 0.89%. All Scottish Widows.
I’m using the mortgage as leverage on the investment portfolio.
A few of the ‘worst-case’ scenarios did actually happen over that first 2 yr period, i.e. covid crash, and extended funemployment. A little hairy but I’m going to plow on regardless..
@The Rhino
I was also looking at this Scottish Widows offset product. It’s cheaper than my current BOE BR +1.74%, but I can extended this existing rate for 25 years.
I like the idea of fixing for 5 years at 1.29%, my concern is for the longer term after 5 years, if interest rates rise back to 4 – 5% or more…. I could pay less for 5 years but then more for 20 years!
What would you take right now if both were on the table… BOE BR +1.74% for 25 years… or 1.29% for 5 years then an unknown rate for 20 years.
Of course if base rate goes up, I will also feel that, I just don’t want to be in a position where i’m forced into taking arbitrary variable rates when i have the certainty of a BOE tracker, plus bouncing about between different providers for many years paying product fees etc.
I’ve actually extended my mortgage by 5 years. I’m paying just over 1% on n interest only mortgage which means a repayment of just over £200 a month on £183k. Happy to keep paying that whilst my investments grow. Sure there is a risk that the investments will drop but I’m 50% equities and 50% bonds, and am happy with that risk profile. I own another house which will have enough equity in it to pay off my mortgage at the end of the extension period (and low risk since there is a low amount of mortgage on the investment house)
Fascinating comments on this post. Looks real end of era, leveraging up to buy, buy, buy. Last serious property crash was early ’90s, I guess people have forgotten (or were too young.)
Fill yer boots, peeps, but count me out.
@Brod
Didn’t the last massive crash in 2008/09 count? I remember it very well, I lucked out with timing to get 20% above offers over price (Scottish system) on my house then weeks later a 10% under valuation deal on a new house. As things panned out, houses continued to drop through 2009 and went from 20% over valuation to 30% under valuation. I think that was a pretty serious crash?
I wouldn’t buy buy buy in 2021, there was a window in 2020 to do that before this rampant inflation. However, there will be another recession at some point of course, and it’s this that I am planning for. I don’t care about short term valuations as I’m in it for 25 years and only buy high quality, high yield, high growth properties.
@Brod — You write:
I take your point but as you know a house price crash (as you’re warning of here) affects house prices, not the value of an outstanding mortgage.
The risk to a mortgage, once taken out, is that you can’t repay it. (That is your income is curbed or your investments are hit if planning to repay via a lump sum. Or that your gran gets into healthy living, if planning to repay via an inheritance… 😉 )
Of course you might say it’s all of a piece and that this reflect a risk-on attitude that’s also reading across into the equity market, but that’s a different matter.
I covered a lot of this here, albeit with an interest-only focus:
https://monevator.com/why-im-not-scared-of-my-interest-only-mortgage/
@Kevin – interesting personal stories about valuations in a small corner of the market. As both your posts point out, you’ve obviously done very well with your buys. Congratulations. But can you give me the Land Registry figures to compare the two recessions? Depth of falls, time to recovery (both real and nominal), number of repossessions? From memory, I think the ’90s crash took over a decade for nominal prices to recover.
@TI – yes, that was my point. And people leveraging a risky asset to buy other risky assets, which by some measures (e.g. CAPE) are themselves very overvalued and perhaps (over?) due a correction.
Though as you say, as long as you have a job, you can make (some) repayments. I think it’s job losses that cause house price corrections.
Hindsight is 2020 and predicting a crash is easy (the “when” is the hard part).
Home prices have been “high” ie 5+ (now 10+) income to price ratio for all of my adult life, and yet if I had bought a home, any home, in any one of those 20 years I would now be better off by an order of magnitude.
Humans have a finite lifespan and you can’t tilt at windmills forever. /derail
I hope there will be a serious house price crash so younger people are not effectively indentured by high prices and vulnerable to interest rate rises. If you find yourself in the position of wanting to buy and potentially able to at some point, it’s fine to wait and hope – as the craziness surely cannot last forever – but I would give consideration to what plan B looks like. What are you going to do if they keep on rising or stay flat for a long time?
I ended up making a shift to working from home around a decade ago, and bought in a beautiful, but relatively poor rural area. It took a lot of sacrifices – living in shared houses until late 30s and all of them at the lower end of the market as well as few holidays. We ended up buying when I was 40. I have no regrets, but would totally understand anyone not wanting to make similar certain sacrifices in exchange for an uncertain positive outcome (and the world is different again from back then).
IIRC there were dips in prices in 2005, 2009 and 2012 (when we bought). Some of the dips varied considerably by geography.
@ Dink
Re reading this article, I stuck at one sentence and pondered.
“It is scary when you work it out like this though. It’s costing me at least 20p for every £1 that I pay off my mortgage.”
Surely this calculation includes the interest on the bit you did not pay off, so run the figures again with a smaller initial balance and get a smaller cost to “pay off” ditto a larger balance – larger cost.
This is just a reverse of the compounding assets curve. A snapshot at a point of debt or asset will not give you the full picture?
If you think about it like that, perhaps paying the 20p premium now is not as bad as paying a 40p premium in the future? – Unless the utility of the money now is better than the utility of the money plus interest and inflationary erosion in the future?
Am I over thinking this?
JimJim
@Brod comment 11
I understand what you are referring to. Leveraging up (via S&S ISA) by using debt (accumulated by not repaying mortgage) sounds like a recipe for disaster.
But we have to understand the unusual circumstances we find ourselves in! Today we can get a 5 yr fixed mortgage at almost 1%! The 30 yr UK gilt is at around 0.94%!
All the above posters (well most of them) are hardly degenerate gamblers. Most of them (including the original poster Dink) have shown extreme prudence and reduced they LTV to at or under 60.
Personally, as you say, I would not replace one risky asset with another, by that I mean I would not lever up by investing in S&S ISA. Although, over a 25 yr period S &S ISA is likely to outperform, my risk averse attitude would never allow me to do anything that even has a 0.001% chance of ruining my family. I have lived through the 08 crisis and have seen all correlations go to 1 , as in house prices, stocks dropped 30-50% at the same time and most ppl became jobless, which typically means your house gets auctioned off and you may still owe the bank!
However, going interest only on your mortgage at 1% (or offset mortgage at just over 1%) and using the balance amt to fill up your pension (especially for higher rate tax payers) seems like a no brainer. You then use that money to buy 0.94% 30 yr UK gilts. Unless you think the UK is going to default in your lifetime, (much bigger problem to be honest) your return is 66.67% on the day of investment, compounded at 0.94%/year. This is a guaranteed return (virtually risk free) and is guaranteed to beat your mortgage by a factor of 10x?
I have run numbers for a mortgage of £200k. If you pay it back at avg rate of 1.75% over 25 yrs, it costs £47k in interest. If you go interest only at 1.75% you pay £87.3k in interest. £200k funneled in a pension over the same 25 yrs will result in £333k. That is net gain of £46k (133-87) instead of an interest payment of £47k on a traditional repayment mortgage. On top of it the UK gilts you buy will produce another 0.94%!
What am I missing??
@ Rishi 18
The only thing I can see you missing is
“If you pay it back at avg rate of 1.75% over 25 yrs, it costs £47k in interest”
The “If” is the risk.
Historically, this may not happen (see link in my first comment), Perhaps unlikely that the interest will gallop back to the 16% PA I started paying my first mortgage at but it still bears risk.
JimJim
@Rishi (#18):
Not sure how old you are, but worth bearing in mind that pension is currently not accessible (under normal circumstances) before age 55. And, even if you were able to access your pension – to e.g. stave off a disaster – then any future contributions beyond that crisis could be curtailed to just £4k PA IIRC.
@Al Cam
The current plan is to raise the private pension access age to 57 in 2028, and recent proposals are to increase the state retirement age to 68 in 2037-9, meaning the private age will probably go to 58 then.
I’m 35 and just working on the assumption my SIPP will be inaccessible until I’m 60. 60 seems to be an age favored at the moment with the Lifetime ISA.
@Andrew (#21)
Indeed. Based on my own experience, a lot will happen in those 25 years – some of which you may just see coming but others will definitely come from “left field”.
Hi Dink,
3 things struck me in this post:
1) 4% return on your portfolio in the financials section.
Mortgage interest is before inflation, so your debt is reducing in real terms if interest is less than inflation e.g. 1%mort-rate, 2%inflation; better than 1%investment loss = positive return.
A 2% real return on your risk profile looks very conservative.
2) If your mortgage offers porting, trust your advisor as it is a doddle to do (providing your mortgage isn’t under water and you’re not buying something exotic and difficult to value).
3) The buying philosophy you used the first time should serve you well going forward with any future larger purchase. Buy within your means, in a location you like and suited for your lifestyle.
Since owning a house from 2008 (moving and porting once for growing family), I have lived in areas I love living in, modest housing and have easily always afforded the monthly payments. This has served my family well despite the hindsight opportunity cost of the first mortgage in 2008 which was a 5 yr fix at 5.99% on 95%LTV!
We just borrowed another £100k on a long term fix at 1.5% to invest elsewhere. We are following the principles above regarding our house and I am confident I can beat a 0.5% real loss on my investments over the long term. The biggest risk is behavioural and keeping this pot separate for the long term.
Enjoy the journey 🙂
@ALL – good conversation this.
But I think there’s an unspoken assumption of continuously low inflation, low interest rates, full employment and rising or stable house & equity prices. Or at least that changes will be slow and predictable. But if inflation takes off (and there are global supply chain issues in the news at the moment, micro-processors rather than oil, and also labour in the UK), interest rates may/will have to rise and the whole economy could turn south. Or maybe none of this will happen? Who knows?
Can I remind people, though, the ’08 crash was alleviated by massive, global QE. QE that’s still ongoing as every time the (US) govt attempts to reduce QE, the markets wobble. Then there is govt support during Covid… So what further support can govts give the markets?
My wife and I took the risk averse route. We paid off the mortgage apart from £50k which is covered by an offset account. We’ve since lived very well & securely, and we’ve poured money into our SIPPs & ISAs. But I’m at the end of my working life, so I’m concentrating on wealth preservation.
@Brod
I don’t think there is an assumption that 1% mortgage rates will last for an extended period of time (i.e. +10 years), I believe this is freak period we are in… I personally expect rates to move back to 3 – 5% at some point, of course we just don’t know when. I’m feeling global commodity and labour inflation big time in my engineering and sourcing job and I dislike the extensive QE program, both of which do make me a bit nervous for the future.
That is what is driving my hesitancy to re-mortgage to a new provider on a 5 year 1.3% fix and releasing £50k equity, versus sticking with my existing provider at BOE BR +1.74% and no equity release but with an extended duration of 25 years. I could pay less for 5 years but a heck of a lot more in the following 20 years. Although that’s the beauty of an offset mortgage, I can re-focus my attentions to diverting funds into the linked savings account and mitigate any big impact on monthly payment.
@Kevin (#25):
Why A or B? Explicitly, have you explored alternatives that might allow you to hedge your bets – a possible approach is outlined at #2 above.
@Al Cam
I have seen part and part as an option, with Virgin money for example, but to be honest i didn’t exactly follow how it worked and what additional benefits it would give me…. feel free to explain in laymans terms if you don’t mind and i’ll do some googling also, thanks!
@Kevin – well, we’ll have to disagree, but good luck. On my very modest terms, I’ve won the game, my family are provided for, so I’m not playing. But you are taking some pretty concentrated, leveraged bets on the UK property market. I just think we shouldn’t look at just the latest decade, or since dotcom, or the ’90s crash but longer. The ’70s maybe?
Btw, isn’t equity release also known as borrowing more? 😉 (Full disclosure, we’re discussing borrowing an extra £150k to buy a place in Spain for potential residency. But plan to repay over the 10 year fix. But that’s completely different. Nothing in common at all. No sirree! Though you’re right, seems rude not to borrow when they’re so desperate to lend.)
!Suerte!
Took a quick look, don’t fancy part and part, quite happy with the full flexibility of interest only offset mortgage. It’s unlikely i’ll ever repay the remaining portion of the loan, most likely will sell the house and downsize when/before it is due…. or as soon as i can punt my kids into my BTL’s ha ha!
@kevin – I would take the 25 yr product over the 5 given the choice. Who’s it with?
It’s with First Direct, who to be fair to them, have been awesome over the last 10 years. I think that’s my mind made up, I’ll probably just stick with FD, extend to 25 years and raise some capital the good old fashioned way… SAVING ha! I’ll probably release a bit of equity from my 2 x BTL instead as they are both on short term 2y fixes. Man it was good to get all that out my head and read about everybody else’s scenarios and thoughts!
@Brod
Ha ha, borrowing in the UK to buy a property in Spain even goes way beyond my red lines! Having lived in Italy, dealing with governments and financial institutions in southern european countries is horrendous! I’d rather have BTL in the UK, then rent in Spain, and perhaps visit new locations each year. I do agree with looking over a longer period and not just the last 10 – 20 years.
@Kevin (#29)
FWIW, we are 25+ years down the line and having cleared our mortgage many years ago – I still cannot see the day when we would ever willingly “sell the house and downsize”. Each to their own.
Article and comments really interesting.
I think that the comments suggesting that using cheap secured borrowing to work your money harder are – on balance – likely correct.
For me though Brod is my guiding star here. You need a home. Why gamble when you have what you need? Pay off the mortgage and you’re only real risk is title/deed fraud or expropriation.
There are a number of known risks which have been mentioned above. There are also unknown, unknown risks of course too.
Someone above cites the fact that the UK is not likely to default on its debt over foreseeable timescales. I agree. What is the risk that the £ won’t be the default UK currency in 25 years time? There are clever people here who know more than me, so with a degree of humbleness, might I suggest this risk is non-zero? There are now competing currencies via crypto and it is possible to imagine various futures in which the powers that be decide to terminate their experiment with fiat currencies given the scale of QE. Just a thought.
Interesting comments, if I was in the position of having a mortgage and able to redeem it AND able to secure a long fixed rate loan then I’d leap it and invest with the proceeds.
I have done similar things in the past, but surprisingly (to me at least) whilst the omens always looked good at the time, stuff happens which did not cause disaster, but certainly took away the bumper returns I anticipated.
Worth remembering that the stuff that happens always seems to be the unexpected, things you didn’t even know to worry about.
We paid off the mortgage on our first and second properties as soon as we could. That was back in the 1980s with double digit interest rates. Equity markets seemed much more risky back then than they do now, probably because the experience of the early 1970s was relatively fresh. Tax rates were much higher as well so the tax free returns on paying off a mortgage were worth a lot more than they would be now, particularly with such generous ISA and pension allowances.
Paying off the mortgage felt absolutely great at the time and emboldened me to take more career risk than I might otherwise have done. I would not dismiss that sense of freedom one gets from paying off a mortgage, it is worth more than the raw maths shows.
On the other hand I can appreciate the temptation to keep a mortgage going with rates so low. I don’t really know what I would do if I was in the Dink’s shoes. Too many factors to take into consideration, many depending so much on personal circumstances. Best of luck whatever you decide to do.
I’m really loving all the comments here, so interesting to see the personal experiences, risk tendencies, outlook on life etc. It’s given me a lot of different perspectives to consider, which was exactly what I was in need. I also read the following threads which gave me even more to ponder:
https://monevator.com/why-im-not-scared-of-my-interest-only-mortgage/
https://monevator.com/investing-versus-mortgage-risk/
At 32 (in 2012) when I bought my forever home I focused for 8 years saving into my offset account to enable me to pay the mortgage off by 40… but then got to 40 with the job done and realised I may have made a mistake by missing out on all those investment returns. On reflection after the financial crash 2008 – 09, investing seemed to be too risky and I just wasn’t educated enough in the ways of Vanguard. Then waxed the lot on 2 x BTL and the rest into our S&S ISA VG100.
So, the natural next big milestone is 50 in 2030, when I also hope to be FI. After a lot of pondering and scribbling of ideas and numbers, I think I’m going to set up a plan to do both this time! Here is my plan:
1) Extend my existing FD Offset IO mortgage back to 25Y at BOE BR +1.74%
2) Save the specific amount monthly required for 9 years to have the ‘option’ of paying the mortgage balance of £140k and be mortgage free (~45% of savings per month)
3) Release equity from my 2 x BTL as and when I re-mortgage, assume 20% capital growth in 10 years, and put the equity into my house to assist saving (approx ~£40K released)
3) Invest ~40% of monthly savings into our S&S ISA’s in VG global index funds.
4) Invest ~15% of monthly savings into our SIPP in VG global index funds.
I figure the option above keeps me on a risk level that I am satisfied with and gives me options and exposure to different assets and wrappers for next 9 years with opportunities to pivot if required. Ultimately I could then pay off the mortgage if I was that way inclined or at least neutralise high interest rates with my offset savings balance. Alternatively I may decide to sell the house and downsize to reach FI. I guess life is all about opportunities and options!
My situation is a little different – no large ISA to consider (earlier in the journey) but I went a different way with our recent remortgage.
Similar mortgage / LTV
I extended our term to the maximum to reduced our payments as much as able – they do mortgages that go till you’re 75 now! – trying to recreate an interest only mortgage as best as able without actually being able to get one.
This allows us to save considerably to out ISA / pensions via SS.
with interests rate this low, the possible upsides of this approach (of leveraging our mortgage) outweigh the (mainly psychological) downsides.
I may yet be wrong. Or right.
Plus, its only a 2yr (deal) experiment, so nothing too binding!