Coming into some money - pay off half of interest-only mortgage or invest so can eventually pay it off in full?

[FungalToeBogeyman]

We took out an interest-only mortgage pre-recession, when our circumstances were very different and we were in a position to save towards repayment.

A few years later, DP, who was a high earner, developed mental health difficulties which affected his ability to work. Now, I'm the main earner, and my job is much more modestly paid. So while we can afford the monthly interest payments, we can't put more than a few hundred away each month towards the eventual repayment. The outstanding borrowing is £260,000.

In a few months, very luckily, I'm due to come into some money, and it will be enough to pay off nearly half the mortgage – a bit over £100,000.

What I'm wondering is, do we pay off a huge chunk of the mortgage with this money or, where the interest we pay is very low (1% over base rate), would it be better to invest it and, by the end of the mortgage term (about 20 years), have enough (with average growth of 5%) to pay it off in full?

I like the idea of seeing the overall borrowing reduce by nearly half, and knowing that when interest rates rise, we'll be able to afford the payments comfortably. However, even with nearly half the mortgage paid off, we still won't have the means to repay in full simply by saving each month, especially when interest rates rise. Nonetheless, we want to keep our settled DC here if at all possible.

My financial adviser recommends investing the money, at least initially while interest rates are still low in relation to the return we could achieve by investing, but I'd just like to get a second opinion.

What do others think? What would you do?

Thanks.

That's bonkers she has a current mortgage of £260k she can't pay off. her DH can't work and so she is the main earner and so unless she is paid a very high salary then taking on additional mortgages to purchase buy to let properties is a crazy idea and probably not even possible.

take on more debt in the hope of property market rising and paying off existing large debt - good plan

PLus you've forgotten the fact that she would also have to pay capital gains tax on the sale proceeds of the buy to let property. Plus she might have down times with no tenants.

Crazy

"take on more debt in the hope of property market rising and paying off existing large debt - good plan "

It has worked for people in the past. Depends what the OP attitude is to risk.

Making 100K into 260K is going have some element of risk. Shares are very high at the moment so if the OP invests in shares then she is likely to lose.

To get a buy to let mortage the OP would need a minimum of a 25K salary and 60% loan to value. You can charge higher rent for a more expensive property.

If she can't get a buy to let mortage then she could buy a property like this outright.

www.rightmove.co.uk/property-for-sale/property-37474981.html

and could acheive £600 a month rent. (assuming £150 per month in costs, agency fees, service charges, maintaince, void periods) would give an average income of £450 per month. If the OP is a basic tax payer then she would get £337 per month which she could then reinvest in an isa. Over 20 years this would give her an absolute minimum of 81K (if she had no interest, unlikely senario, it is likely rents would increase over 20 years)

Paying captial gains tax is not the end of the world. You only pay captial gains tax if you have actually made profit. She would have an allowance of 11K and if she married her partner then they could have a joint allowance of 22K. Depending on how strong her relationship she could put a property in joint names to reduce the tax burden.

now here's the thing

Now, I'm the main earner, and my job is much more modestly paid. So while we can afford the monthly interest payments, we can't put more than a few hundred away each month towards the eventual repayment. The outstanding borrowing is £260,000

So we have a person with a not-very-high income, who is in debt (yes, a mortgage is a debt) to the tune of £260k and can service the debt at the moment.

The person has the opportunity to reduce the debt. Should she take it?

Yes of course. Interest rates are going to rise. If OP can afford to make the same payments on the reduced mortgage, it will eventually be paid off. Alternatively if she wishes to gamble on investments going up and down at exactly the right time to suit her, she could make reduced mortgage payments (until the interest rate goes up, which it will) for a few years, and tuck the excess away somewhere where she can be sure it will not lose 40% of its value in a matter of months.

As for BTL, if you were able to get a 1% mortgage on £100,000, the interest would be a laughable £83 per month. When interest rates go up, and your mortgage costs you 6.5%, the interest alone will be £541 per month and perhaps you will be repossessed.

We know three things:

1. Interest rates will go up
2. When they do, many BTL landlords will be unable to service their debts, and will become distressed sellers
3. When hordes of BTL landlords become distressed sellers, the value of their houses and flats will fall

Try to find an older person who lived through the Thatcher years, and ask them what it was like when their mortgage interest rate went up to 15%.

3) When hordes of BTL landlords become distressed sellers, the value of their houses and flats will fall

Which is why I suggested that she buys a property outright - she won't need to sell. Rents will always stay reasonably high in an area where there is a reasonable amount of work on offer.

You wouldn't actually get more than a garage in London for £100k but perhaps one of the regional cities would give you an option. High transport costs mean that renting close to work is more attractive to people.

Buy to let requires a huge desposit to prevent sellers falling into negative equity and getting into the postion of being a distressed seller. (ie. BLT loans are 60% ltv) In the past distressed sellers were people who had loans of 100% ltv.

When we have lunatic interest rates then fewer people can buy and you have more renters as everyone needs somewhere to live. Periods of high interest rates have not lasted long as usually it brings the entire country to its knees very quickly. The OP could choose to invest some in a buy to let and put the rest in a high interest savings account to safeguard against a rainy day.

Newham is supposed to be one of the best areas to get a btl.

www.rightmove.co.uk/property-for-sale/property-44283308.html

There are plenty of people who want to live near London and its an up and coming area. The other area which is supposed to give a good yield is South Wales. However there is very little work in South Wales compared with London.

Pay your mortgage down OP and ignore risky BTL options. When interest rates rise - which they will you will be pleased you did.

6.5% is not remotely lunatic.

If OP buys a property for £100k or under, cash (she could get a bargain at an auction) she will have an instant extra income which could be used to invest further into whatever she wants.

And when we have "lunatic" interest rates the OP will be able to service both a £260k mortgage on her own and a BTL mortgage will she?

Crazy.

IF she can find a property for £100 she then has regular additional outgoings that may or may not cover her additional debts.

Again, not the plan for this particular OP in her particular circumstances.

"And when we have "lunatic" interest rates hmm the OP will be able to service both a £260k mortgage on her own and a BTL mortgage will she?
"

She can keep a fund of 30K aside to manage interest rates if/ when they rise. If rates return to 6.5% then she can remortgage if necessary. Rents rise with inflation and the really high interest rates of the thatcher years were to bring down inflation rates of 15% percentage. When we have high inflation then the value of savings are eaten away.

I agree with horsetowater that if the OP can get a property for under 100K it would be ideal. It would be a safer and more reliable investment. Find such a property near London would be hard, although I have provided a link further up the thread.

Agents are often a bit lazy and I think it would be helpful to get a property in reasonable distance of where the landlord lives. It may well be worth taking out a small loan to get something a little nicer as it would be easier to rent. You will not get a high class professional tenant in a fleabitten cesspit which is what a 100K flat near London would be.

I don't know about the regions. Prehaps a holiday property on the Isle of Wight would give income and be an investment.

I think this all comes down to the OP's risk appetite. I am quite risk averse and would want to prioritize security - the most certainty of being able to meet my living costs in future. So I would pay down debt and use future interest payments saved to pay it down further.

A different person would see a once in a lifetime opportunity to invest more widely and possibly be better off in the long run. Or possibly not. The range of views here on what you can realistically expect from investments is probably all you need to know. Are you comfortable with that uncertainty?

Putting it the other way around, which would be worse in ten years. Being in a better position on the current property but still having a bit of debt and wondering what could have been? Or struggling with a portfolio that is underperforming and wishing you'd bagged the security when you had the opportunity?
r not?

www.rightmove.co.uk/property-for-sale/property-27480045.html

You would need time and to borrow extra money to do renovations. The tenant upstairs could provide income to fund improvements

far safer bet if you don't want a mortgage

www.rightmove.co.uk/property-for-sale/property-23708652.html

I only read the first page, so sorry if repeating.

I would invest, for definite. If mortgage rates rise and you struggle to pay, you can always cash in some of the investment at that point.

Speaking as one who was in this position a few years back. Pay off as much as you can. It's liberating.

'Invest' might simply mean putting the cash in a five year bond paying 4%. It's not risky, pays better than the reducing the 2% mortgage saves, it's inaccessible enough not to be frittered away and stays the property of the OP in their DP status. Five years down the track, if rates are up a percent or two (whoever mentioned the 15% rates of the 1990s was being alarmist) then they can reassess.

Where can you get a five year bond paying 4%?

saving rates are crap at the moment

www.money.co.uk/savings-accounts/fixed-rate-cash-isas.htm

OP you would be better off with something like this - less than a mile from the centre of Birmingham.

www.rightmove.co.uk/property-for-sale/property-43748453.html

You would get around £600 a month from it which you could spend on shoes! Worry about interest rates when they actually go up, take advantage of them now. If the worst comes to the worst at least you have the rental income in Birmingham to top up your current finances.

"if rates are up a percent or two "

6.5% is quite normal. We are currently in exceptional conditions. They won't last.

So OP should expect your interest-only mortgage to cost five or six times what it does today. No scaremongering. Exceptional conditions happen. 15% was exceptional. 1% is exceptional. Either can happen.

Most people with 1% mortgage borrowed at a time with 6.5% was a normal interest rate. Most people took out a mortage on what was managable with income.

If you tried to borrow new mortgage you would be borrowing roughly 3% above the base rate rather than 0.5% above the base rate. The OP is more likely to get into trouble if she remortgages on 160K than if she keeps the present mortgage.

I think that flat that horsetowater pointed out looks an excellent buy. It would provide much needed income that would help with a mortgage rise or saving into a plan to pay of the 260K mortgage.

If there is any sanity in this world, IRs will go up to about 5% but I'm sure it will happen gradually so there will be plenty of time to readjust. If it takes 5 years OPs circumstances may have changed anyway - who knows where life takes you?

Really all you can do is to sit down with a calculator and work out the potential yield/rental income you could get on 100k (£500 a month). Don't assume the property will go up in value, it probably won't but you never know. I don't think it will go down in value though.

Then work out how much you would be saving per month if you paid off more of your mortgage.

If it's long term gain you are looking for then you have to work it out differently, looking at a snapshot of finances in 20 years time.

the aspect of risk control is very important

A £260k debt with no liquid assets and a low income could be very worrying.