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.

"I like IO because in good months I pay down shed loads of capital and in bad months none"

talkinpeace this is what currently appeals to me. DD starts nursery in March so we probably wont put as much back as a payment onto the mortgage for a few months.

Other than if we was in dire financial difficulties and not able to meet mortgage payments- can the bank ever just withdraw our Interest only mortgage- this is what worries me currently as realistically due to surprise baby number 3 (10 year age gap between her and DC2) we would struggle going on a re-payment. When DD starts school (in 2018) our childcare costs will go down so we could go on re-payment. Before then would be a disaster.
Could the bank just 'withdraw'?

littleredsquirrel-
Thank you. It really is something that worries me because of scaremongering.

tiredmamma
nope
only by re negotiating the whole terms of the mortgage
once you have signed on the dotted line its that deal till YOU choose another
THEY can only choose another if you do not pay

I got the mortgage for this house on my then salary
and completed my resignation six weeks later
nowt the C&G could do - and as we never dropped a payment and I'm me they never dared

PS
we moved from C&G to Royal Bank to Co op
all of them have learned not to argue with me as I'm prone to turn up at their branches with a laptop and my spreadsheets and ask to see theirs
at which point they accept mine

being a sociopath / mild psychopath has definite advantages in financial matters
DH's view is "why have a dog (me) and bark yourself"

Talkinpeace I cannot tell you how relieved I am by your post.

I had been worried about them saying 'right- time for re-payment please".

We will just continue with how it is and continue to make the odd capital payment here and there (which has been 7k since 2011 so far) - not a MASSIve amount- but an amount all the same?

I like the dog analogy. Ill be 'following' you around the board should I ever get stuck with even the most basic financial questions!
thanks

i would pay off 90K and add 10 k to your cash isa's if you pay off your mortgage and something came up you would never be able to borrow at that preferential rate with your partner unable to work i would have 12 months living expenses minimum in savings

technically any mortgage can be withdrawn at anytime but in practice no

This is why I suggested that OP keeps her IO mortgages and invests all the money in another property. She gets extra income and retains the advantage of the IO mortgage, which is its flexibility and current low payments.

You can't get an IO mortgage at the moment without proof of and commitment to repayment vehicle. Times are changing as I said squirrel - we applied last month and were refused. She is unlikely to get an IO mortgage again.

horsetowater, your preferred option means her assets are concentrated in domestic property (so no diversification and high exposure to the risks of a single asset class) and she has maximised her debt. I think these are two unwise choices.

So she would be even more at risk than she is now, if house prices fail to soar, and when (not if) interest rates rise.

If house prices drop where she buys her rental investment then she sells it. By this time it is likely to have gained her at least £6000 a year after expenses. It might increase in value as well, or rents might increase. I think town centre properties and rents are going to increase as fuel costs rise.

an income of £6000 a year, after tax and expenses, maintenance and agents, and voids between tenants, sounds rather optimistic on an investment of £100k including fitting out and buying costs, even if she does not have the bad luck of having to evict a non-paying tenant leaving a damaged property.

How do you know that the resale value, after selling costs, of the potential BTL, will not drop by more than the income you picture?

if OP was my client I would never ever suggest going into BTL with money she cannot afford to lose
ie if there is other debt, clear that before speculating - which is what BTL really is

Piglet that is allowing at least £2000 for costs and expenses. If you buy carefully and the flat is affordable you normally get good tenants and a steady income. Instant income of £500 a month will enable her to put that in to cover the mortgage repayments.

Of course if she's saving more than £500 a month by paying off £100000 early then it would make sense to do that but considering that but she would also need to consider whether her property would hold more market value in the longer term than a rental.

I'm not saying I have the solution here, I really don't know the savings she would make by paying of the 100k - perhaps an answer to that question would be helpful.

easy to test - pop it into my mortgage spreadsheet ....

Talkin whether she puts the money into her own property or a BTL it's still speculating - either way, it's a loan on a property. If she sinks the money into her own and they build HS2 next door and it loses its value then the money's gone. It is all speculation.

The only thing that I would be nervous about is an increase in interest rates. If that happens the £500 rental will come in handy!

when the interest rate rises to 6.5%, it will save her £6,500 a year. When it is 8% it will save her £8,000 a year. When it is 1% it will save her £1,000 a year. Next time we have a banking or currency crisis, who knows?

However she will miss the excitement of midnight calls when the roof leaks or the boiler breaks down.

BTL income is of course taxable.

Sorry Talkin can you link me the spreadsheet again please (I'll bookmark it this time) :)

www.mumsnet.com/Talk/legal_money_matters/1715581-Cost-of-credit-cards-and-mortgages-the-spreadsheets

"
However she will miss the excitement of midnight calls when the roof leaks or the boiler breaks down."

Plenty of landlords pay for an agent to manage all that!

Every decision we make in life is a gamble. Many cypriots are regretting having savings accounts with the Bank of Cyprus.

Prehaps we all be nuked to kingdom come and all our property will be radioactive waste.

OK steady on Reallytired, the house price crash is enough to be worried about without getting into full scale apocalypse anxiety.

yep, there are plenty of risks, and plenty of costs

Having all your eggs in the "domestic property" asset class increases your risk by excluding diversification.

If you seek excitement and risk, don't pay a wedge off your mortgage. Then you will have the thrill of watching interest rates go up, and the interest of wondering if an Event will reduce your income.

I agree it is wiser in this case to pay £100k off the mortgage and keep the IO mortgage at its very low rate and use the savings on monthly payments to pay off capital once a year on the home loan.

As for BTL my daughter is one and the agent's fee was much much more if the agent managed the flat so instead she just paid the one off £2k fee for finding the tenants. Then had the new £2k boiler needed. Other problems, repairs etc etc. You cannot just say I will make XYZ rent, less interest and other costs and wear and tear and balance taxed at 40% and so I make ABC profit. You have to factor in replacing appliances, painting works etc etc. In my view BTL works if you keep the property a good few years and there is capital appreciation. If not then if you need a large loan to buy the property you are probably better speculating on some shares with some of the money and putting the rest into a simple savings account making sure you don't have more than £85k in each one or whatever the protection limit is.

"As for BTL my daughter is one and the agent's fee was much much more if the agent managed the flat so instead she just paid the one off £2k fee for finding the tenants."

2K for finding tenants! Surely not. Our agency charges £250 for just finding a tenant or 10% for full managed or 6.5% for rent collection.

You don't need an agent for a one bed flat in a block if you have charge a fair rent and have a good tenant.

Buy to let disasters usually happen because there is a bad agent that doesn't deal with things. This causes resentment between both parties and ends up in a battle.

"You don't need an agent for a one bed flat in a block if you have charge a fair rent and have a good tenant."

What a massive cavet!

A beginner landlord benefits from a GOOD agency to make sure that they are complying with the law. Ie. gas safety certificates done every year, electrical safety check, desposit put into a secure account, proper notices sent if you want the tenent to leave.