Pay off mortgage now, then borrow later for building work?

[BasilPersil]

Our mortgage deal is up in August (currently 4.6%). We've got about 42k left on the mortgage which we can easily pay off and be left with about 30k in savings. House is worth about £820 k (we've done well on London property market over last 14 years). Will be about 920 with work completed we think (but not planning on moving).

We're planning some quite major work which will cost about £130k but means we won't have to move and can stay in the house forever. Planning is in place but the very earliest we'll be able to start that is October and it might take until next year to get a builder's slot once the whole structural calcs/quotes/party wall shenanigans are done.

I don't want to be paying interest on a 170k mortgage when we don't need the money yet.

DH thinks we should pay off the mortgage in August and then remortgage when we need the money, which allows for the delay and means we're not paying any interest at all. We can obviously save the mortgage payments at the higher rate in the meantime. And then remortgage for the costs of the works only. I'm keen to keep our exposure to mad interest rates down as well- DH is also a bit older and 11 years off retirement.

A lot of the savings are in DH's stewardship as well and he is terrible at maximising them or investment, so that's probably the best return he's going to get as well.

Are there any downsides to this plan, e.g. struggling to remortgage a house we've paid off? We both have secure jobs and I'm the higher earner by some margin.

Some mortgage companies used to allow you to keep a nominal balance so you keep the mortgage open with £100 outstanding so if you ever needed to borrow more it was easier. That being said if you’ve both decent jobs it maybe easier to just borrow against the house when you need to. Speak to your existing mortgage company and find an independent financial advisor, many don’t charge fees they just take a commission when you take out the product.

Keep the mortgage as it is. Put as much of your savings are you able towards the building works - say £50k then borrow add the remaining balance to the mortgage which would be £70k so you have mortgage balance of £110? the. Consider the term to pay it off based on retirement.

but check your numbers, £130k investment to only add approx £100k to the house value isn’t right….

It (probably, but might) won't add the total value to the house, but is still loads cheaper than up sizing (various considerations mean staying near where we are now) especially with bonkers London stamp duty which would be about 45k before anything else. The mortgage rate goes up to about 7.5% in August so holding onto that seems not a smart move (we'll have to pay a rearrangement fee at that point anyway).

So otherwise we'd need two products, one remortgage now and one later?

I would try and keep a small mortgage even if you largely want to pay it off because otherwise, when you come to remortgage, it’ll be treated like a new purchase - you’ll have to have surveys etc done as part of the application process (disclaimer - this happened to us a decade ago, may have changed since then). So even if you kept £5000 over 10 years for example, when you come to then need more, the process will be much easier.

Oh that's a good point on the conveyancing, I'll check that out.

Surely an offset mortgage is what you’re looking for? Remortgage and put the amount you need for building in the offset. You can then take it out only as and when it’s needed. Plus in the future after building you can put savings in there to try to get the mortgage paid off sooner but still be able to access the money for any emergancy without penalty

@StealthMama it very much can be right. The whole idea that building work always adds more value is very wrong in my opinion. Sometimes - especially in the south - you need to do something to the house that benefits your living arrangements but not necessarily benefit a different set of people who might buy your house at some arbitrary time in the future.

I had a look at offset mortgages (they seem to be less popular than they were) and the interest rates were not amazing. Maybe we need a better broker.

@KarmenPQZ yes exactly and also the house has very significantly gone up in value, I'm happy to essentially lose some of that for work so we can stay in a great location. I think the rising building costs and SE property values have done a bit of a number on the 'return' on the value.

I didn't have a mortgage but took one out a couple of years ago to do some work on my house. It was pretty straightforward no survey needed as the plot was worth more than the amount borrowed.

Yes we did ours on two products.

the compound interest in your case on mortgaging the whole amount later will likely be more expensive in the long run.

plus you’re making a loss on the investment so you want to borrow less to counteract that by using as much savings as you can and reducing the interest.

7.5 seems really high? Have you shopped around given your term coming up?

I’d take your 70k and invest it in an index fund for the next 10 years and remortgage to pull the extra 130k out on your house when you need it, hopefully at more like 4%.

I don’t disagree that it doesn’t always add value. But in a desirable SE London location, that would seem unusual.

the balance here is more around how the OP intends to use the equity long term and how much of that should be protected, vs hard cash in the bank.

I’d assume the 7.5% is the follow on rate once they’re out of deal so probably about right.

It might do, it's difficult to tell as no one has done the same on the street and obviously values at that level are pretty stagnant/not selling rn (one of the reasons why we're not moving, but not the only one). So hard to tell. But we need the extra space so...and it's all on paper unless you're actually selling isn't it.

Yes we can get a better deal than 7.5%, more like 4.9%- that's just the need to do something in August.

@starpatch I think that would be the same for us, given location. I'll check it out. Good advice from all here.

You need to run the figures with actual % rates, and consider the tax implications, are your saving in an ISA wrapper, are they stock's and shares based or cash, if S&S will it be advantageous at some point to transfer to cash, to lock in gains you have made? It is quite believable that a S&S ISA could be making a better return than your mortgage rate. The other problem is that you will need to save the money you are no longer paying out for the mortgage, it's very easy to think, we've got plenty of money, new car, expensive holiday.........

You don’t need an offset mortgage. Remortgage to something without an EPC (eg we have a tracker, as mortgage not big vs income it seemed not a big risk). Then overpay, and it may have an overpayment reserve so you can take it back out in the future (I’ve had a couple of mortgage products where I’ve been able to do this)

But actually just go and see a mortgage broker!