Remortgaging to drip feed into ISAs

[BlueDog]

I wondering if anyone has thoughts on the following idea or strategy.

I’m now in my early 50s. Main mortgage to be paid off within a few years, currently on a very low 10-year offset/fix with 2 years left to run. My wife and I also own a flat in London, debt free, currently let. (After the Mgt fees from an estate agent, the net pre-tax is not great, but one of the original reasons for keeping it after we moved out was in case it would be of use to the kids, either for university or early working lives. But that is a whole different thread on returns etc.)

In order to move a large part of the value into a tax-sheltered ISA I am considering

1. Raise debt, say 200k. Ideally on an offset basis, probably on our main house as it is likely to be a better rate. I’m also not sure how many offset BTL products there are. The lack of interest cost deductibility now makes the rate more important that where the debt sits.
2. Withdraw £40k each year, for 2x ISA allowances. Offsetting means only paying for what we “use”.
3. Do this for, say, 5 years. 200k into ISAs. Invest across the year rather than drop it all into the market at one point each tax year.
4. Then, at some point, sell the investment property. There will be a chunk of CGT, so we may delay until we have both stopped working, so more gets caught at lower CGT rates. Try to sell in a year where we arrange to have zero taxable income. (Or is it income = personal allowance, as CG can't be offset against the PA, so withdraw some taxable pension to at least use the PA, with CG then taxed partly at the basic rate - I need to check this.)
5. Proceeds net of CGT are then used to pay down the debt incurred now. It should leave a fair bit over, either to be ISA wrapped in future years post-sale, splurge on hols, or gift to kids.

This avoids getting a larger lump sum in, say, 7 years which can only fill that year’s ISA allowances. We don’t have the spare income for £40k ISA contributions in the next few years. But we do have the capital – it's just illiquid, and in the wrong place. Raising 200k would not be an issue on LTV or ongoing interest costs.

One would hope that the returns generated would exceed the interest. Yes, it’s a fairly short horizon for equities, but the plan is to remain predominantly equity invested as we retire, investing for income. (Thanks to pyad and tjh whose posts I read a lot of 25 years ago.)

So… has anyone done something similar? Are there any pitfalls I have not though of? The LTV would be such that even in the event of a big decline in equities, plus a slump in property prices we wouldn’t end up having to firesale the property. It does commit us to an ongoing monthly cost that would otherwise drop away soon, but I think the value in moving capital into ISAs negates that. It depends on our view of rates, but I would think a 5-year fix would be most likely to remove the IR risk.

The other option is to not ever sell - either let the kids use it, or just keep it to provide rental income. I think I probably need a more detailed spreadsheet to see if the CGT part is worth paying. After all, if it passes into our estates at some point the gross asset value for probate/IHT will be the same but with a debt allowed against it. And without having paid CGT. Though IHT would then be due on the ISAs anyway (at point of death of last spouse), unless value is given away and we survive 7 years.

I realise that this is much harder in the context of other pension assets, existing ISAs, retirement lifestyle etc. But borrowing against assets rather than selling them (like a minted tech bro would!) appears to makes sense.

I assume any remortgage lender is not too bothered about where the funds would go, though realistically they should be pleased that they will be invested and not spent.

With hindsight, based on poor/minimal capital growth for London flats in the last 18 years and our fairly risk averse nature, we have probably been underleveraged for a while.

Are there any flaws to this that I haven't noticed? Has anyone else made a conscious decision just to extract value rather than sell up, because of IHT/CGT considerations?

Many thanks for any contributions.

PS I’ve only just signed up for TLF, but have read bits on and off here for a while, and I’m pleased to see this reincarnation of TMF Boards is still going strong. I was a big fan of TMF from around 98-04 (though posting under my surname, which seems quaintly naïve now!) The fun days of ARM shares, NXT panel speakers, the lastminute.com IPO… One of the first things I ever bought in 1999[?] was GSK at around 1480p…which have now motored on to 1453!!

[Pheidippides]

If you remortgage through Barclays then you they allow offset with a Cash ISA (unless Rachel from Accounts changes the rules)

I remortgaged a year prior to retiring early to give me the offset facility as a slush fund. Without it I wouldn't have been to pay cash for what is, now, my new house.

Regards

Pheid

[Urbandreamer]

While I can see where you are coming from, I'd recommend some careful calculations.

First of all your principle private residence (PPR) is exempt from CGT. So remortgaging the PPR doesn't make sense with respect to CGT.
Secondly there is a residential nil rate band (RNRB) with respect to IHT to consider. You could actually manage to increase your IHT.

[scrumpyjack]

While I can see where you are coming from, I'd recommend some careful calculations.

First of all your principle private residence (PPR) is exempt from CGT. So remortgaging the PPR doesn't make sense with respect to CGT.
Secondly there is a residential nil rate band (RNRB) with respect to IHT to consider. You could actually manage to increase your IHT.

Mortgages have no effect on CGT/PPR but it is the case that it could reduce the RNRB as that is limited to your 'interest in the property' (being market value less mortgage).

As long as you fully understand the risks there is a lot to be said for using fully your ISA allowances even if you have to borrow to do so.

[Gerry557]

Basically you are asking if paying off the mortgage v ISA investing with some tax considerations. There are several articles available such as the Monivator website to give you a taste.

The main issue is can you invest for better returns than the cost of the mortgage. Currently you say you have another two years on a low rate so that should help especially as there is a delay between borrowing from you offset and getting your investment return in dividends.

I can see why as the ISA is use it or loose it and future governments might change the rules anyway.

So the main question is what rate will the new mortgage be, probably more than the current one. I think you will be looking in the 5% range. I don't know about BTL offsets but a broker could help their.


The next questions are how good are you at picking investments and how long have you got before you can no longer roll over your mortgage.

A spread of ITs and dividend shares should cover the offset mortgage costs but you might want to prioritise keeping dividends in the isa wrapper, if so how much can you afford from other areas to pay interest on the offset. Not every investment will work out, I know from experience.

When is the cliff edge when the mortgage finally needs to be paid back and how will you deal with that. Those planning the same when covid happened might tell a different story as investments tanked just as the bill was due. So that needs some consideration. Most mortgages wont allow you into retirement age but there might be specialist ones available.

So you can make this work and many have but you probably only have 15 year time line to do this. You have to consider what you would do if rates rise much higher but you would have the fixed rate period to work out what to do. You can always change plan if the sums don't make sense.

Some will say there is a risk keeping the mortgage and you should pay it off asap. Remember inflation will effectively eat away at that debt and there might be more risk in paying it off than investing. Hopefully investment income will grow with inflation. An IT paying 4% today might grow to an effective 8% payment in 10 years time.

there are probable other considerations like pensions and job security.

[Harry23]

This geared strategy reminds me of the endowment mortgages in the 1990s, which worked well while the markets were growing but put people at risk when growth stalled. I expect they had high fees which you can avoid by adopting a DIY approach though. I can't see whether you are looking at paying back the loan on your house as a repayment mortgage or interest only, which would make a difference to the risks you'd be taking.

Timing is another factor too. Interest rates have increased in the last few years, and the stock markets (if that's where you're planning to invest the money) have already had a good run. Are you optimistic about investment returns over the period you're thinking about? The longer the time period the better the chances of the gearing working in your favour.

[vand]

Are you still working with PAYE income that is pensionable?

The ordering of investments doesn't change even if you are employing leverage, so for most people investing in your pension is more tax efficient that ISA.

[Gerry557]

This geared strategy reminds me of the endowment mortgages in the 1990s, which worked well while the markets were growing but put people at risk when growth stalled. I expect they had high fees which you can avoid by adopting a DIY approach though. I can't see whether you are looking at paying back the loan on your house as a repayment mortgage or interest only, which would make a difference to the risks you'd be taking.

Timing is another factor too. Interest rates have increased in the last few years, and the stock markets (if that's where you're planning to invest the money) have already had a good run. Are you optimistic about investment returns over the period you're thinking about? The longer the time period the better the chances of the gearing working in your favour.

There were articles about the chances of success in investing over a period, from memory 30 years had a 97% or 99%. I think basically the longer the period the greater percentage of success.

[tjh290633]

This geared strategy reminds me of the endowment mortgages in the 1990s, which worked well while the markets were growing but put people at risk when growth stalled. I expect they had high fees which you can avoid by adopting a DIY approach though. I can't see whether you are looking at paying back the loan on your house as a repayment mortgage or interest only, which would make a difference to the risks you'd be taking.

Timing is another factor too. Interest rates have increased in the last few years, and the stock markets (if that's where you're planning to invest the money) have already had a good run. Are you optimistic about investment returns over the period you're thinking about? The longer the time period the better the chances of the gearing working in your favour.

The difference is that in the 1990s you had tax relief on the endowment premiums. When that was removed, they became unviable. The endowment costs now were fully felt.

TJH

[monabri]

… One of the first things I ever bought in 1999[?] was GSK at around 1480p…which have now motored on to 1453!!

Plus Haleon shares.

[Gerry557]

This geared strategy reminds me of the endowment mortgages in the 1990s, which worked well while the markets were growing but put people at risk when growth stalled. I expect they had high fees which you can avoid by adopting a DIY approach though. I can't see whether you are looking at paying back the loan on your house as a repayment mortgage or interest only, which would make a difference to the risks you'd be taking.

Timing is another factor too. Interest rates have increased in the last few years, and the stock markets (if that's where you're planning to invest the money) have already had a good run. Are you optimistic about investment returns over the period you're thinking about? The longer the time period the better the chances of the gearing working in your favour.

The difference is that in the 1990s you had tax relief on the endowment premiums. When that was removed, they became unviable. The endowment costs now were fully felt.

TJH

Most endowment owners just had the promise of it paying off the mortgage early or a lump sum left over at the end of term. Most probably didn't have a clue what was in them or able to monitor the real value with the magic bonus at the end.

I'm not sure of all the factors of why Most failed but didn't some pay out too generously not leaving enough for those left. Returns must have played a part but did tax relief make that much difference?

Still it's much easier to calculate your own investments these days and no silly bonus to worry about or expect to magic you to some sort of wonderful place.

[Gerry557]

… One of the first things I ever bought in 1999[?] was GSK at around 1480p…which have now motored on to 1453!!

Plus Haleon shares.

And around 700p in dividends

[tjh290633]

The difference is that in the 1990s you had tax relief on the endowment premiums. When that was removed, they became unviable. The endowment costs now were fully felt.

TJH

Most endowment owners just had the promise of it paying off the mortgage early or a lump sum left over at the end of term. Most probably didn't have a clue what was in them or able to monitor the real value with the magic bonus at the end.

I'm not sure of all the factors of why Most failed but didn't some pay out too generously not leaving enough for those left. Returns must have played a part but did tax relief make that much difference?

Still it's much easier to calculate your own investments these days and no silly bonus to worry about or expect to magic you to some sort of wonderful place.

I don't see how any failed where the principal of the endowment was the same as the principal of the mortgage loan. In other words, you had a loan of saying £10,000 and an endowment for £10,000 plus profits. Then they brought out policies where the anticipated value of the endowment including profits was more than the amount of the loan, but not guaranteed.

The one I had was an Eagle Star policy and a Halifax mortgage. That provided a comfortable surplus in 1997 when it matured. One company which had very good bonuses in the 1960s but which diminished drastically by the 1990s was NPI. I had a policy with them which came from a superannuation from the FSSU, who paid bonuses every 3 years. It matured in 1993, and began tailing off towards the end with far lower bonuses than in earlier years. Anyone who used them in those later years could well have had a problem.

TJH

[Alaric]

I'm not sure of all the factors of why Most failed but didn't some pay out too generously not leaving enough for those left. Returns must have played a part but did tax relief make that much difference?.

Failure started in ernest from the early 2000s. There was a triple whammy. The near collapse of Equitable introduced a loss of confidence in the with profits system for allocating investment returns. The FSA insisted that companies take more note of underlying guarantees and be less cavalier about investing in equities. That coincided with the collapse of some share prices following the end of the tech boom. The effects may have been connected with divesting from equities sustaining a stock market crash.

Also the inflation outlook was much lower, so equity returns of 6% or less became the expectation, rather than 12% or above.

Tax relief on premiums had been abolished for new policies in the 1983 budget. Another factor was that LAUTRO had insisted that illustrations used standardised charges. What they didn't really mandate was a disclosure that actual charges were somewhat higher than suggested by the illustrations and thus likely returns on maturity somewhat lower.

[Charlottesquare]

I'm not sure of all the factors of why Most failed but didn't some pay out too generously not leaving enough for those left. Returns must have played a part but did tax relief make that much difference?.

Failure started in ernest from the early 2000s. There was a triple whammy. The near collapse of Equitable introduced a loss of confidence in the with profits system for allocating investment returns. The FSA insisted that companies take more note of underlying guarantees and be less cavalier about investing in equities. That coincided with the collapse of some share prices following the end of the tech boom. The effects may have been connected with divesting from equities sustaining a stock market crash.

Also the inflation outlook was much lower, so equity returns of 6% or less became the expectation, rather than 12% or above.

Tax relief on premiums had been abolished for new policies in the 1983 budget. Another factor was that LAUTRO had insisted that illustrations used standardised charges. What they didn't really mandate was a disclosure that actual charges were somewhat higher than suggested by the illustrations and thus likely returns on maturity somewhat lower.

You also have to remember the recalculation of liabilities and pushing (forcing) the WP funds to hold more fixed interest and less equity- Standard Life especially

I took a stonking hit to move a WP pension from Standard Life into money purchase, think it was something like 34%, longer term the right decision as it morphed eventually into my SIPP and the funds that did shift have done okay.

We let our SL endowments run, the largest one which had originally covered my 1985 mortgage, but I kept running after it had been repaid, did at least just cover the £14,000 that had been the original mortgage when the endowment finally matured (2005)