The Lemon Fool

And what's more, it's going to be a large interest-only mortgage.

Who else is with me?

Standard/early retirement doctrine is to pay off all your major life expenses before you head into retirement. However there is also the view that you can make your money work harder and become wealthier by purposefully not paying off a large mortgage, carrying cheap debt for as long as possible and investing the money instead. It allows you to retire with a earlier, with a smaller amount of wealth today so long as you're happy that wealth is on track to grow enough to meet the future payments due on the mortgage.

So, rather than have the money tied up in your home, you could extract the equity and pay peanuts on the interest, and put the money to work in other assets such as equities at a much higher rate of return.

In practical terms, the problem is that it is difficult to get a mortgage if you are retired and have no paid income. So my plan is to fix the mortgage for 10yrs just before I RE in a few years' time. 10yr fixed rates are still available for around 2% or so, and if those rates are still available when I am near to pulling the eject button, then I think its a very enticing proposition. I think that even sub-3% 10yr fixed would fine.


The biggest drawback of this strategy is that, of course, there is no gaurantee that your investments will make enough to eventually pay off the mortgage. It also requires discipline that many ordinary folk are ill suited for. I feel that on TLF we are not schmucks and have a good understanding of the pitfalls and upsides of the strategy.

Anyone else thinking along the same lines?

vand wrote:And what's more, it's going to be a large interest-only mortgage.

Who else is with me?

Standard/early retirement doctrine is to pay off all your major life expenses before you head into retirement. However there is also the view that you can make your money work harder and become wealthier by purposefully not paying off a large mortgage, carrying cheap debt for as long as possible and investing the money instead. It allows you to retire with a earlier, with a smaller amount of wealth today so long as you're happy that wealth is on track to grow enough to meet the future payments due on the mortgage.

So, rather than have the money tied up in your home, you could extract the equity and pay peanuts on the interest, and put the money to work in other assets such as equities at a much higher rate of return.

In practical terms, the problem is that it is difficult to get a mortgage if you are retired and have no paid income. So my plan is to fix the mortgage for 10yrs just before I RE in a few years' time. 10yr fixed rates are still available for around 2% or so, and if those rates are still available when I am near to pulling the eject button, then I think its a very enticing proposition. I think that even sub-3% 10yr fixed would fine.


The biggest drawback of this strategy is that, of course, there is no gaurantee that your investments will make enough to eventually pay off the mortgage. It also requires discipline that many ordinary folk are ill suited for. I feel that on TLF we are not schmucks and have a good understanding of the pitfalls and upsides of the strategy.

Anyone else thinking along the same lines?

I considered it quite recently but I came to the conclusion that although it may be a profitable strategy, I couldn't justify (and don't need) the risk.

RC

vand wrote:The biggest drawback of this strategy is that, of course, there is no gaurantee that your investments will make enough to eventually pay off the mortgage.

We paid our mortgage off 13 years ago and retired last September - I do not regret that at all, having no mortgage is a HUGE psychological boon to me, having a mortgage and being beholden to interest rate rises in retirement when you cannot do much about it, no thanks.

Yes, I might have been a little richer by doing as you suggest, but I would still make the same decision.

Yes, it's a nice feeling to have a paid off home, but it's also a nice feeling to know that you have you money working at a higher rate. I personally did have a fully paid off home as recently as 2019 so I know that feeling, but as mortgage rates continued to drop I couldn't continue to ignore the cheap money on offer and we took out a large mortgage when we moved home a couple of years ago.

Over the years I have tried to develop the view that wealth is completely fungible, and don't care if it's tied up in my pension, my home, or my chequing account.

Darka wrote:

vand wrote:The biggest drawback of this strategy is that, of course, there is no gaurantee that your investments will make enough to eventually pay off the mortgage.

We paid our mortgage off 13 years ago and retired last September - I do not regret that at all, having no mortgage is a HUGE psychological boon to me, having a mortgage and being beholden to interest rate rises in retirement when you cannot do much about it, no thanks.

Yes, I might have been a little richer by doing as you suggest, but I would still make the same decision.

We had the chat last night about moving and size of mortgage. SO thinks a bigger house and garden would be nice for our next stage, my retirement, I want a veg patch and workshop and they need a proper home office now their comuting is probably a thing of the past.
We've been gathering a lump sum to add towards the deposit on the next more expensive property to try and keep our payments and term about the same. The lump sum is enough to clear our current mortgage but I suggested the 1.75% we're paying for the next few years fixed is well below the % our investments grow by.
We know we're going to have another mortgage in a few years time so that mental release of being mortgage free would probably be shortlived.

We have a base rate variable mortgage and have done for many years now.

It's 0.1% above base rate. So for clarity that's not 1.0% it is 0.1%.

I know

Whilst the money is available to pay the mortgage off it does seem somewhat silly to do so. If that changes then fairy snuff we can review.

AiY(D)

vand wrote:And what's more, it's going to be a large interest-only mortgage.

In practical terms, the problem is that it is difficult to get a mortgage if you are retired and have no paid income. So my plan is to fix the mortgage for 10yrs just before I RE in a few years' time.

Good luck with that. When we remortgaged recently, we could only get it for a period as long as the time to my expected retirement date.
If RE, I guess you could say at 40 that you intend to retire at 60 and then retire next week, but the older you are, the less likely it will be that you can get a longish mortgage.

I think so long as you are in paid employment a nice cheap mortgage is great but once you retire I think even a low interest only mortgage is something of a burden that I could do without. What the OP is suggesting is of course leveraging up his investments. That is not something I have ever done but if I were to do it I would be keeping a fairly tight grip of it and ensuring that they were within fairly tight limits of say 15/20% of the investments. Also of course get as long term a fix as I could. Ten years is not very long I have to say.

People seem to forget that investing is not a one way street. Investment values can drop significantly as well as rise, and remain low for a long time.

I would not be doing that, not just because of the psychological benefit of having no mortgage but because there are enough concerns after retiring without carrying a large debt as well.

Dod

AsleepInYorkshire wrote:We have a base rate variable mortgage and have done for many years now.

It's 0.1% above base rate. So for clarity that's not 1.0% it is 0.1%.

I know

Whilst the money is available to pay the mortgage off it does seem somewhat silly to do so. If that changes then fairy snuff we can review.

AiY(D)

That's a really good rate. We have a flexible interest only mortgage at BoE base + 0.5%. Currently in a mostly paid off state as this is the best return we can get on instant access cash. Being untaxed helps enormously. We could have paid it off years ago, but it has been great to have the facility as it can be quickly deployed as good investment opportunities come along. We have to repay in a few years and I will look around to see what we can get when the time comes, but I doubt the terms will be anywhere near as good and probably not interest only.

Right now 5-10 year fixes look good value to me. But I am not sure how easy it would be for us to obtain one. We are not drawing from our SIPPs so have no pension income to speak of. We have sufficient assets to repay any loan and the mortgage would be on a very low LTV, but we don't exactly tick the boxes that banks want ticked as we lack "income". Could a specialist mortage broker help?

Cynically, my first thought when presented with a person paying an interest only mortgage is to assume that odds have been calculated on a 'sombre event'.

W.

hiriskpaul wrote:Could a specialist mortgage broker help?

I suppose so for a price.

Retirement Interest Only Mortgage - quick explanation/example

The usual LTV is about 60%.

AiY(D)

James wrote:

vand wrote:And what's more, it's going to be a large interest-only mortgage.

In practical terms, the problem is that it is difficult to get a mortgage if you are retired and have no paid income. So my plan is to fix the mortgage for 10yrs just before I RE in a few years' time.

Good luck with that. When we remortgaged recently, we could only get it for a period as long as the time to my expected retirement date.
If RE, I guess you could say at 40 that you intend to retire at 60 and then retire next week, but the older you are, the less likely it will be that you can get a longish mortgage.

Well, I can just tell them that my expected retirement age is the standard 67, right? It's not like they're gonna send the employment police around every year, and technically I wouldn't be breaking any of their terms, as it's always possible that I could still do that and the early retirement is just an option for me.

It's like you want to release some equity to put into the stock market, but if you tell them that they'll laugh at you, so you just tell them its for "home improvements."

Generally I'm OK with the idea. Yes it might work out better but it could also work against you too. Risk and reward and all that.

What is your plan to exit at the 10 years time point?

During covid the markets dropped rapidly, so not the best time to be selling. Can you imagine being a forced seller at the bottom of the market because you cant get a new mortgage and base rates could be back to 15%+

So if you are serious what is the exit plan. If you have one great but you could end up in a cliff edge situation and nowhere to jump too.

Mortgages like investments are great if you have lots of time. You can use this time to adapt over the course of events especially if things turn against you. what do you do if there are only six months of your time left.

Of course you might be able to roll over the mortgage again, the SVR might be much lower than my case above in which case great, you won the risk/reward for a bit longer.

Looking forward to hearing what your plans are to exit.

Gerry557 wrote:Generally I'm OK with the idea. Yes it might work out better but it could also work against you too. Risk and reward and all that.

What is your plan to exit at the 10 years time point?

During covid the markets dropped rapidly, so not the best time to be selling. Can you imagine being a forced seller at the bottom of the market because you cant get a new mortgage and base rates could be back to 15%+

So if you are serious what is the exit plan. If you have one great but you could end up in a cliff edge situation and nowhere to jump too.

Mortgages like investments are great if you have lots of time. You can use this time to adapt over the course of events especially if things turn against you. what do you do if there are only six months of your time left.

Of course you might be able to roll over the mortgage again, the SVR might be much lower than my case above in which case great, you won the risk/reward for a bit longer.

Looking forward to hearing what your plans are to exit.

You are right that you want to be conservative. It will not be a 100% stock portfolio, more likely something like a Permanent Portfolio or some variation thereof. I don't need 7% real growth for it to work out well, I just need to beat the nominal interest rate.

Permanent Portfolio's stats are hard to beat or this sort of requirement:

- longest nominal drawdown 3.5yrs, longest real drawdown 5yrs,
- average real return 5% (so 7%+ nominal)
- 10yr start date sensitivity: worst -2.7%, best +3.1%, so a 10 year annualised return of 2.3% - 8.3% depending on how lucky you are.. again, translates to probably 4.3% - 10.3% nominal return range.

So I figure use a 4.3% discount rate in your calculations and you should be more than OK unless the next 10 years really worse than anything we could imagine.

This is also tied up with one's normal FIRE plan. If your house payment portfolio is struggling over 10 years, chances are that your are running into all sorts of SORR issues in your main FIRE portfolio too, and should probably reassess.

vand wrote:

James wrote:

vand wrote:And what's more, it's going to be a large interest-only mortgage.

In practical terms, the problem is that it is difficult to get a mortgage if you are retired and have no paid income. So my plan is to fix the mortgage for 10yrs just before I RE in a few years' time.

Good luck with that. When we remortgaged recently, we could only get it for a period as long as the time to my expected retirement date.
If RE, I guess you could say at 40 that you intend to retire at 60 and then retire next week, but the older you are, the less likely it will be that you can get a longish mortgage.

Well, I can just tell them that my expected retirement age is the standard 67, right? It's not like they're gonna send the employment police around every year, and technically I wouldn't be breaking any of their terms, as it's always possible that I could still do that and the early retirement is just an option for me.

It's like you want to release some equity to put into the stock market, but if you tell them that they'll laugh at you, so you just tell them its for "home improvements."

Again, from personal experience, even if you want to remortgage for home improvements, as we did, you'll need a quote from a builder first. Things have really tightened up in the mortgage market.
You can tell them any retirement date you like, and no, they won't send the retirement police around (although could recall the mortgage if they decided you had applied dishonestly). In our example, I had to say I'd be working to 67 to get the term/rate we wanted, even despite the fact that it's my other half that pays the mortgage.

vand wrote:
Anyone else thinking along the same lines?

Already doing it, although on a variable mortgage, not fixed.

Aren't there existing products that target older people who have pad off their original mortgages, and offer them cash in return for a new mortgage?

I believe that I have seen these referred to as Equity Release Mortgages or Reverse Mortgages. They provide cashflow to people who own their home free and clear, without them having to sell their home and move out. The loan is then paid off either when the homeowners die or when they choose to sell up. Moreover the cash payments received are not taxable as income.

Lootman wrote:Aren't there existing products that target older people who have pad off their original mortgages, and offer them cash in return for a new mortgage?

I believe that I have seen these referred to as Equity Release Mortgages or Reverse Mortgages. They provide cashflow to people who own their home free and clear, without them having to sell their home and move out. The loan is then paid off either when the homeowners die or when they choose to sell up. Moreover the cash payments received are not taxable as income.

Try getting one of those with a variable interest rate at base rate + 0.1% (or so) or a fixed rate around 2%

dealtn wrote:

Lootman wrote:Aren't there existing products that target older people who have pad off their original mortgages, and offer them cash in return for a new mortgage?

I believe that I have seen these referred to as Equity Release Mortgages or Reverse Mortgages. They provide cashflow to people who own their home free and clear, without them having to sell their home and move out. The loan is then paid off either when the homeowners die or when they choose to sell up. Moreover the cash payments received are not taxable as income.

Try getting one of those with a variable interest rate at base rate + 0.1% (or so) or a fixed rate around 2%

Yes but you don't actually have to make loan repayments. The lender is paying you!

So the loan amount will go up, and therefore the home equity will go down. But then that is their whole point - you can use them to access the value of your home equity without selling. It does mean that your estate will be smaller when you die, which is more of a concern for your beneficiaries than to you.

Lootman wrote:

dealtn wrote:

Lootman wrote:Aren't there existing products that target older people who have pad off their original mortgages, and offer them cash in return for a new mortgage?

I believe that I have seen these referred to as Equity Release Mortgages or Reverse Mortgages. They provide cashflow to people who own their home free and clear, without them having to sell their home and move out. The loan is then paid off either when the homeowners die or when they choose to sell up. Moreover the cash payments received are not taxable as income.

Try getting one of those with a variable interest rate at base rate + 0.1% (or so) or a fixed rate around 2%

Yes but you don't actually have to make loan repayments. The lender is paying you!

So the loan amount will go up, and therefore the home equity will go down. But then that is their whole point - you can use them to access the value of your home equity without selling. It does mean that your estate will be smaller when you die, which is more of a concern for your beneficiaries than to you.

I will let him speak for himself, but that wasn't the strategy outlined by the OP.

It wouldn't work for me.