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Frenchman 96
Posted: 19 March 2017 12:04:30(UTC)
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Hi Guys

Would appreciate comments/advice on the following.

My son, aged 48 has been unemployed for a while through illness, he has an interest only mortgage, and on my advice, has reduced his borrowing by paying extra when he could, reducing the mortgage to 55K. The rate he pays is 3.39% and this runs till 2019, who knows what rates will be then.

He is starting a job tomorrow on a 2 week trial, and if he secures it, he will be in a position to pay off mortgage OR invest, £100 weekly.

I am thinking, he should be able to find a SAGE investment to earn more than 3.39% and that would be better than paying mortgage, then when his mortgage is due to be paid off in 2025, he can do so with the money he has invested.

Getting to my LONG WINDED question, would he be better paying his £10 into a SIPP, as he would be able to take it out in 2024 when he is 55, or leave it longer of course. I am thinking SIPP as GOV will add 25%.

I visited Monevator for the first time, and picked up on their comments, see attached

Just realised, I cannot attach?
Frenchman 96
Posted: 19 March 2017 12:51:34(UTC)
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I quoted wrong site, it was MAVERICK MONEY
Sara G
Posted: 19 March 2017 12:56:07(UTC)
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This is a complex question...

No one knows what markets will do (they could tank) and interest rates could rise more quickly than most expect.

The situation is complicated by the fact that it is an interest-only mortgage. I have a strong aversion to these and have always insisted on a repayment mortgage so that the capital is paid down. With an interest-only mortgage I would be strongly tempted to focus on overpaying.

Against this, putting off starting to invest may reduce future returns - especially if markets continue to rise...

My own decision, in similar circumstances was to do both, splitting the difference between overpaying the mortgage and investing. Then any time I got a pay rise I invested the extra amount.

Edit: forgot to say... for the money invested, a SIPP is definitely the way to go.
Frenchman 96
Posted: 19 March 2017 13:24:39(UTC)
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Thanks for reply, he has been overpaying as per my advice, and has reduced it from 105k to 55k, interest only was acquired, to give him lowest premium poss, BUT to overpay when he could, and he has.

Is it a stupid question to ask if people much older. like me at 76, can invest into a SIPP to gain the 25%
Sara G
Posted: 19 March 2017 13:38:43(UTC)
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No - the age limit for contributing to a SIPP is 75...
Frenchman 96
Posted: 19 March 2017 14:43:07(UTC)
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Thanks, I missed the boat then, next time round I may do I ((:
xcity
Posted: 19 March 2017 14:57:31(UTC)
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Frenchman 96;44781 wrote:
I am thinking SIPP as GOV will add 25%.

Frenchman 96;44788 wrote:
can invest into a SIPP to gain the 25%

It's only 25% if you are paying standard tax rate (20%) when you are paying in and no income tax when you are withdrawing it.

And if you try to draw out a large amount in one go, then that will push you into paying income tax even if you don't usually.
Frenchman 96
Posted: 19 March 2017 15:09:01(UTC)
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My son will be paying 20% tax if/when he started it in the NEAR future, and it sounds like, he should not be working and paying tax, if he wanted to draw it at 55.

But if he carried on working UNTIL he drew it, he could draw it without any problem.
xcity
Posted: 19 March 2017 15:35:50(UTC)
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At 55 (atm), he can take out 25% tax free.

Ideally, if his income in retirement is within the personal allowance, he should take his money out of the SIPP then but only gradually so that it stays tax free.
However, he presumably also has a deadline to pay off the mortgage.
Frenchman 96
Posted: 19 March 2017 16:19:27(UTC)
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xcity

his mortgage needs to be settled by 2025
he is 55 in 2025
I know about the 25% being tax free, not sure what you mean about the AH!!

you mean only draw enough to stay under the income tax yearly allowance?

Great site for answers
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Guest on 19/03/2017(UTC)
xcity
Posted: 19 March 2017 16:34:26(UTC)
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Frenchman 96;44798 wrote:
you mean only draw enough to stay under the income tax yearly allowance?

That would be ideal, but he does need the money to pay off the mortgage.
If he pays 20% tax on what he takes out, that's not too bad, simply a gain foregone.
If he goes into the 40% tax band, then that could eradicate all the gains from being in a SIPP.
All depends on the precise numbers.
And there's little scope to delay, given that the mortgage needs to be paid in the year (before or after his birthday) he is first allowed to withdraw from his SIPP.
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Frenchman 96 on 19/03/2017(UTC)
JSL
Posted: 19 March 2017 17:21:01(UTC)
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I'd go with the ISA, No tax to worry about and money can be accessed easier when you need it. With a SIPP the government gives then takes back at the other end.
Grumpy OAP
Posted: 20 March 2017 13:16:05(UTC)
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if the mortgage is interest only, what is he overpaying?
Frenchman 96
Posted: 20 March 2017 17:45:29(UTC)
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OAP

Off the capital when he has spare cash
Mark C
Posted: 22 March 2017 08:06:36(UTC)
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Forgive me raising this issue but it has relevance. You're 76; in 2025 you'll be 84 - assuming that the old geezer with the scythe doesn't turn his attention to you before that. What a cheery topic for 0730hr on a sunny morning.

Anyhow, your own position; if (when!) you are indeed untimely ripp'd from this plane, will you be able to leave your son anything cashwise which could form the basis of repaying the mortgage or providing an income in later life? If he has regular or intractable health problems and receives benefits for longer periods which are means tested (my stepson is one such, sadly) you need to be careful because he might lose benefits which could be near impossible to get back again..

It's a tricky question because there's so much unavailable information. Is he married? Children? Other debts? Other savings? Other pensions from employment? My feeling would be that if the job works out he should save a "buffer" of say £1500 - £2000 (assuming he has no savings now) for easy access in emergency, and then concentrate on overpaying the mortgage. If he has other debts such as credit card he should kill those first.

After a year of saving, then 7 years of overpaying at £100/w, £5200 a year he'll have paid in £36400, and saved interest on much of it for several years, so his mortgage will be down to the low teens and he's protected himself against the effect of higher interest rates. No reputable lender will call in a £14000-ish mortgage or force a sale, where there's no default. Your son'll end up on a Standard Variable Rate, no doubt, but that's just the consequence of interest only mortgages. Ultimately they're a mug's game unless rigidly managed.

Good luck to him. Forget trying to beat 3.39% by investing; for the sums of money involved here the effective yield differential is likely to be peanuts even if it's positive. Plus if you get into the arithmetic, because the mortgage interest is calculated daily, the overpayment gets bigger and bigger each month in terms of interest saved, whilst staying constant in terms of what your son is paying. If you see what I mean. Think "virtuous circle" :-)
Frenchman 96
Posted: 22 March 2017 09:34:51(UTC)
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Mark

I wish we had a sunny morning...yes, I hear what you say, I can hear him sharpening the scythe now )):

He has no debt except mortgage, house value today £180K debt 55K

He and his sister will inherit our estate around 350k

And he lives a very frugal life, so if/when he gets the job after 2 weeks trial, he will save any surplus, and as before, he probably will pay it off house.

Good point made.
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Mark C on 22/03/2017(UTC)
Mark C
Posted: 22 March 2017 10:53:19(UTC)
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In those circumstances, Frenchman, I certainly wouldn't change my opinion. Get some emergency cash in place, and get the mortgage paid down. There's the chance that your Estate will get eaten away by future care costs, but with luck there'll be funds there to keep him going and some (hopefully not-to-close) point in the future.
t s
Posted: 22 March 2017 10:54:36(UTC)
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JSL;44800 wrote:
I'd go with the ISA, No tax to worry about and money can be accessed easier when you need it. With a SIPP the government gives then takes back at the other end.


Entirely agree with this post. I have found a SIPP to have been a bad move compared to the ease of an ISA.

With a SIPP you seem to pay back the advantages when you want to draw out. Everyone takes a slice and you have very little control.

Go for the ISA option
Peter Evans
Posted: 27 March 2017 12:07:31(UTC)
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Joined: 24/03/2017(UTC)
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Yes, i am agree with ts. You invest in ISA but before 5 April. After this ISA allowance change. You can also invest in New LISA which come from 6 April is long-term saving account that give you government bonus of 25%.
Frenchman 96
Posted: 27 March 2017 12:27:00(UTC)
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[quote=Mark C;44947]In those circumstances, Frenchman, I certainly wouldn't change my opinion. Get some emergency cash in place, and get the mortgage paid down. There's the chance that your Estate will get eaten away by future care costs, but with luck there'll be funds there to keep him going and some (hopefully not-to-close) point in the future.[/q

I acknowledge what you say Mark, and we have bothagreed that he will overpay on his mortgage.

On our estate, I have created a "Family Trust" including mirror LPA's so hopefully, that helps.
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