I'm planning to carry a large mortgage into early retirement - anyone else?

[vand]

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.

yes, Lootman is thinking about reverse mortgages. That's not what I'm proposing, though it could be an option later on if you really plan to die having spent all your wealth and not caring to leave anything on to heirs.

[Mike88]

Taking early retirement does relieve stress but I wouldn't want the stress associated with hoping my investments perform sufficiently well to pay off the mortgage. It seems to me the OP is swapping one form of stress for another.

[BT63]

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

Who else is with me?

---/----

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?

In the past I have used mortgage money to buy shares (and did very well out of it, but sometimes didn't sleep as well).

At the moment my mortgage is 99% paid so almost zero borrowings, with a tiny balance outstanding to keep the mortgage account open - it still has about ten years to run.
The mortgage has been 'overpaid' over the years which was allowed under its terms. Excess monies paid into the mortgage can be borrowed back and that facility has been used a few times.

Most recently in Feb-March 2020 during the Corona crash I was beginning to think about gearing up but as it happened markets zoomed higher before I had completely spent cash savings, therefore no need for borrowing to scoop up additional shares on the cheap.

I don't think many people will have the stomach for the probable extreme volatility that seems likely to come as central banks grapple with inflation and bubbles on a scale only seen once or twice in a lifetime.
Could you sleep at night if the shares you bought with borrowed money fell by half over the next couple of years and didn't recover for several years? I think even the toughest investor might be tempted to cut their losses and run. It would also make them very miserable, possibly straining household relationships.

I think using borrowings at this time to fund the buying of your average share will hang you by your own rope.

At the moment I have not the slightest interest in gearing up my portfolio.



Edited to add:
I found a couple of my previous posts discussing borrowing to invest:

viewtopic.php?p=258868#p258868

viewtopic.php?p=296974#p296974

[Spet0789]

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."

Err, that's called fraud. You know, lying for pecuniary or material advantage. Yes, that one.

For future reference, don't admit stuff like this on internet forums!

https://www.theguardian.com/business/20 ... er-dealing

Good luck with it anyway. We'll see you back on the forum in a few years.

[Spet0789]

Free legal advice aside, I plan to carry an undrawn offset mortgage into retirement.

When I (expect to) FIRE, it will still have over 20 years to run and would allow me to cover all my living expenses for around 7 years. Basically my plan is to run a cash buffer of 1 year's spending and draw that down over the year. Then if markets tank, rather than take anything from my investments I'll take the next year's spend from the offset and so on.

Even if fully drawn it would only be about 40% LTV so in the worst case I'll have to downsize to pay it off, but that would need to be guns and ammo territory as it would suggest that my portfolio has reduced in (nominal) value by over 50% over 10 ish years with no withdrawals.

[vand]

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."

Err, that's called fraud. You know, lying for pecuniary or material advantage. Yes, that one.

For future reference, don't admit stuff like this on internet forums!

https://www.theguardian.com/business/20 ... er-dealing

Good luck with it anyway. We'll see you back on the forum in a few years.

Sorry, but that's just nonsense. Ask every 40 year old taking out a new 25 year mortgage if they are planning to work until they are 65 and I bet a fair few of them are hoping to retire before that age!!

I think the point of that article was the highlight the insider dealing, not the mortgage loan .. For the record, I have no inside contacts at Goldmans

[Spet0789]

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."

Err, that's called fraud. You know, lying for pecuniary or material advantage. Yes, that one.

For future reference, don't admit stuff like this on internet forums!

https://www.theguardian.com/business/20 ... er-dealing

Good luck with it anyway. We'll see you back on the forum in a few years.

Sorry, but that's just nonsense. Ask every 40 year old taking out a new 25 year mortgage if they are planning to work until they are 65 and I bet a fair few of them are hoping to retire before that age!!

I think the point of that article was the highlight the insider dealing, not the mortgage loan .. For the record, I have no inside contacts at Goldmans

I'm sorry, but you're wrong. Lying about your intended use of funds on a mortgage application is fraud. You may never be caught or prosecuted but it's still a very dangerous thing to do especially if one is daft enough to create a written record of one's intent. The guys in the case I linked to were obviously caught because of their insider trading, but the prosecution for fraud stands on its own two feet. They said they were borrowing (personal loan, not a mortgage) for home improvement, knowing that they would use the money for something else.

Do some googling. You'll find I'm right.

[vand]

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."

Err, that's called fraud. You know, lying for pecuniary or material advantage. Yes, that one.

For future reference, don't admit stuff like this on internet forums!

https://www.theguardian.com/business/20 ... er-dealing

Good luck with it anyway. We'll see you back on the forum in a few years.

Sorry, but that's just nonsense. Ask every 40 year old taking out a new 25 year mortgage if they are planning to work until they are 65 and I bet a fair few of them are hoping to retire before that age!!

I think the point of that article was the highlight the insider dealing, not the mortgage loan .. For the record, I have no inside contacts at Goldmans

I'm sorry, but you're wrong. Lying about your intended use of funds on a mortgage application is fraud. You may never be caught or prosecuted but it's still a very dangerous thing to do. The guys in the case I linked to were obviously caught because of their insider trading, but the prosecution for fraud stands on its own two feet. They said they were borrowing (personal loan, not a mortgage) for home improvement, knowing that they would use the money for something else.

Do some googling. You'll find I'm right.

I'm not lying about the use of the mortgage.

I already have a large mortgage on my house that I don't intend to pay off for a long time. I'm not drawing out more money to invest.

That is what an interest only mortgage is. You don't pay off the capital, you invest in a separate vehicle to build up the capital to eventually pay off the debt? That's my plan.

[Spet0789]

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."

Err, that's called fraud. You know, lying for pecuniary or material advantage. Yes, that one.

For future reference, don't admit stuff like this on internet forums!

https://www.theguardian.com/business/20 ... er-dealing

Good luck with it anyway. We'll see you back on the forum in a few years.

Sorry, but that's just nonsense. Ask every 40 year old taking out a new 25 year mortgage if they are planning to work until they are 65 and I bet a fair few of them are hoping to retire before that age!!

I think the point of that article was the highlight the insider dealing, not the mortgage loan .. For the record, I have no inside contacts at Goldmans

I'm sorry, but you're wrong. Lying about your intended use of funds on a mortgage application is fraud. You may never be caught or prosecuted but it's still a very dangerous thing to do. The guys in the case I linked to were obviously caught because of their insider trading, but the prosecution for fraud stands on its own two feet. They said they were borrowing (personal loan, not a mortgage) for home improvement, knowing that they would use the money for something else.

Do some googling. You'll find I'm right.

I'm not lying about the use of the mortgage.

I already have a large mortgage on my house that I don't intend to pay off for a long time. I'm not drawing out more money to invest.

That is what an interest only mortgage is. You don't pay off the capital, you invest in a separate vehicle to build up the capital to eventually pay off the debt? That's my plan.

Great - glad to hear it. Then you're fine.

But when you said:

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."

You were describing a fraud. The key difference being you describe lying to get extra money. You know it's dishonest, hence the " ". And yes, it would be a crime.

Obviously if you have the money already and made no representations as to what you would do with it, no issue.

I'm not trying to get at you. Just make sure other forum users know that's not ok to do. I am sure lots of people have done it and got away with it, just like lots of BTL landlords have sold up and not declared their capital gains and so on.

[BT63]

I already have a large mortgage on my house that I don't intend to pay off for a long time. I'm not drawing out more money to invest.

Buying £1000 more investments each month instead of paying off the mortgage capital each month is very different to drawing a large sum of equity out of your home and throwing it into the market all in one go.

The latter could go badly wrong but the former would be very likely to earn a respectable return in the long term due to pound-cost averaging and a chance for growth to overcome shorter-term setbacks such as a nasty bear market.

[Wuffle]

As mentioned earlier.
Especially if it sidesteps high rate income tax on the repayment element, which is ultimately sorted out by an inheritance from a principle residence.
This has a feint whiff of the 7 year rule and tax arbitrage.

W.

[BullDog]

No. I have a strong dislike of any debt. It's a personal thing, yes. But the proposed course of action here falls into the "trying to be a bit too clever" category for my liking. Having been mortgaged when interest rates were more than 15% may contribute to that opinion. I had a mortgage, my only ever debt. It was cleared as soon as I could. My grown kids are also debt free. Good luck to anyone with their personal plans, but this one feels a bit too much like playing with fire to me.

[BT63]

No. I have a strong dislike of any debt. It's a personal thing, yes. But the proposed course of action here falls into the "trying to be a bit too clever" category for my liking. Having been mortgaged when interest rates were more than 15% may contribute to that opinion. I had a mortgage, my only ever debt. It was cleared as soon as I could. My grown kids are also debt free. Good luck to anyone with their personal plans, but this one feels a bit too much like playing with fire to me.

Debt can work both ways; it can increase profits or increase losses.

A company or person with very little debt is in a strong position during a downturn but debt can enhance profits during the good times.
When a company goes bankrupt it is almost always because it has taken on too much debt during the good times.
Good times tend to turn to bad times when people and businesses least expect it.

Someone taking on a large amount of borrowing to fund shares must be highly confident in their future income stream to ensure they can continue paying the loan.
If there is a recession, not only might their debt-backed investments be worth less than they paid for them, but they might lose some or all of their wages which pay for those borrowed shares.

[Gerry557]

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
Does that mean you are going full term to the cliff edge repayment method then.

Inflation should be your friend too

[AsleepInYorkshire]

No. I have a strong dislike of any debt. It's a personal thing, yes. But the proposed course of action here falls into the "trying to be a bit too clever" category for my liking. Having been mortgaged when interest rates were more than 15% may contribute to that opinion. I had a mortgage, my only ever debt. It was cleared as soon as I could. My grown kids are also debt free. Good luck to anyone with their personal plans, but this one feels a bit too much like playing with fire to me.

I completely agree with you. How we look after our personal finances is ... well ... exactly that ... personal. We have to be comfortable with the level of risk we accept. It really is as simple as that and we should all respect each others comfort zones. I would, if I may take the liberty of passing judgement on you please, also like to say that you have clearly passed some great financial values to your children and debt free is an enormously fantastic place to be.

We all have our problems in life. Mine have mostly been around my health. As I approach retirement I find myself having to step outside of my financial comfort zones with regard to risk. I have two options.

1. Retire, sell our home and move down-market and watch the reruns of cricket from 1982 for the rest of my life
2. Accept a little more risk and fight the above and hopefully keep our home and have some hobbies in retirement.

So my mortgage rate is 0.1 above base rate. There is absolutely no way I am going to pay that off until interest rates are unacceptably high and the financial gain for me is no longer available. I pay £138/month for my mortgage, interest only. Currently that money invested in pensions returns over £2K per month. I'm not playing with fire. I can pay the mortgage off tomorrow. But why?

As regards debt I have discussed with my 14 year old daughter about "student debt" and my beliefs and values regarding it. We are also fortunate enough to be able to add to her JISA by the full amount each year. We also have a retirement plan, that if successful, will allow us to add £12K per year to her ISA until she is over 30. It's a way of passing wealth to her and encouraging her to save. And saving when we're young can sometimes be difficult. Not just because we want to enjoy our life but because we simply cannot afford it when we want to own our home, have children and go on holiday etc.

We all have to deal with the deck that life hands us. I've had health issues for 47 years now. I still do not have the correct diagnosis, although I am fairly sure what it is now. My health has impacted my income. And that's just tough luck. But I need to think outside the box and fight back to ensure I can at least enjoy some form of comfortable retirement with my good lady. Perhaps even be there for grandchildren.

Take care

AiY(D)

[BullDog]

No. I have a strong dislike of any debt. It's a personal thing, yes. But the proposed course of action here falls into the "trying to be a bit too clever" category for my liking. Having been mortgaged when interest rates were more than 15% may contribute to that opinion. I had a mortgage, my only ever debt. It was cleared as soon as I could. My grown kids are also debt free. Good luck to anyone with their personal plans, but this one feels a bit too much like playing with fire to me.

I completely agree with you. How we look after our personal finances is ... well ... exactly that ... personal. We have to be comfortable with the level of risk we accept. It really is as simple as that and we should all respect each others comfort zones. I would, if I may take the liberty of passing judgement on you please, also like to say that you have clearly passed some great financial values to your children and debt free is an enormously fantastic place to be.

We all have our problems in life. Mine have mostly been around my health. As I approach retirement I find myself having to step outside of my financial comfort zones with regard to risk. I have two options.

1. Retire, sell our home and move down-market and watch the reruns of cricket from 1982 for the rest of my life
2. Accept a little more risk and fight the above and hopefully keep our home and have some hobbies in retirement.

So my mortgage rate is 0.1 above base rate. There is absolutely no way I am going to pay that off until interest rates are unacceptably high and the financial gain for me is no longer available. I pay £138/month for my mortgage, interest only. Currently that money invested in pensions returns over £2K per month. I'm not playing with fire. I can pay the mortgage off tomorrow. But why?

As regards debt I have discussed with my 14 year old daughter about "student debt" and my beliefs and values regarding it. We are also fortunate enough to be able to add to her JISA by the full amount each year. We also have a retirement plan, that if successful, will allow us to add £12K per year to her ISA until she is over 30. It's a way of passing wealth to her and encouraging her to save. And saving when we're young can sometimes be difficult. Not just because we want to enjoy our life but because we simply cannot afford it when we want to own our home, have children and go on holiday etc.

We all have to deal with the deck that life hands us. I've had health issues for 47 years now. I still do not have the correct diagnosis, although I am fairly sure what it is now. My health has impacted my income. And that's just tough luck. But I need to think outside the box and fight back to ensure I can at least enjoy some form of comfortable retirement with my good lady. Perhaps even be there for grandchildren.

Take care

AiY(D)

Thanks. Our circumstances are more similar than you might imagine. After more than three decades of worsening symptoms, I have recently had a diagnosis. I had periods where I couldn't work too. In the end it delayed giving up work by maybe a decade to ensure myself and the kids were debt free after education and buying apartments and starting SIPPs. Good luck to you, I hope the future is bright.

[simoan]

I’m not sure I really see the point of taking the risk? The whole idea of FIRE for me was to completely eliminate financial worries of any kind. It’s important to know when you’ve won the game and then stop playing by dialling down risk.

IMHO it makes more sense to reduce mortgage payments to a minimum whilst you’re still working and invest the excess capital each month into equities. I feel quite fortunate in that I’ve been doing that during the longest bull market ever and am now in a very comfortable position. All I can do now is balls it up by taking on more risk than is necessary.

All the best, Si

[Mark66]

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.

Hear my view is completely different to yours. I view risk as more than one dimensional. When we are young, we don't have wealth but have plenty of working years ahead of us to earn an income. We initially use the gearing of a mortgage to help start to build our wealth. But to me, as my wealth started to build, it was important to keep an eye on securing a roof over my head and a reasonable standard of living by retirement. Money in excess of this, for an even more luxurious life, I am happy to risk. So to me wealth is not fungible, it has distinct compartments.

My home being one such compartment is not an investment to me it is a place to live. If there was a major downturn where property prices significantly fall, using a mortgage in later life to gear could risk the basics so it would be a no no for me.

But statistically I would agree there seems, on past performance, a very good chance it should work. If your and (just as important) your families attitude to risk is accepting of all this then I see no reason not to do it.

I like most it seems prefer the security and feeling of owning my own home in retirement.

[BullDog]

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.

Hear my view is completely different to yours. I view risk as more than one dimensional. When we are young, we don't have wealth but have plenty of working years ahead of us to earn an income. We initially use the gearing of a mortgage to help start to build our wealth. But to me, as my wealth started to build, it was important to keep an eye on securing a roof over my head and a reasonable standard of living by retirement. Money in excess of this, for an even more luxurious life, I am happy to risk. So to me wealth is not fungible, it has distinct compartments.

My home being one such compartment is not an investment to me it is a place to live. If there was a major downturn where property prices significantly fall, using a mortgage in later life to gear could risk the basics so it would be a no no for me.

But statistically I would agree there seems, on past performance, a very good chance it should work. If your and (just as important) your families attitude to risk is accepting of all this then I see no reason not to do it.

I like most it seems prefer the security and feeling of owning my own home in retirement.

Well said, extremely pragmatic and sensible. You shouldn't really be buying shares with money you can't afford to lose. And if that money is borrowed from someone else, even more need to be cautious.

[vand]

IMHO it makes more sense to reduce mortgage payments to a minimum whilst you’re still working and invest the excess capital each month into equities. I feel quite fortunate in that I’ve been doing that during the longest bull market ever and am now in a very comfortable position. All I can do now is balls it up by taking on more risk than is necessary.

yes, that's what I am doing currently. I have a large IO mortgage - very happy not paying it off, and investing instead. I just want to extend this further and carry the mortgage into (early) retirement too.

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.

The "house fund" is really a subsection of the whole FIRE plan, so it makes little sense to consider it alone in isolation, but ideally, if the numbers still support it and it is possible to roll over the debt in 10yrs time, then why not do that?

However, I am also aware that things do change. We get older, our risk tolerance changes, our health changes, and our ability to adapt changes. I will be 45yo this year and am in good health, and hope to retire before I am 50. Ask me again when I am 55 and I might say that I'd prefer to begin to derisk, but as of today I'll take the leverage - my feelings about that might change in the future, in which case, fine, I can just start paying down my mortgage quicker.

Hear my view is completely different to yours. I view risk as more than one dimensional. When we are young, we don't have wealth but have plenty of working years ahead of us to earn an income. We initially use the gearing of a mortgage to help start to build our wealth. But to me, as my wealth started to build, it was important to keep an eye on securing a roof over my head and a reasonable standard of living by retirement. Money in excess of this, for an even more luxurious life, I am happy to risk. So to me wealth is not fungible, it has distinct compartments.

My home being one such compartment is not an investment to me it is a place to live. If there was a major downturn where property prices significantly fall, using a mortgage in later life to gear could risk the basics so it would be a no no for me.

But statistically I would agree there seems, on past performance, a very good chance it should work. If your and (just as important) your families attitude to risk is accepting of all this then I see no reason not to do it.

I like most it seems prefer the security and feeling of owning my own home in retirement.

A good response, and a perfectly sensible point of view. While it may seem an aggressive option to leverage up your investments with a mortgage, in other ways I am quite risk adverse. As a household we live well below our means and have a high saving rate, and in investing terms I have always learnt to pay great attention to the risk in the portfolio, and run a well diversified portfolio.

It's strange and not logical to me that many people will not consider leveraging up with mortgage money but will happy run an aggressive high beta portfolio in their investments. I am almost the opposite, I pay great attention to portfolio risk but am also happy to leverage up a sensible amount and not pay down my mortgage doing so.