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

[NotSure]

I can’t be sure but im thinking most of us on here because weve geared our main investment and are reaping that success. Combined with an erosion of that debt due to inflation. Ok it was probably a mortgage invested In property but it was still somewhat risky, property values could have crashed, mortgage rates could have spiralled. I don’t see any fundamental difference. It’s understandable that risk should be reduced as we age but if we’re dependent on an income from the stock market we’re already accepting risk.

I don't think that buying one's primary residence using a loan while having gainful employment is really comparable to gearing into shares, once retired, by using one's primary residence as collateral. In the first case, most of us have no option as saving for a house is not practical (and so what if you 'win' - what are you going to do, sell up and make a tent out of tenners?) In the second, the risks look a bit asymmetric - if you win, you have some extra money in retirement, but if you lose, you and your family suffer all sorts of turmoil, and hard to rectify as you're retired.

[dealtn]

In the second, the risks look a bit asymmetric - if you win, you have some extra money in retirement, but if you lose, you and your family suffer all sorts of turmoil, and hard to rectify as you're retired.

All sorts of turmoil. Really? This isn't a binary situation that once the decision is made you can't adjust. Someone successful enough to be able to retire early doesn't sound like the type of person that can't adapt if it doesn't work out as planned or predicted. They could even go back to work and retire at the "normal" age.

It's not a route for everyone, but many would be comfortable with that kind of plan I would think.

[NotSure]

In the second, the risks look a bit asymmetric - if you win, you have some extra money in retirement, but if you lose, you and your family suffer all sorts of turmoil, and hard to rectify as you're retired.

All sorts of turmoil. Really? This isn't a binary situation that once the decision is made you can't adjust. Someone successful enough to be able to retire early doesn't sound like the type of person that can't adapt if it doesn't work out as planned or predicted. They could even go back to work and retire at the "normal" age.

It's not a route for everyone, but many would be comfortable with that kind of plan I would think.

I agree - my point was that the risks involved in funding a house purchase with a mortgage while working full time were not (IMHO) directly comparable with the risks of gearing into shares using a mortgage once retired, as seemed to be suggested by anniesdad. I wasn't trying to say don't do it, just that not everyone who could tolerate the risk of the former strategy was therefore suited to take the risks of the latter.

[tjh290633]

I can’t be sure but im thinking most of us on here because weve geared our main investment and are reaping that success. Combined with an erosion of that debt due to inflation. Ok it was probably a mortgage invested In property but it was still somewhat risky, property values could have crashed, mortgage rates could have spiralled. I don’t see any fundamental difference. It’s understandable that risk should be reduced as we age but if we’re dependent on an income from the stock market we’re already accepting risk.

Saving is a major factor. In years gone by, Endowment policies were a popular form of saving. Then came unit-linked endowments, and finally PEPs, which morphed into ISAs.

For a lot of people, an interest only mortgage, coupled with an investment vehicle like a unit-linked endowmwnt, was a prime way to buy your home and to have a healthy surplus when the mortgage was repaid. Things changed as the 20th century derew to a close.

TJH

[ursaminortaur]

I can’t be sure but im thinking most of us on here because weve geared our main investment and are reaping that success. Combined with an erosion of that debt due to inflation. Ok it was probably a mortgage invested In property but it was still somewhat risky, property values could have crashed, mortgage rates could have spiralled. I don’t see any fundamental difference. It’s understandable that risk should be reduced as we age but if we’re dependent on an income from the stock market we’re already accepting risk.

Saving is a major factor. In years gone by, Endowment policies were a popular form of saving. Then came unit-linked endowments, and finally PEPs, which morphed into ISAs.

For a lot of people, an interest only mortgage, coupled with an investment vehicle like a unit-linked endowmwnt, was a prime way to buy your home and to have a healthy surplus when the mortgage was repaid. Things changed as the 20th century derew to a close.

TJH

Yes things changed, as unfortunately a lot of people found that rather than having a healthy surplus when the mortgage was repaid they actually had a shortfall which they had to make up - hence why endowment mortgages went out of fashion.

https://www.bbc.co.uk/news/business-20858236

[tjh290633]

Yes things changed, as unfortunately a lot of people found that rather than having a healthy surplus when the mortgage was repaid they actually had a shortfall which they had to make up - hence why endowment mortgages went out of fashion.

https://www.bbc.co.uk/news/business-20858236

That happened when LAPR was removed. At that stage you were investing less than you contributed each month. Previously the tax relief paid for the insurance and gave you a small surplus. Back in that time I was paying £4,89 in premiums and investing £5 per month.

Two comparable policies, one with LAPR and the other without, IRR 10.75% with LAPR, 7.43% without LAPR.

Tax "reform" has a lot to answer for.

TJH

[vand]

I am too young to have been around when endowment mortgages were fashionable, but really.. weren't they just a classic case of overpromising and underdelivering based on past performance, and negligence from the homeowner to not keep track of the investment?

Some good posts above.

As I have alluded to, the retirement mortgage is really a subset of the whole FIRE fund, and if the house fund fails then your whole retirement strategy is probably also failing. So either you believe in your investment strategy or your don't - in which case you should question your whole FIRE fund, not just the house fund.

But I've always said that there are no completely risk-free plans or truly 100% gauranteed SWRs, because the future can always be worse than the worst periods from our known past. The best defence you have is to remain physically and mentally healthy in order to earn more should you feel the need or desire to top up your investments during retirement. I would rather go into 40yr retirement on a 5% withdrawal rate and with the willingness to work another couple of years at some point if it was decided to be necessary, than go into it on a 3% withdrawal rate but taking away the option to ever work again.

[Gerry557]

I am too young to have been around when endowment mortgages were fashionable, but really.. weren't they just a classic case of overpromising and underdelivering based on past performance, and negligence from the homeowner to not keep track of the investment?
.

Having had a few endowments it wasn't easy to track the investment. Most relied on the promise of a bonus at the end of the term. The bonus may or may not be paid and was not set out until it was actually paid based on what was going on at the time rather than what happened 10 or 20 years prior.

Hidden costs also ate away at most and moving ment missing the bonus but yes they did over promise and under deliver. Even when the issues and shortfalls were known about accurate figures still could not be obtained.

I suppose its the same as investing now. You can estimate what you might get based on previous performance but there are many black swans trying to eat your bread.

[vand]

I am too young to have been around when endowment mortgages were fashionable, but really.. weren't they just a classic case of overpromising and underdelivering based on past performance, and negligence from the homeowner to not keep track of the investment?
.

Having had a few endowments it wasn't easy to track the investment. Most relied on the promise of a bonus at the end of the term. The bonus may or may not be paid and was not set out until it was actually paid based on what was going on at the time rather than what happened 10 or 20 years prior.

Hidden costs also ate away at most and moving ment missing the bonus but yes they did over promise and under deliver. Even when the issues and shortfalls were known about accurate figures still could not be obtained.

I suppose its the same as investing now. You can estimate what you might get based on previous performance but there are many black swans trying to eat your bread.

Yep, when I took out my first mortgage I didn't really understand too well exactly what I was being put on. Only a few years later did I understand that it was an interest only mortgage, and the repayment vehicle set up was a FTSE All Share tracker inside a S&S ISA which was assumed to be able to return 7%. I was never given a choice of what to invest in, and even today I have no idea what the fees were, although I'm sure that it was shockingly high, as when I took the money out 10 years later it had barely returned anything at all above what I had put in it.

That was almost 20 years ago and when I look back on it and realise how little I knew back then. Had I stuck with it I'm sure that it would now still be lagging and I would have been asked to increase my contribution at some point. Fortunately that's not the case today but when you are putting your trust into people then its easy to be duped into believing what the the usual financial "advisor" spiel.

[anniesdad]

Going off on a tangent but I’m interested in the ‘failure’ of endowment mortgages. Was the failure due more to human nature something like ….

1. Buy a house when interest rates are high. This is reflected in interest cost and typical investment returns. Take out a mortgage in 2 parts. Expect to pay say £50 endowment and £500 interest total £550 for the next 25 years.

2. During the term Interest rates half!!! Your mortgage now costs you £50 endowment and £250 interest total £300 You don’t understand why and you don’t ask too many questions but youre happy to enjoy your savings. You buy new kitchen, new cars, holidays etc with your £250 surplus.

3. A few years later you find that your endowment hasn’t performed as forecast due to interest rates / investment returns falling.

4. If you’d have voluntarily maintained your original £550 as planned you wouldn’t have had a problem. You could have put £250 surplus into the endowment or into a 2nd investment vehicle, or you could have reduced capital in chunks or changed to capital repayment.

[tjh290633]

Going off on a tangent but I’m interested in the ‘failure’ of endowment mortgages. Was the failure due more to human nature something like ….

1. Buy a house when interest rates are high. This is reflected in interest cost and typical investment returns. Take out a mortgage in 2 parts. Expect to pay say £50 endowment and £500 interest total £550 for the next 25 years.

2. During the term Interest rates half!!! Your mortgage now costs you £50 endowment and £250 interest total £300 You don’t understand why and you don’t ask too many questions but youre happy to enjoy your savings. You buy new kitchen, new cars, holidays etc with your £250 surplus.

3. A few years later you find that your endowment hasn’t performed as forecast due to interest rates / investment returns falling.

4. If you’d have voluntarily maintained your original £550 as planned you wouldn’t have had a problem. You could have put £250 surplus into the endowment or into a 2nd investment vehicle, or you could have reduced capital in chunks or changed to capital repayment.

1. When interest rates rise, increase your payments, when they fall keep them the same and reduce your repayment time.

2. Endowments and unit-linked policies became unviable when tax relief on premiums was removed. My interest only mortgage finished in 1997 with a surplus from the endowment. Falling bonus and terminal bonus rates at that time were not looking good. The FTSE reached a maximum in 1999 and took 17 years to get back to that level, so tracker funds would not help.

3. With low interest rates, a repayment mortgage involves less outlay to be completely repaid, compared with the alternative.

The answer is falling bonuses and loss of tax relief.

TJH

[dealtn]

Going off on a tangent but I’m interested in the ‘failure’ of endowment mortgages. Was the failure due more to human nature something like ….

1. Buy a house when interest rates are high. This is reflected in interest cost and typical investment returns. Take out a mortgage in 2 parts. Expect to pay say £50 endowment and £500 interest total £550 for the next 25 years.

2. During the term Interest rates half!!! Your mortgage now costs you £50 endowment and £250 interest total £300 You don’t understand why and you don’t ask too many questions but youre happy to enjoy your savings. You buy new kitchen, new cars, holidays etc with your £250 surplus.

3. A few years later you find that your endowment hasn’t performed as forecast due to interest rates / investment returns falling.

4. If you’d have voluntarily maintained your original £550 as planned you wouldn’t have had a problem. You could have put £250 surplus into the endowment or into a 2nd investment vehicle, or you could have reduced capital in chunks or changed to capital repayment.

Only 3 is really relevant. The others also apply to other types of mortgages, so whilst they explain the history they in themselves don't explain the "failure" of endowment mortgages.

[Howard]

Going off on a tangent but I’m interested in the ‘failure’ of endowment mortgages. Was the failure due more to human nature something like ….

Answering your question may also give a pointer to the question raised by the OP.

In my case Endowments under-promised and probably over-delivered. (Helped by inflation?)

Buying our first house for £5,000. (Those were the days ) and taking out a Standard Life with-profits endowment mortgage for £4,000 turned out to be a good idea. It was possible to transfer this endowment each time we moved. (And I seem to remember I got some tax relief so the repayment costs were no more than a repayment mortgage).

I can remember the pleasure, when twenty five years later I received a cheque for over £20,000 - the excess profit from the endowment after the 4k had been paid off.

Over the years I had taken out two further endowments. One did quite well and the final one (called a low-cost endowment) underperformed. Government policies and the stockmarket were critical in influencing the outcomes.

The reason I took out the first endowment was that at that time Building Societies were very sniffy about giving loans to young budding executives on the first rung of the ladder and made one wait to even get an interview. The salesman who sold me the endowment fixed it up in less than a week and made our first house purchase easy. I’m sure he got a good commission from me - but he earned it as far as I was concerned.

To be honest I wasn’t able to predict how the endowment policies would perform (and anyone who believed they could was deluded!) The same applies to the OPs question. If all goes well it is fine to take a large mortgage into retirement, but if things go badly it will look like a bad decision. I probably took a very small risk in buying an endowment because, though in a junior role, I was employed by a blue chip company.

So the OP has to decide what risk he is taking and what his future prospects are. Only he can do this, but I hope his decision proves as successful as mine.

regards

Howard

[BullDog]

Going off on a tangent but I’m interested in the ‘failure’ of endowment mortgages. Was the failure due more to human nature something like ….

1. Buy a house when interest rates are high. This is reflected in interest cost and typical investment returns. Take out a mortgage in 2 parts. Expect to pay say £50 endowment and £500 interest total £550 for the next 25 years.

2. During the term Interest rates half!!! Your mortgage now costs you £50 endowment and £250 interest total £300 You don’t understand why and you don’t ask too many questions but youre happy to enjoy your savings. You buy new kitchen, new cars, holidays etc with your £250 surplus.

3. A few years later you find that your endowment hasn’t performed as forecast due to interest rates / investment returns falling.

4. If you’d have voluntarily maintained your original £550 as planned you wouldn’t have had a problem. You could have put £250 surplus into the endowment or into a 2nd investment vehicle, or you could have reduced capital in chunks or changed to capital repayment.

1. When interest rates rise, increase your payments, when they fall keep them the same and reduce your repayment time.

2. Endowments and unit-linked policies became unviable when tax relief on premiums was removed. My interest only mortgage finished in 1997 with a surplus from the endowment. Falling bonus and terminal bonus rates at that time were not looking good. The FTSE reached a maximum in 1999 and took 17 years to get back to that level, so tracker funds would not help.

3. With low interest rates, a repayment mortgage involves less outlay to be completely repaid, compared with the alternative.

The answer is falling bonuses and loss of tax relief.

TJH

The "problem" with endowment mortgages and the underlying policies failing to pay back the full capital was with what were known as "low cost endowment policies". This was a policy where, unlike the full cost policy, at the end of the term, full capital repayment was not guaranteed by the insurance company. Full endowment policies were a lot dearer than the low cost policies but guaranteed paying the capital loan in full. Following many years of overpayment of endowment bonuses, to be at the top of performance league tables, the insurance companies had to seriously reduce or suspend annual and terminal bonuses on all endowment policies. That led to the low cost policies having a shortfall at maturity. I had one for 25 years to cover a £20,700 mortgage. When the policy matured after 25 years, there was a £4,500 shortfall that I had to pay from savings to clear the mortgage loan. I think I paid £28 per month for 25 years for the low cost endowment policy.

[vand]

The history and performance of endowment mortgages is both interesting and instructive.

I think what the missing info is on this topic: what were the endowment invested it?! The concept of low cost passive investing into a balanced global portfolio sounds simple today, but it is a relatively new idea in the overall scheme of things, and back in the 80s and 90s you would probably have been shoved into some active strategy, high on fixed income, and with shocking fees..

As I mentioned I was shoved into a UK only tracker as recently as the early 2000s, which then saw 20 years of miserable underperformance for an all-equity strategy. Nobody knew any better at that time..

[BullDog]

The history and performance of endowment mortgages is both interesting and instructive.

I think what the missing info is on this topic: what were the endowment invested it?! The concept of low cost passive investing into a balanced global portfolio sounds simple today, but it is a relatively new idea in the overall scheme of things, and back in the 80s and 90s you would probably have been shoved into some active strategy, high on fixed income, and with shocking fees..

As I mentioned I was shoved into a UK only tracker as recently as the early 2000s, which then saw 20 years of miserable underperformance for an all-equity strategy. Nobody knew any better at that time..

There's far less an issue of what endowment policies were invested in.

And more an issue of market forces whereby the insurance companies were competing with one another to be top of the endowment policy return league tables. Add to that a culture of corporate greed where sales people in building society branches and banks were generously incentivised to up sell customers endowment mortgages and you have a recipe for disaster.

For in excess of a hundred years, insurance companies had successfully run endowment policy business without shouting from the roof tops or media hype.

There never really was a problem that needed fixing with the endowment policies themselves.

But introducing low cost endowment policies into a market becoming increasingly financially sophisticated at a time of light touch financial regulation, increasing corporate greed, media hype and property inflation was never going to end well. And it didn't

[Charlottesquare]

The history and performance of endowment mortgages is both interesting and instructive.

I think what the missing info is on this topic: what were the endowment invested it?! The concept of low cost passive investing into a balanced global portfolio sounds simple today, but it is a relatively new idea in the overall scheme of things, and back in the 80s and 90s you would probably have been shoved into some active strategy, high on fixed income, and with shocking fees..

As I mentioned I was shoved into a UK only tracker as recently as the early 2000s, which then saw 20 years of miserable underperformance for an all-equity strategy. Nobody knew any better at that time..

Actually Standard Life was the reverse, they had within their With Profits funds high equities exposure, then along came their regulators, told them to get safer investments (especially covering guaranteed annuity rates that 70s policies often offered) , they had to comply and sell notwithstanding the poor equity market at the time and my With Profits pension fund at the time dropped from circa £44k to£30k, at that juncture I took the hit, moved to a unitised policy and then into a SIPP re both my paid policy and my contracted out policy.

I did leave one SL 20 year endowment policy in play, it had been used re my first house purchase and was taken out in 1986, at the time it was intended to cover £14k, it did by 2006 just but with very little headroom. (I used it to pay my wife's PG loan, bought a small 14 ft dingy , outboard and trailer and that was it gone)

[vand]

The history and performance of endowment mortgages is both interesting and instructive.

I think what the missing info is on this topic: what were the endowment invested it?! The concept of low cost passive investing into a balanced global portfolio sounds simple today, but it is a relatively new idea in the overall scheme of things, and back in the 80s and 90s you would probably have been shoved into some active strategy, high on fixed income, and with shocking fees..

As I mentioned I was shoved into a UK only tracker as recently as the early 2000s, which then saw 20 years of miserable underperformance for an all-equity strategy. Nobody knew any better at that time..

There's far less an issue of what endowment policies were invested in.

And more an issue of market forces whereby the insurance companies were competing with one another to be top of the endowment policy return league tables. Add to that a culture of corporate greed where sales people in building society branches and banks were generously incentivised to up sell customers endowment mortgages and you have a recipe for disaster.

For in excess of a hundred years, insurance companies had successfully run endowment policy business without shouting from the roof tops or media hype.

There never really was a problem that needed fixing with the endowment policies themselves.

But introducing low cost endowment policies into a market becoming increasingly financially sophisticated at a time of light touch financial regulation, increasing corporate greed, media hype and property inflation was never going to end well. And it didn't

Hmm, I'm just not convinced on this... I'm not saying that there hasn't been misselling and bad practices along the way, but surely you want to know what's under the hood of anything that you're invested in - an "endowment" isn't an asset class, after all?

And yep, maybe these schemes have existed for a long time and been delivered what was marketed, but we've never seen such a huge bull market in fixed income either that pulled forward all future returns earlier than they should have been. Past performance etc etc

[hiriskpaul]

What was wrong with endowment policies? They were opaque, high charging investment vehicles with fat commissions. That was what was wrong with them. The downsides may once have been mitigated by tax relief, but when that went they were doomed. It was only a matter of time before their inadequacies were exposed.

We took out our first mortgage in 1985 and although there was very hard selling of endowment mortgages the building societies would not turn away the mortgage business when you said no as they were awash with cash. As I understand it this was not the case in the 70s and earlier when it was very much a sellers market.

[BullDog]

The history and performance of endowment mortgages is both interesting and instructive.

I think what the missing info is on this topic: what were the endowment invested it?! The concept of low cost passive investing into a balanced global portfolio sounds simple today, but it is a relatively new idea in the overall scheme of things, and back in the 80s and 90s you would probably have been shoved into some active strategy, high on fixed income, and with shocking fees..

As I mentioned I was shoved into a UK only tracker as recently as the early 2000s, which then saw 20 years of miserable underperformance for an all-equity strategy. Nobody knew any better at that time..

There's far less an issue of what endowment policies were invested in.

And more an issue of market forces whereby the insurance companies were competing with one another to be top of the endowment policy return league tables. Add to that a culture of corporate greed where sales people in building society branches and banks were generously incentivised to up sell customers endowment mortgages and you have a recipe for disaster.

For in excess of a hundred years, insurance companies had successfully run endowment policy business without shouting from the roof tops or media hype.

There never really was a problem that needed fixing with the endowment policies themselves.

But introducing low cost endowment policies into a market becoming increasingly financially sophisticated at a time of light touch financial regulation, increasing corporate greed, media hype and property inflation was never going to end well. And it didn't

Hmm, I'm just not convinced on this... I'm not saying that there hasn't been misselling and bad practices along the way, but surely you want to know what's under the hood of anything that you're invested in - an "endowment" isn't an asset class, after all?

And yep, maybe these schemes have existed for a long time and been delivered what was marketed, but we've never seen such a huge bull market in fixed income either that pulled forward all future returns earlier than they should have been. Past performance etc etc

You are not on your own in making the mistake of viewing endowment policies in the 1980's with 2022 hindsight. The personal finance world in the early 80's was very different than it is today. As were the typical customer.

I am not here to convince anyone of anything.