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'I'm 76 and my mortgage payments have doubled – should I pay off the last £100,000?'

Homeowner David Peddy faces difficult decisions amid rising interest rates - Andrew Fox
Homeowner David Peddy faces difficult decisions amid rising interest rates - Andrew Fox

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Like many homeowners in Britain today, David Peddy is worried about soaring mortgage rates.

He has a “standard variable rate” mortgage, which has more than doubled his repayments – from £146 a month to £323.

His monthly bills will keep going up if the Bank Rate keeps rising as the Bank of England battles to control inflation.

Mr Peddy, 76, from Eynsham in Oxfordshire, wants to know if he should pay off his mortgage now using his pension or cash savings.

Other options he is considering are to wait for mortgage rates to fall – they are forecast to peak in the autumn – or wait for his investments to appreciate so he can use the capital gains to pay off the mortgage.

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His outstanding mortgage is £103,895, and he would have to pay a penalty of £2,037 if he wanted to repay the mortgage this year. The penalty would fall to £1,018 next year and there would be no penalty if he waited until the year after.

He gets £38,000 a year from his pension, and he is working on the assumption that he might live to the age of 95. On top of his pension, he earns £7,000 to £10,000 a year doing some part-time consultancy work.

Peddy’s pension fund is held by St James's Place, Britain's biggest wealth manager, and is worth £396,237. He has £139,981 in an Isa, also managed by SJP, a small portfolio of shares worth £3,500, and £2,000 invested in Cornish Lithium, a mining company.

He hopes that when the company lists on the stock market, he could realise a significant capital gain, which could potentially be used to pay off his mortgage – but this would mean having to wait.

He also has £42,000 in cash savings.

Mark Chicken, chartered financial planner at The Private Office, said:

Mr Peddy should certainly consider making the maximum permitted overpayment by his lender, without an early repayment charge becoming payable, usually around 10pc of the outstanding balance each year.

Overpayments in excess of this figure may result in greater interest being saved, but these savings will be tempered by the cost of any early repayment charge.

For example, if Mr Peddy repaid the mortgage in its entirety immediately, the interest saved over the course of that year would be approximately £6,000 (assuming a typical 6pc standard variable rate mortgage) but the early repayment charge would be around £2,000, providing a net interest saving of £4,000.

By comparison, he could simply make a deposit into a one-year fixed rate savings bond and receive interest at a comparable level (after income tax) and retain access to this money if needed once the bond has matured.

Currently a deposit of £103,895 into the top one-year fixed rate bond paying 4.91pc would earn £5,090.86 gross (£4,072.68 after 20pc tax).

Before making any overpayments, he needs to consider his likely cash requirements in the next three to five years.

The maximum allowable overpayments over the next two years, around £10,000 a year, would leave him with around £20,000 in cash savings.

Mr Peddy should consider whether this will be enough, allowing for a suitable emergency fund.

When the overpayment charges are no longer payable in two years’ time, he will then have a decision to make as to whether the mortgage is cleared.

The decision to repay the mortgage at this point will likely involve the sale of some of his investment portfolio.

Whether it is financially beneficial to do so will depend on whether the long-term rate of return he can achieve on his investments will exceed the interest payable on his mortgage.

In the era of low interest rates and cheap borrowing, this was much easier than an environment in which mortgage rates are around 6pc. In the current environment it is of course still feasible, but far from guaranteed.

In any case, he should defer the decision regarding the full repayment until the early repayment charges come to an end. Economists disagree as to where interest rates will peak and settle, but there is a general consensus that the days of cheap money are over.

If Mr Peddy elects to repay the mortgage he should be mindful of any exit penalties payable on his existing investment accounts and as a general rule of thumb consider drawing on taxable investments in the first instance (subject to any capital gains tax constraints), followed by his Isa.

The individual shareholdings (including Cornish Lithium) represent a relatively small part of his overall wealth. Therefore providing his other investments are sufficiently diversified, he could retain such holdings if he has an in-depth understanding of the companies and/or believes the growth outlook is positive.

In the meantime, the cash he holds with NatWest is likely to be earning less than he could find elsewhere.

The NatWest Flexible Saver is paying 1.66pc on a deposit of £42,000 which means gross interest of £697.20 a year before the deduction of tax.

If he were to switch to the best paying easy access account with Chip (an app-only account) he could earn as much as 3.71pc – so £1,558.20 a year.

So this is very much worth moving as he’ll earn more interest but retain the same level of access to his cash.

David Gibb, chartered financial planner at Quilter, said:

ONS data suggests that the average life expectancy for a 76-year-old male is 87, but there's a 1 in 10 chance of living to age 96.

How long Mr Peddy wants to continue to do part-time consultancy work is up to him and also dependent on his health but having mortgage payments hanging over him well into your later life may not be the best course of action.

As he is on the SVR, any Bank Rate rises will push it higher.

However, we are likely at or near the peak now. According to the lender's website, the SVR is at least 6pc.

The key question is whether Mr Peddy could earn a net return of 6pc from savings and investments. While possible, achieving this return would require accepting some volatility risk.

Given this, it likely makes sense to pay off the mortgage.

An alternative could be to switch to an interest-only mortgage. Some providers offer this option based on the premise that the capital will be paid off on death from the sale of the property.

Another option could be an equity release loan, which would eliminate the need for repayments. This would, however, increase the debt and reduce the value of the estate — a factor that may not be a concern, given the lack of dependents.

Mortgage payments will eventually decrease, but predicting when and by how much is impossible.

It's highly unlikely that they will revert to the lows experienced before the recent rapid rate increases though so biding time until then might be futile.

As for the Cornish Lithium shares, predicting their performance is impossible.

A float may or may not happen, and even if it does, would a £2,000 holding be sufficient to realise a gain that could clear the mortgage?

These should be viewed as a nice to have rather than a significant factor in a financial plan.


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