I had an existing client who was nearing the end of her fixed rate which was a traditional mortgage on an interest- only basis. The client was aged 46, single, no dependents and self-employed although no arrangements were in place yet to repay the mortgage by retirement. As my client was self-employed she was flexible with a retirement date and whilst she was happy to work to age 70, if the opportunity arose, she would like to retire earlier if possible.
My client’s property was valued at £750,000 with a mortgage outstanding of £315,000 and importantly during the course of the fact find it was ascertained that my client had approx £70,000 in savings. In addition, she was a higher-rate tax payer with an annual income of just short of £100,000. Whilst my client had a good level of income, she enjoyed living life to the full and wanted to keep monthly mortgage payments within a budget of approx £1400.00 per month, although she could afford more if absolutely necessary.
I therefore had two key priorities to consider, firstly, to ensure the mortgage was repaid by age 70 but ideally earlier and secondly to keep monthly payments within her budget.
Our initial discussions took place following the EU referendum and given the leave decision it was fairly clear that the Bank of England would reduce bank rate in the short term and despite inflationary pressure likely to increase due to the lower pound, it was felt that bank rate would still likely remain lower for longer. Due to this, I recommended a tracker rate over a term of 23 years (to allow the mortgage to be cleared by age 70) which ensured that the monthly payments were on budget and given the bank rate decrease in August, monthly payments fell further and importantly should rates increase the client felt she could afford higher payments if necessary.
The key, as far as I was concerned is the savings of £70,000 (which my client had not earmarked for any specific purpose) and the fact she was a higher-rate tax payer. By depositing these monies in a linked savings account using an offset mortgage, I calculated that based on the current interest rate the mortgage term would reduce by three years, seven months, which would allow the client to retire earlier if she wished. It could also save her over £70,000 because interest rates will eventually increase reducing the term of the mortgage further So, for example, if bank rate eventually peaks at a rate of 3% the term would reduce by around five years saving even more money.
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