Mortgage renewal

[skip207]

Out of interest has anyone covered this before?  In theory we would like to be mortgage free when we FIRE but there is c15 ish years to run and we hope we are around 5 years from FIRE. 

Our existing deal runs out in 4 years so we will get to fix for probably another 5 years just before we FIRE so that's ok.  However c4 years into FIRE (assuming we don't pay it off) we will go back onto SVR which is going to be IRO 4-5% I guess. 

If rates are still low that might be a pain given rates for renewals at the moment are IRO 2%.  So better off investing rather than overpaying IYSWIM. 

I am going to guess lenders are not going to be keen on us if we don't actually have an income.  I know when we took out this current mortgage we could not use our rental income as "income" for the purposes of affordability. 

Just thinking ahead, what do you guys think?

[runewell]

I think I don't understand what you are asking. IYKWIM.  DYKWIM?

[VoteCthulu]

I think I don't understand what you are asking. IYKWIM.  DYKWIM?

Probably a UK thing, since I don't know of any US mortgages that act that way. So yes, IKWYM.

[terran]

Yes, the "traditional" 30 year mortgage is a very US centric thing as I understand it. A result of the GI bill after WWII I think. Some Canadian friends have explained to me that 5 year fixed mortgages are much more common in the rest of the world. I'm not sure of specifics like if they normally just switch to variable rate at that point, or if you're expected to then get a new mortgage, but anyway, I think that's what's going on here.

OP, you might want to edit the title to indicate that this is a UK based question as I think you need advice specifically from people on that side of the pond.

[SwordGuy]

I think I don't understand what you are asking. IYKWIM.  DYKWIM?

If you know what I mean?
Do you know what I mean?

That's my guess.

[SwordGuy]

I'm guessing you can't get a 15 year or longer fixed rate in one mortgage.  Is that correct?

The best you can get is a 5 year, so you have to get 3 five year mortgages to pay everything off at the current payoff rate.

Is that your situation?

[skip207]

I never knew the US did not have that?!  Sorry yes I am UK based.

The "normal" mortgage in the UK is for 25 years (for people under 42).  The rate is often very high, around 4% currently (variable).
However for the first 2,3 or 5 years you get a discount, currently around 1.5% discount bringing the rate to around 2.5%, maybe even lower if you have good LTV. 
This rate is also fixed.  Generally speaking you get a slightly better rate the shorter the discount period.  I took 5 years as it was only 0.1% between that at 3 years.

After that you go back onto what is called SVR (standard variable rate) which is around 4%.

So most people change lenders at the end of this fixed period, or renew with their existing lender on another discounted rate.

Lenders look at your income, outgoings very closely each time.  We have had a lot of new regulations come in over the last few years due to the sub prime issues.  People were getting loans which they could not afford to repay (6-7x income).  Now lenders have gone the other way and are probably a bit too strict.  These days you will only get 4x your income, maybe 4.5x at the very most if you have a lot of equity.  So if you earn £25k you can get £100k mortgage.  (give or take)

Anyway I suspect I best ask my mortgage broker what he thinks.  My main concern is getting stuck on the SVR!!  Like I said when I applied for the mortgage they would not take rental income into the calculations.  If they wont take that then I suspect there is no way they will take investment income! 

[sea_saw]

Yeah I was shocked at how mortgages work in the US! 30 year fixed rate seems so strange when you're used to planning to shop around for the best deal every 2-5 years.

I'd recommend /r/UKpersonalfinance or Monevator for detailed UK questions like this. But I'll have a go... I haven't had to remortgage yet, but know when I spoke to a mortgage broker about getting my mortgage in the first place he said lenders really didn't like to take into account rental income purely from a risk perspective. There's no guarantee you won't have a problem tenant who doesn't pay up, some vacancy time, etc, and if you're relying on that income to make the payments to your lender that's no good from their perspective. Same for e.g. jobs on zero hour contracts.

I can't imagine proving income from investments is that hard. Your stache will presumably be several times larger than your mortgage loan by then, so quite a different situation. People in retirement, early or not, can still have mortgages. A mortgage advisor/more expert person may be more helpful to tell you what paperwork the banks may want to see, or point you to which lenders' criteria best match your circumstances.

I guess it's possible that they'll assess you as only able to afford a lower monthly payments rather than the amount you qualify for now while employed. If so, maybe you can remortgage with a longer term, or put some of your stash into the mortgage to reduce the loan amount, or just keep your current balance and move on to whatever the SVR is at the time. You'll just have to crunch the numbers and decide what makes the most sense!

Some friends of mine did this when they took a sabbatical year and lived off savings. The banks wouldn't have qualified them for a new mortgage, even though the payments would have been lower than the ones they were making. They  decided paying a bit extra in interest was acceptable to them to make that year off work happen, and just counted the extra £50/month as part of their expenses. In their case they remortgaged when they went back into the workforce, you'd be thinking more long term.

We obviously don't know what the SVR will be in five years, but if you work out how much of your loan you'll have left and your approximate expected stache size, you could do some tentative projections to see what interest rates would 1) make paying down a mortgage more attractive than keeping it in the stache, and/or 2) impact your FIRE calculations in terms of your outgoing expenses.

But if you have enough of a stash to FIRE I really can't see getting a mortgage being a huge problem. BUT ask an expert because I am merely a first time buyer who has done a lot of reading.

[RobFIRE]

Yes, the SVR at the moment is for those too lazy/not financially savvy to take a fixed deal. At other times, where rates are expected to increase but then don't, you could actually save money on the SVR versus taking out a fix at a higher ate.

Well, I suspect you will struggle to remortgage post FIRE without earned income to prove your ability to pay. As you say with historically record low interest rates for the last 8 years or so, on average you would be better off investing extra income/cash than using it to overpay your mortgage. Though only on average due to investment returns being variable. On the other hand you cannot assume that in 4 years time we will still be in a period of record-low interest rates. Rates will surely move back to historical averages at some point.

So I think if I were in your situation I would plan to complete another remortgage while still working, and then plan to pay off the mortgage in full at the end of that, and/or overpay during the last few years.

[skip207]

Remor is due late 2021.  FIRE is on the cards late 2022, never know might even be able to get a 10 year fix.... if that's the case might go for that.
We are trying to pay it down in the meantime but I am mindful of overpayments reducing our ability to invest / save so its a case of robbing peter to pay paul..
Will ask the mortgage broker and see what he thinks of it all and report back.

The other part to this is we may downsize when we FIRE anyway as the current place whilst nice is probably a bit too expensive.  But its very close to work for both of us so we want to move out of this area at some point once we stop working. 

[Goldy]

Is there a maximum cap that rates can go up to or is the sky the limit on SVR? 

[skip207]

So SVR can go up and down but no matter where the market is at the SVR is usually a good bit higher than the discounted rates you can get on a 2/3/5 year fix.

Some people do get good deals, but often due to luck.  I am on 1.25% on one of my mortgages because I was lucky to get an SVR rate of 1% above Bank of England back before the 2009 crisis.  At the time when I took it out rates were 5%+ so 1% above was still a lot in interest.  However I just timed it right as the discounted period ended rates were falling and I got very lucky.  Anyone who took out a 5 year fix in 2004/5 will have probably been in a similar position.  I have no doubt the bank would love me to switch!

Compare to another mortgage I have which is on a 5 year fix from 2015 at 2.7% however the SVR is 4%...  current BOE (FED) rate is 0.25%!

[dreams_and_discoveries]

I've found that some banks will let you switch products without doing any checks.

So if you keep the same mortgage amount and term, when your deal expires, you can just pick a new deal they have available. It does limit you to remaining with the same provider, and although this has been my experience, other banks may have different processes.

When I first started contracting, and was thus un-mortgageable I was a bit worried about this; I had plenty of income but not enough tax returns to prove it. I was happy when the process never even asked me about employment or income, just what new product do you want?

[Goldielocks]

I have the identical concern, except mortgages here don't roll over into a default higher rate.  You MUST requalify when your term is up.  I have a variable rate 5 year renewable mortgage, (at 2.1%) and fixed rate 5 year mortgages (at 2.7%+) are also very common here.  A few people may sign up for 7 or 10 year terms, but not many.

I FIRED this year, with my DH's income being only 25% of our previous total combined income.   If rates rise at all, we will not qualify to refinance in 3 years, according to the rules.

YET, we have nearly 20 years left on the mortgage.

My solution --
1) If we keep to the same lender, it will likely roll into a new term without may refinancing questions.  Not a problem if rates don't rise much in 3 years.. As time goes on, the mortgage gradually is paid off, and it is easier and easier to qualify for the smaller mortgages.  DH's income may increase over time as well.

2)  If we can't afford a very large mortgage based on FIRE income, I have available cash saved to pay down part of my mortgage, to the level we can be approved for.  Alternatively, many banks will accept proof of invested cash in the retirement funds that cover the balance as a sign of credit worthiness.  (may need to lock the investments in as collateral, however).

3)  Last case, I am able to fully cover my mortgage with my own retirement funds.  In Canada, you can hold your mortgage in your RRSP (retirement account).  This means that I don't need to remove the cash (and pay income taxes) to pay off the mortgage, but can pay off the bank with the RRSP money, and create a "loan" or mortgage to myself that I continue to pay monthly.. to myself.   This last option would be the equivalent of resetting my retirement allocations to be very heavily weighted to fixed income, rather than equities, and is a bit more pricey than a conventional mortgage, so it a last resort.  But I will have full control over whether I approve myself or not.  (LOL)

I was quite happy to know that there is ZERO chance of being kicked out of my home, no matter what the banks choose to say or do, despite having a very large resetting mortgage right now.


Does that help answer your question?   

tldr:   Essentially, have the money available in a retirement account to cover your mortgage if you need to.  When you have money, borrowing money is much easier.