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When I sold my educational business one of the hardest decisions I’ve had to face was ‘how to utilise and invest the money’. When you sell a company you essentially get years of earnings in a lump sum payment. At the same time, you lose your monthly income overnight.
It may seem strange but this has been one of the more challenging parts of selling the business. With a young family and hopefully 60 years of life ahead of me I wanted to use the money to preserve and maintain my life for the decades ahead.
Many would say ‘pay off the mortgage’ and yes absolutely that must be a liberating feeling however it felt like too much money to stick into one basket. Coupled with record low-interest rates; it wasn’t something I wanted to do in its entirety.
I’m a keen index fund investor. They’ve served me very well over the past few years since my initial website sale however going ‘all in’ on the stock market also felt one dimensional.
That’s when I looked into the possibility of interest-only mortgages.
You would be right in thinking interest-only mortgages are a tool used by buy to let investors. Leveraging someone else’s money and servicing the debt while earning yourself a monthly income. My plan however was to use it on my own property. There were a number of reasons for this.
Why we chose an interest-only mortgage?:
Leveraging low-interest rates:
Interest rates have never been lower. You can pick up mortgages on a stable 5-year fix at a 1% interest (This is what I have). If financially savvy this is mind-blowing leverage never seen before. It felt naive to not at least utilise some of this opportunity while still holding a high level of equity in the property.
Time to create new cash-generating assets:
Having sold my primary business my monthly cash flow was reduced overnight. My two remaining assets are in their infancy and earnings are currently low. By reducing the mortgage and switching to interest-only we have dropped our outgoings by approximately 33%.
This gives me plenty of time to grow my remaining assets to comfortably cover our living expenses (which are incredibly modest) without dipping into money from the business sale.
The monthly earnings from the two projects I am involved in currently account for 60% of my monthly outgoings. I also have 12 months of monthly expenditure saved to cover us nicely for the next year while I work on these projects and hopefully reach 100% coverage.
I have some great diversification plans away from these two assets so I am hopeful within 12 months things will be completely covered.
Hedge my bets:
Having chosen not to pay the entire mortgage off I have still chosen to pay off a substantial sum. Our equity in the property now stands at 70% which is a comfortable number. Coupled with knowing my mortgage outgoings for the next 5 years we feel more than happy with this arrangement.
Some will argue that I should have kept the entire mortgage balance and invested all my money however this felt like a happy medium of risk.
Invest without worries:
My monthly mortgage payments are now less than someone would pay for a small car on finance. Perhaps similar to what a family of four would pay for a gym membership. I want to be able to invest money remaining from the sale in Index funds (perhaps other ventures) without compromising our month to month living. 5 years provides me with adequate time to invest hard and not be worried about mortgage payments.
You can still overpay up to 10% a year:
The great part about interest-only mortgages is that you can still overpay up to 10% a year without penalty. This far exceeds any amounts you would typically pay monthly on a repayment mortgage. Best of all it actually reduces the interest owed instantly so your monthly payments will be smaller.
The businesses I have equity in could pay dividends this year, I may choose this to overpay the mortgage with these or if my new ventures eclipse our monthly spending we may choose to overpay monthly. We have great options.
We plan to downsize when older:
Our plan has always been to downsize when older. It’s possible the remaining equity will have been paid by then but I’m in no rush to pay it off as we already hold a substantial sum. This should in theory grow further too.
We are mortgage neutral
The money to pay off the remaining balance is invested and is relatively liquid. This could be accessed at any time to pay the mortgage off. Of course given the ‘power of compounding,’ we have no plans to do this, however, we are mortgage neutral so could pay the mortgage off if there were issues with the bank.
Now or never….:
Although financially we are in a much better position from a bank’s perspective we were a more attractive proposition when we were earning strong salaries from the educational business. Our current tax years and those previous show good earnings however these will drop significantly from the April 2022 tax year.
I was keen to use some of the bank’s money still and let my money work harder elsewhere. Given our upcoming change in earnings, it felt like the perfect time to secure a longer-term mortgage solution utilising existing tax returns to show our earnings.
Are interest-only mortgages difficult to secure?
Interest-only mortgages are indeed more difficult to obtain than a standard mortgage. Lenders want clear evidence that you are financially savvy and have the means to pay off the remaining balance. Like all mortgages, they are more interested in monthly cash flow than they are in savings. It’s why retirees struggle to obtain mortgages.
It took a lot longer than I anticipated for this to be approved, however, if you have a clear investment plan, a good lump sum of equity and great earning potential then you shouldn’t have any troubles.
Lending Criteria:
– Typically At least 300k equity (although some lenders may lend with less).
– At least 40% equity (60% Loan to value as well as hitting the equity threshold).
– A clear plan for how you will repay the money (also known as a repayment strategy)
– Above the UK national average salary (A couple would require 100k of earnings a year or evidence of this on previous tax returns)
Who would an interest-only mortgage appeal to?
Interest-only mortgages/ offset mortgages and other non-repayment mortgages are nothing new. They have been around for years now. I do however feel like they are an underutilised tool.
Repayment mortgages are ‘forced savings accounts’ and for the vast majority this is essential however for those with sound financial knowledge, an investment strategy and significant equity then interest-only is a great option (especially in terms of low interest rates).
To summarise:
– Those with significant equity in their home who want to leverage some of the bank’s money.
– Individuals with a clear investing strategy.
– Those who want to balance quality of life.
– Those who plan to eventually downsize- Those who feel they can get a better return elsewhere
Plans:
I have some exciting plans with the money I earmarked to pay off the mortgage with the sole aim to increase my monthly income to mirror our outgoings. Watch this space for future updates.