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Early retirement
I am taking early retirement this summer aged 50 years. I am at present in the process of selling my existing house and buying a new one with a mortgage of £40,000 over 20 years at variable rate. Using £30,000 of my retirement gratuity, I intend to reduce the mortgage capital to £10,000 immediately on retirement. I intend then to request the building society to reschedule my payments based on this capital sum over the 20-year period. Should I have my solicitor include a clause to this effect in the mortgage agreement? Is this the most cost-effective way of using the £30,000 to defray the repayments on the loan over the 20-year period?
Mr J.C., Dublin
The first thing to bear in mind is that, taking retirement 15 years ahead of the standard retirement age, you are going to require your pension to stretch a lot further than many people.
You don't say whether you are already negotiating with a lender over a mortgage, but you should be aware that it can be more difficult to persuade institutions to lend over a 20-year period as one grows older.
This is especially so when one starts relying on pension for income. It is not an ageism issue as such; it is simply that lenders tend to be a pragmatic bunch and they will want to be confident that you have the ability to repay the loan, not just at current rates, but even if rates should rise by a fair degree. Bear in mind that rates have been at historic lows, but that we are now on a rising curve, with two increases in based lending rates in the past few months and every indication of more ahead over the coming couple of years.
While 50 is hardly old, every passing year makes it more expensive to purchase the life assurance policy which most lenders like their customers to hold alongside a mortgage to ensure there is no outstanding debt should you die before the mortgage is fully paid.
Naturally, any health problems would only exacerbate this cost issue. In extreme cases, policies can become so expensive that some borrowers avoid them but this runs the risk of requiring your family, if any, to sell off the property to meet the debt should you die before the loan is fully paid off.
For all those reasons, I can see why you would be tempted to use your lump sum upon retirement to cut the capital on the loan. There is no impediment to your doing so on a technical level and, on a variable rate loan, you should not need your solicitor to include a clause indicating your wish to sharply cut the loan capital at an early stage of the pay-off period. Having said that, ensure you read all the loan conditions carefully and ensure a facility is provided allowing lump-sum payments over and above the monthly or annual repayments.
As to whether the whole process is good value, two points arise. The first is that mortgage borrowings tend to be the cheapest of all money to buy. Therefore, it would not be sensible to use any capital you have to pay this off before you settle any other outstanding debts. Second, you need to be certain in your own mind that using the money to cut the loan capital, will not leave you so short of income as to require you to borrow elsewhere in the future - at more expensive rates.
You don't give me details of your expected income and outgoings or, indeed, the value of the house you are buying but, as I said at the outset, given expected longevity these days, retirement at 50 means you can expect to have to eke your income out over a good many years.
Although cutting a chunk off your home loan may seem attractive at the outset, it might leave you too little room for manoeuvre later on if unexpected costs arrive, such as medical bills etc.
The second point is that, if you do decide to use the funds to cut the loan capital to £10,000, you are negating some of that advantage by continuing to extend the life of the loan over the 20 years. It would seem to be more sensible to reduce the loan period.
If funds do not permit this, I think you probably need fundamentally to consider your strategy as it sounds like you are running things too tight for comfort. Again, on a variable rate as a rule, the repayment period automatically continues to be the same - in this case 20 years - regardless of the loan capital outstanding, unless that loan capital is fully paid off. Check the small print.
In any case, with the lump sum you are receiving, you really should look at investment options. Given current interest rates, there is every chance that your money can work harder for you in carefully chosen investments than you will save by paying a chunk off the loan.
Obviously this is an area where you would want to get professional advice from an independent broker. A list is, I understand, available from the Central Bank. He or she will need to take account of your income requirements to ensure your money is not locked away in an inaccessible investment if you should need it at reasonably short notice.
