Our experts advise a reader on the options for clearing his interest-only loan
Christopher Jackson, 67, and his wife, Carol, 61, live in Climping, near Littlehampton in West Sussex. He is a property developer who owns houses and commercial premises that provide him with a substantial income.
The Jacksons are not your average couple — in 2006 they set sail from the Spanish islands of Gran Canaria to the Caribbean island of St Lucia on their yacht, The Duchess.
It was an expedition of a lifetime that took 20 days, after which they spent six months travelling around the Caribbean before sailing to Portugal and home.
After all that excitement, Christopher has a financial dilemma. About 15 years ago he took out an interest-only mortgage of £610,000 at 1.5 per cent above the base rate.
This is due to be repaid in September next year. He would like to know what options he has for refinancing or restructuring the loan — or whether he will have to sell some of his property to pay it off.
“I could sell our house and repay most of the loan. However, we do not feel ready to move — maybe in another 10 or 15 years,” he says. “The best outcome would be to find an alternative mortgage, interest-only and at a comparable interest rate. However, I think that may be too much to hope for.”
Christopher’s biggest property is in Bognor Regis, West Sussex, and is a complex of eight flats (one of which he no longer owns) and two shops. It is worth about £1 million.
He also owns a separate flat in Bognor, three shops along the coast in Worthing and two flats elsewhere.
The couple’s total gross income from their properties is £90,000 to £100,000 a year. His accountant has suggested selling some of his properties or his yacht, which is moored in Chichester. It is on the market for £99,950.
The house in which he and his wife live is worth about £500,000. The couple have no children of their own, but Christopher has a stepdaughter, Emma, and stepgrandson, Rufus.
The experts’ advice
Mark Harris, chief executive of SPF Private Clients, a mortgage broker
“Because the couple wish to stay in their home for another 10 or 15 years, it may be possible to refinance their existing mortgage. It helps that Christopher has a good level of income and a sizeable property portfolio.
“Continuing with interest-only payments shouldn’t be an issue, using property sales as a repayment strategy. Furthermore, raising finance into your seventies is no longer as hard as it was. The cheapest finance could be secured against the house and flats, but it may also be possible to obtain a commercial mortgage secured against the shops, or even one large loan secured against a selection of properties.
“One or more of these strategies should generate a decent proportion of the funds they require, but it may not be straightforward because lenders don’t always like 100 per cent of income to come from rent, and a partial repayment of the outstanding mortgage may be required. The Jacksons are enjoying an exceptionally low rate of interest because the base rate has fallen to a historic low, but the good news is that fixed rates are competitive.
“Equity release may be another option because these lend on the equity within a property rather than the borrower’s income. We would normally advise waiting until three months before the end of the mortgage term, but with rates as low as they are, now may be the time to lock into a good fixed rate.”
Jeannie Boyle, director and chartered financial planner, EQ Investors
“Christopher should consider diversifying his property portfolio. As the saying goes, don’t have all your eggs in one basket. When it comes to selling or disposing of assets, Christopher and his wife need to be aware of capital gains tax [CGT]. They each have an allowance of £11,100 [£11,300 from April 6] and after that will pay tax on any profits likely to be 28 per cent on residential property because they are higher-rate taxpayers or 20 per cent for commercial property.
“The drawback of selling property is the loss of rental income. Investing in income-producing shares and bonds can yield 3.5 to 4.5 per cent and would allow them to offset some of their income against dividend and personal savings allowances to reduce the tax.
“With their boat already for sale, it might be better to sell this and invest the proceeds in an Isa, while saving on maintenance and mooring fees. The new £20,000 allowance for 2017-18 means that married couples can invest up to £40,000 tax-free. Make sure that assets are split equally. Transfers between spouses are exempt from CGT.”
Chris Lloyd, associate director, Enness Private Clients
“I would advise raising most of the money against the ten buy-to-let properties because this will result in cheaper monthly repayments than it would on the commercial units and the rental income will cover most of the mortgage repayments.
“The shortfall could be raised against the clients’ home and could be even cheaper because residential mortgage rates tend to be lower than buy-to-let rates.
“Most high street banks will agree a residential mortgage until a borrower’s retirement age — deemed to be 75.
“Most will not look at rental income when assessing affordability, but there are a number of lenders who will raise a mortgage for older clients on an interest-only basis, making the monthly payments much lower. This fits in with the requirement to keep their home for the next 10 to 15 years, during which time I would advise selling some of their property portfolio.”
Aaron Strutt, product and communications director, Trinity Financial
“Before considering remortgaging to another lender, it is worth speaking to your bank and asking if it will extend your mortgage term.
“Over the past few years lenders have changed the way they treat older borrowers, and the market is more flexible. There is a selection of building societies with no maximum age limits at all.
“To work out the maximum mortgage amount, lenders will want to know how much a borrower earns and how much they spend. They use affordability calculators to assess salaries and pension income. If you earn enough money and you have enough equity in your home, some lenders may offer you interest-only. They are likely to take into account
the duration of any income, and this will affect the mortgage term.
“The couple are clearly in a good position, with properties generating a generous income. If they sold the boat, they could repay a chunk of the mortgage.”
“We do not want to sell anything until we have to. CGT is clearly a problem, as is loss of income, so that is not the road to go down. I am hoping to refinance the loan for, say, 15 years to allow us to continue enjoying our home and income for what will hopefully be another 15 years of active life. I guess the question is should we be looking for an alternative now, while rates are low, or should we hang on with HSBC until the last possible moment? In some ways I would prefer to get the new deal done rather than living with the sword of Damocles hanging over my head. Food for thought.”