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Our clients, a couple running their own business, had a property worth £2.8m with a mortgage of £1.7m. At the time, their mortgage was coming to the end of its 2-year fixed rate period, and they were looking to take out a new fixed-rate mortgage with a longer term of 5 years in order to insulate themselves against potential interest rate rises.

After two great years of business during the pandemic with a 15% increase in profits, they were tempted to withdraw £500k from the business to pay off part of the existing £1.7m mortgage. However, in order to achieve this, they would have had to pay up to 39% dividend tax on any money that they withdrew from the company. Furthermore, they were looking to take out a capital repayment mortgage so that they could pay off the capital as quickly as possible and pay less interest overall. However, this would mean that their monthly repayments would be high and leave them restricted in their monthly cashflow with little flexibility.

Our broker believed there was a better way to work with this client.

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With vast experience negotiating property finance of every kind and after analysing the client’s specific circumstances with a wealth adviser, it resulted that a mortgage of £1.2m they had originally wanted with a term of 18 years at 2.2% would cost the client £6,733 overall. Whereas an interest-only mortgage for the current £1.7m at a slight premium at 2.4% would cost only £3,400 per month over the same period, saving the client £3,333 per month in terms of cash flow.

The clients were hesitant to take on an interest-only mortgage as they were cautious about the extra risk associated with this mortgage type. However, after we explained all the benefits, they were more than happy to take on this extra risk:

  • Instead of taking the £500k out of the business to pay off the capital on the mortgage, they could pay this money into their SIPP, thus building the couple investments in the longer term and potentially outperforming the interest on the mortgage. They would also have no tax liability.
  • They would minimise their monthly mortgage repayments and therefore would need to withdraw less cash from the business, and therefore pay less tax longer term.
  • They had a 10% overpayment facility during the fixed-rate period, and unrestricted overpayment allowance after this, which meant the couple could pay off parts of the loan principle when they wished to. This added flexibility on their monthly outgoings, which is especially valuable in uncertain times. They also expected some other liquidity events in their lives to pay down the mortgage without having to take too much out of their business.

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