Invest vs Mortgage

[Parky]

Thanks again for all the responses.


@Parky - fair point on capital appreciation & no CGT on your home however how can you crystallise this without selling up your home?

Wouldn't you be in exactly the same position as having to sell off your shares to pay off your mortgage at the end of the term? Or you may be downsizing your house.

[Urbandreamer]

@Urbandreamer - I would pay off the mortgage first if interest rates were double digits!
Not sure if you missed my questions earlier about recommendation for a passive ETF or two.

I think that others have made a few suggestions, but I tend not to use ETF's.

The only one that I ever owned was ROBG.

https://www.hl.co.uk/shares/shares-sear ... s-and-auto

I hope that it is of interest. Full of things like gearbox manufacturers, inspection equipment and AI vision systems companies.

[Gerry557]

I may be wrong on this, but isn't the general view that accumulation units are more complex outside tax wrappers than income units as the income is still there and needs to be accounted for but is hidden and therefore hard to calculate?

This is no or relatively small amounts of income with accumulation funds so no dividend income to worry about unless over the £2k allowance.

That's true no matter what kind of units you have, income or accumulation. As staffordian says, the notional dividend from accumulation funds is treated, tax wise, exactly the same as dividends from income funds, so there's no difference or advantage for tax purposes.

However, the complexity with accumulation funds outside a tax wrapper comes when you sell, 'cos you have to keep track of and add all those notional dividends back into your base cost when calculating CGT. If you have to hold anything outside of a wrapper, tax wise income units are just simpler.

Well you live and learn! I suppose it stops you avoiding long term income tax. Much simpler to use an ISA. I wonder if I have ever fallen fowl in the past? Fortunately nearly everything is sheltered now, well funds anyway. Individual shares seem easier to fathom.

I suppose a long time ago my income, if it was missed, would have been very small although I don't think the allowance was available back then to offset it. Not holding funds outside I've not looked to closely at the regulations.

Still it makes sense to put the higher income paying assets it the ISA.

[ppk79]

Thanks again for all the responses.

@Parky - fair point on capital appreciation & no CGT on your home however how can you crystallise this without selling up your home?

Wouldn't you be in exactly the same position as having to sell off your shares to pay off your mortgage at the end of the term? Or you may be downsizing your house.

Yes but I have up to 19 years to grow the money. If I pay the mortgage, I can only invest my saving + what I save after this point. The key difference is time which we all know is the key to growing investment. Appreciate there is risk involved with stocks going down vs likelihood of property going up. I could downsize in future and release the equity but I could do that with the mortgage. Forgive me if I missed your point.

[mc2fool]

To confirm:
1. Acc funds will reinvest profit thus increasing the price of the fund so you have to keep track of initial buy in price - sell price = profit for CGT calculations? Not sure where the £2k allowance comes into play here, sorry if I missed it.
2. Inc fund provide dividends therefore have to manage the £2k tax free allowance/7.5%/32.5% against other income?

No! Both acc and inc units "provide" dividends. The difference is that the inc units will pay them out into your pocket, whereas the acc units will automatically reinvest them into the fund.

However, from the taxman's point of view, both have "paid" you dividends and you will (potentially) be taxed on them, as dividend income.

Now, for CGT, the income units are straightforward, the gain is sell price minus buy price (inc. dealing costs, etc).

But for accumulation units the taxman's point of view is that the automatically reinvested dividends are exactly akin to you having reinvested the dividends from income units yourself. So, the CGT gain is:

sell price minus (buy price plus all the notional dividends that were automatically reinvested)

[Alaric]

So, the CGT gain is:

sell price minus (buy price plus all the notional dividends that were automatically reinvested)

If you forget to do this or don't have the records, it's to the taxman's advantage as it increases the amount that might be liable to CGT. The error doesn't matter when disposals are well within the annual limits.

[Parky]

Thanks again for all the responses.

@Parky - fair point on capital appreciation & no CGT on your home however how can you crystallise this without selling up your home?

Wouldn't you be in exactly the same position as having to sell off your shares to pay off your mortgage at the end of the term? Or you may be downsizing your house.

Yes but I have up to 19 years to grow the money. If I pay the mortgage, I can only invest my saving + what I save after this point. The key difference is time which we all know is the key to growing investment. Appreciate there is risk involved with stocks going down vs likelihood of property going up. I could downsize in future and release the equity but I could do that with the mortgage. Forgive me if I missed your point.

My point was that you are gambling that the investment gains, less taxes less mortgage payments are greater than zero by an amount worth taking the risk.

You are right that you have 19 years to grow (or lose) the money. In effect you are "borrowing" £200000 from the money you have set aside to pay off your mortgage in order to invest it in shares. You may be happy doing that, but I would not be, and I don't think many investors would be. How would you feel if there were a stock market collapse towards the end of that 19 years, which is quite likely as history will demonstrate - in fact there may be several during the period? I would not sleep well in that event (which is why I paid off my own mortgage early). Although the stock market trends upwards over time , it is not necessarily true over specific time periods, and you have a specific start an end point. Your strategy is not guaranteed to pay off over that specific period. For example, the FTSE100 was 6930 in December 1999 and is about 5% lower today at 6560 as I write this, a similar time period to that you are considering. It all depends on your attitude to risk, and understanding the risk.

[dealtn]

How would you feel if there were a stock market collapse towards the end of that 19 years, which is quite likely as history will demonstrate - in fact there may be several during the period?

Can you explain what you are saying here as it can't be what my interpretation of what you are saying is!

A reasonable definition of stock market collapse is what? A 20% fall?

There have been maybe 5 or 6 such falls in the last century?

Define "towards the end of that 19 years". The last year, 5 years?

Let's assume the latter, there are 20 such periods in a century. have there been 20 such "collapses" spread as equally over such a time period?

I guess I am struggling with the claim of "quite likely as history will demonstrate", can you flesh this out a bit to show what your thinking and concerns actually are.

[Gerry557]

Wouldn't you be in exactly the same position as having to sell off your shares to pay off your mortgage at the end of the term? Or you may be downsizing your house.

Yes but I have up to 19 years to grow the money. If I pay the mortgage, I can only invest my saving + what I save after this point. The key difference is time which we all know is the key to growing investment. Appreciate there is risk involved with stocks going down vs likelihood of property going up. I could downsize in future and release the equity but I could do that with the mortgage. Forgive me if I missed your point.

My point was that you are gambling that the investment gains, less taxes less mortgage payments are greater than zero by an amount worth taking the risk.

You are right that you have 19 years to grow (or lose) the money. In effect you are "borrowing" £200000 from the money you have set aside to pay off your mortgage in order to invest it in shares. You may be happy doing that, but I would not be, and I don't think many investors would be. How would you feel if there were a stock market collapse towards the end of that 19 years, which is quite likely as history will demonstrate - in fact there may be several during the period? I would not sleep well in that event (which is why I paid off my own mortgage early). Although the stock market trends upwards over time , it is not necessarily true over specific time periods, and you have a specific start an end point. Your strategy is not guaranteed to pay off over that specific period. For example, the FTSE100 was 6930 in December 1999 and is about 5% lower today at 6560 as I write this, a similar time period to that you are considering. It all depends on your attitude to risk, and understanding the risk.

You are forgetting 20 odd years of dividend income or compounded reinvestment in that calculation. Some will be done higher, some lower during the years but I would expect there would be growth in the holdings even after a 5% fall in unit price

[Parky]

How would you feel if there were a stock market collapse towards the end of that 19 years, which is quite likely as history will demonstrate - in fact there may be several during the period?

Can you explain what you are saying here as it can't be what my interpretation of what you are saying is!

A reasonable definition of stock market collapse is what? A 20% fall?

There have been maybe 5 or 6 such falls in the last century?

Define "towards the end of that 19 years". The last year, 5 years?

Let's assume the latter, there are 20 such periods in a century. have there been 20 such "collapses" spread as equally over such a time period?

I guess I am struggling with the claim of "quite likely as history will demonstrate", can you flesh this out a bit to show what your thinking and concerns actually are.

I am simply saying that over a specific time period the stock market can end lower than it started. My example was a period of 20 years over which the FTSE100 dropped 5%.

[Parky]

Yes but I have up to 19 years to grow the money. If I pay the mortgage, I can only invest my saving + what I save after this point. The key difference is time which we all know is the key to growing investment. Appreciate there is risk involved with stocks going down vs likelihood of property going up. I could downsize in future and release the equity but I could do that with the mortgage. Forgive me if I missed your point.

My point was that you are gambling that the investment gains, less taxes less mortgage payments are greater than zero by an amount worth taking the risk.

You are right that you have 19 years to grow (or lose) the money. In effect you are "borrowing" £200000 from the money you have set aside to pay off your mortgage in order to invest it in shares. You may be happy doing that, but I would not be, and I don't think many investors would be. How would you feel if there were a stock market collapse towards the end of that 19 years, which is quite likely as history will demonstrate - in fact there may be several during the period? I would not sleep well in that event (which is why I paid off my own mortgage early). Although the stock market trends upwards over time , it is not necessarily true over specific time periods, and you have a specific start an end point. Your strategy is not guaranteed to pay off over that specific period. For example, the FTSE100 was 6930 in December 1999 and is about 5% lower today at 6560 as I write this, a similar time period to that you are considering. It all depends on your attitude to risk, and understanding the risk.

You are forgetting 20 odd years of dividend income or compounded reinvestment in that calculation. Some will be done higher, some lower during the years but I would expect there would be growth in the holdings even after a 5% fall in unit price

The income is partly used to continue the mortgage repayments.

[dealtn]

How would you feel if there were a stock market collapse towards the end of that 19 years, which is quite likely as history will demonstrate - in fact there may be several during the period?

Can you explain what you are saying here as it can't be what my interpretation of what you are saying is!

A reasonable definition of stock market collapse is what? A 20% fall?

There have been maybe 5 or 6 such falls in the last century?

Define "towards the end of that 19 years". The last year, 5 years?

Let's assume the latter, there are 20 such periods in a century. have there been 20 such "collapses" spread as equally over such a time period?

I guess I am struggling with the claim of "quite likely as history will demonstrate", can you flesh this out a bit to show what your thinking and concerns actually are.

I am simply saying that over a specific time period the stock market can end lower than it started. My example was a period of 20 years over which the FTSE100 dropped 5%.

Well that's quite a change from "quite likely" to "could".

Besides you would need to consider a "Total Return" comparison not just the FTSE100 index level (and adjust for the equivalent interest payments).

I suspect you will find few 20 year periods where the Total Return index has fallen in that way.

[Lootman]

I may be wrong on this, but isn't the general view that accumulation units are more complex outside tax wrappers than income units as the income is still there and needs to be accounted for but is hidden and therefore hard to calculate?

This is no or relatively small amounts of income with accumulation funds so no dividend income to worry about unless over the £2k allowance.

That's true no matter what kind of units you have, income or accumulation. As staffordian says, the notional dividend from accumulation funds is treated, tax wise, exactly the same as dividends from income funds, so there's no difference or advantage for tax purposes.

However, the complexity with accumulation funds outside a tax wrapper comes when you sell, 'cos you have to keep track of and add all those notional dividends back into your base cost when calculating CGT. If you have to hold anything outside of a wrapper, tax wise income units are just simpler.

Yes, a it can get even messier when you sell part of your position and, within 30 days before or after that, there is a dividend reinvestment.

I avoid all accumulation type units AND never reinvest my dividends in the same security. That way all I have to worry about is the original buy and the equivalent sell (and intermediate corporate actions, if any). Keep things simple!

[Parky]

Can you explain what you are saying here as it can't be what my interpretation of what you are saying is!

A reasonable definition of stock market collapse is what? A 20% fall?

There have been maybe 5 or 6 such falls in the last century?

Define "towards the end of that 19 years". The last year, 5 years?

Let's assume the latter, there are 20 such periods in a century. have there been 20 such "collapses" spread as equally over such a time period?

I guess I am struggling with the claim of "quite likely as history will demonstrate", can you flesh this out a bit to show what your thinking and concerns actually are.

I am simply saying that over a specific time period the stock market can end lower than it started. My example was a period of 20 years over which the FTSE100 dropped 5%.

Well that's quite a change from "quite likely" to "could".

Besides you would need to consider a "Total Return" comparison not just the FTSE100 index level (and adjust for the equivalent interest payments).

I suspect you will find few 20 year periods where the Total Return index has fallen in that way.

Nevertheless, you are borrowing money to invest with your house effectively as security for the loan, and there is a risk that you might not get all of the money back. The risk may be small but there is a risk. Paying off the mortgage now, you will always have the house. Incidentally it will diversify the portfolio to include property and shares, reducing risk further.

[tjh290633]

Can you explain what you are saying here as it can't be what my interpretation of what you are saying is!

A reasonable definition of stock market collapse is what? A 20% fall?

There have been maybe 5 or 6 such falls in the last century?

Define "towards the end of that 19 years". The last year, 5 years?

Let's assume the latter, there are 20 such periods in a century. have there been 20 such "collapses" spread as equally over such a time period?

I guess I am struggling with the claim of "quite likely as history will demonstrate", can you flesh this out a bit to show what your thinking and concerns actually are.

There have been more falls than you assume. In my investing lifetime, since 1958, there have been quite a lot. 1974 was a substantial fall and in the recent past 1987, 2000-03, 2008, 2016 and the current fall.

You need to look back at a synthesised index to get a better record, as the FT30 covers less than 100 years.

TJH

[dealtn]

Can you explain what you are saying here as it can't be what my interpretation of what you are saying is!

A reasonable definition of stock market collapse is what? A 20% fall?

There have been maybe 5 or 6 such falls in the last century?

Define "towards the end of that 19 years". The last year, 5 years?

Let's assume the latter, there are 20 such periods in a century. have there been 20 such "collapses" spread as equally over such a time period?

I guess I am struggling with the claim of "quite likely as history will demonstrate", can you flesh this out a bit to show what your thinking and concerns actually are.

There have been more falls than you assume. In my investing lifetime, since 1958, there have been quite a lot. 1974 was a substantial fall and in the recent past 1987, 2000-03, 2008, 2016 and the current fall.

You need to look back at a synthesised index to get a better record, as the FT30 covers less than 100 years.

TJH

Well I would need to go back and check properly but the most recent of those barring the current one you mention was 2016. The FTSE100 peak was below 7,000 and to achieve a 20% fall suggests a low of at least 5,600. I'm not sure it fell below 6,000 from memory.

Anyway the point it seems is less relevant as my interpretation of what was being claimed wasn't actually what was being said it seems.

[dealtn]

Nevertheless, you are borrowing money to invest with your house effectively as security for the loan, and there is a risk that you might not get all of the money back. The risk may be small but there is a risk. Paying off the mortgage now, you will always have the house. Incidentally it will diversify the portfolio to include property and shares, reducing risk further.

Agreed a portfolio including shares and property is probably better diversified, but I thought your preference was to pay off the mortgage and not invest in equities.

It will come down to individuals and risk tolerance at the end of the day, there won't be a one size fits all answer.

[swill453]

Well I would need to go back and check properly but the most recent of those barring the current one you mention was 2016. The FTSE100 peak was below 7,000 and to achieve a 20% fall suggests a low of at least 5,600. I'm not sure it fell below 6,000 from memory.

You're wrong.

(but only slightly )



(the peak before was 7070)

Scott.

[dealtn]

Well I would need to go back and check properly but the most recent of those barring the current one you mention was 2016. The FTSE100 peak was below 7,000 and to achieve a 20% fall suggests a low of at least 5,600. I'm not sure it fell below 6,000 from memory.

You're wrong.

(but only slightly )



(the peak before was 7070)

Scott.

Not bad for a memory - my last year(ish) in the City.

[Hariseldon58]

All,


Re: attitude to risk - we understand that the value can fall however based on our experience with ISA investments over the last 15 years, the value has normally recovered or grown. Given we have 19 years left on the mortgage, I’m hoping the £200k can grown into something bigger. If there is a shortfall at the end, we have other saving we can use to make up the difference however this is a worse case scenario.


Thanks, ppk79

Leverage can really bite you.....I have been investing 30+ years and have had two 50% down episodes, both times I was about 95% in equities and did not sell out. The first time I was still saving a substantial part of my income and the market started to recover after about three years and I bought some cheaper shares during the recovery period. The second time was 2008/2009, just after I 'retired' in my late 40's, wasn't expecting that ! The markets recovered in due course, but still not pleasant.

Have I ever levered up in a similar fashion to your suggestion with mortgage debt, yes, was it disastrous No, however it didn't really work out to a significant gain either.

At present we are in unusual times to say the least, the market is not cheap, bad things can happen. Recovery does tend follow a sharp fall but it can be many, many years and markets can fall very heavily indeed. The 70's were horrendous....

The problem is that when bad things happen, it can often be the unexpected, illness, losing a job, your company goes bust and bad things can come together.

Attributed to Buffett,

Rational people don't risk what they have and need for what they don't have and don't need.