Invest vs Mortgage

[Parky]

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.

No. I didn't spell it out specifically enough perhaps . My preference would be to pay off the mortgage with £200000 and invest the other £150000 (or a proportion of it, depending on the OPs risk tolerance) in equities. As the intervening posts have suggested (to me anyway), the likely gains from investing the whole £450000 in equities are not worth the risk involved.

[Gerry557]

The exit strategy would surely need to be identified first so you can work back from there.

Would the plan involve total payment on the last day of the mortgage, risking any market moves but allowing maximum growth time.

Small overpayments throughout the remaining term thus reducing leverage over time, probably from the investment income after tax.

Endowments had options of pay off mortgage when saving equalled outstanding loan or keeping it running to build up a next egg (or shortfall ) This point is a but mute as the mortgage is currently covered. Normally the plan was to build a pot from zero.

A growth phase, 5 or 10 years followed by some overpayments to reduce the overall balance followed by a final smaller sum to complete.

Any mix of the above, adjusted as time and circumstances dictate.

One last consideration would be rates changing. Although not looking likely right now, what if events escalate faster than you can react with your portfolio.

[Alaric]

One last consideration would be rates changing. Although not looking likely right now, what if events escalate faster than you can react with your portfolio.

A key point to bear in mind is that paying off a loan by investing in something else works only if the returns on the investment exceed the interest on the loan.

[ppk79]

Thanks again for all the questions and areas to think about.

Re: exit strategy - the plan is to sell within the CGT allowance each year and keep a sensible amount in the offset savings so we're not having to sell at the end of the 19 years. For example - £200k / 19 years = £10.5k target to save each year. If we happen to sell £12.3k each then I'd reinvest the rest. If we were unable to save 10.5k in a particular year, we'll make it up the following year. In any case, the plan is to be disciplined about paying that mortgage down.

Re: rates going up - I have thought about this and will have to assess if we're making more from investing than the current mortgage rate. If not, we'll have to start with saving the full £24.6k against the mortgage each year then look to pull the money out.

Any thoughts on whether I should start a SIPP for my wife who is 44 so 11 years till she can access the pot?

Thanks, ppk79

[swill453]

Any thoughts on whether I should start a SIPP for my wife who is 44 so 11 years till she can access the pot?

13 years. The pension age is planned to increase to 57 in 2028 https://www.pensionsadvisoryservice.org ... and-choice

Scott.

[Urbandreamer]

Any thoughts on whether I should start a SIPP for my wife who is 44 so 11 years till she can access the pot?

Thanks, ppk79

As said, it's 13 years. However it's also a question that we don't have the information to answer. I would argue that if she is a higher rate tax payer the answer is a simple yes. If she pays basic rate it's a more complicated question, but probably a yes.

Assuming that she is a basic rate tax payer and retires at state retirment age with a full state pension then the benefits are tiny. Simply the amount that she can draw tax free on a fund created by tax free contributions. That and the IHT advantages.

However if she plans on retiring before claiming state pension then manipulating taxible income may mean that no tax is due upon what she draws from the SIPP. This is also true if she currently pays no tax and possibly would still be the case after state pension age.

If she is not going to recieve a full state pension then again, a SIPP is a good idea.

A point about the state pension, it's REALLY well worth having. Ensure that your wife qualifies, either by working or claiming (though not necessarily recieving) child allowance.

[Urbandreamer]

Assuming that she is a basic rate tax payer and retires at state retirment age with a full state pension then the benefits are tiny.

Oops. Sorry the tax benefits. Non monitary benefits are not having to worry about CGT or dividend tax. It could simplify things a lot.

[Gerry557]

Thanks again for all the questions and areas to think about.

Re: exit strategy - the plan is to sell within the CGT allowance each year and keep a sensible amount in the offset savings so we're not having to sell at the end of the 19 years. For example - £200k / 19 years = £10.5k target to save each year. If we happen to sell £12.3k each then I'd reinvest the rest. If we were unable to save 10.5k in a particular year, we'll make it up the following year. In any case, the plan is to be disciplined about paying that mortgage down.

Re: rates going up - I have thought about this and will have to assess if we're making more from investing than the current mortgage rate. If not, we'll have to start with saving the full £24.6k against the mortgage each year then look to pull the money out.

Any thoughts on whether I should start a SIPP for my wife who is 44 so 11 years till she can access the pot?

Thanks, ppk79

I would seriously think positively about adding to your wife's pension. The only negative is getting access to the pot for several years, although this is also classed as a positive! The returns should be boosted by additional tax offsets being added at her tax rate so almost definitely if she's a higher rate tax payer and most likely if basic. You dont need the income now so can be deferred. IHT benefits, and possibly lower tax paid on way out or maybe none if its within the personal tax levels, whatever they will be then. 25% tax free cash pot should you need it. There is also the possibility of early retirement! More a levelling of income over time for when she's not earning. Pensions save tax going in, ISAs going out.

Personally I would be considering this more than "unsheltered investing" but maintaining a decent level of access to some of your funds, just in case you trade up your house or need to move with work etc.

I think bits of each over time would be my option. You can get £200k in isas over the next few years using both your allowances and that is without reinvestment of any dividend income.

Have you worked out if taxed investments will result in more income than your mortgage costs and how big a margin that will be?

[Wuffle]

I know nobody likes to go here but projecting 10 years out from your 40's and talking 'exit strategy' without mentioning the value and health of the parental units is disingenuous in my mind.
My close friends come from the south coast and the north respectively and I split the difference. At a similar age and professional achievement our final outcomes just come down to the geography of the family home.
Unsavoury but true.

W.

[ADrunkenMarcus]

Whenever one listens to "experts" on Money Box or similar programs, their advice is also to pay down the mortgage. In my view, this is muddle headed, especially with today's low interest rates.

Agreed. With a mortgage rate fixed around 2 percent, I've not prioritised accelerating payments on my mortgage. Instead, I've purchased equities with my spare cash.

Best wishes,

Mark.

[moorfield]

Whenever one listens to "experts" on Money Box or similar programs, their advice is also to pay down the mortgage. In my view, this is muddle headed, especially with today's low interest rates.

Agreed. With a mortgage rate fixed around 2 percent, I've not prioritised accelerating payments on my mortgage. Instead, I've purchased equities with my spare cash.

Best wishes,

Mark.

What's your Plan B when equities go to zero ?

[dealtn]

Whenever one listens to "experts" on Money Box or similar programs, their advice is also to pay down the mortgage. In my view, this is muddle headed, especially with today's low interest rates.

Agreed. With a mortgage rate fixed around 2 percent, I've not prioritised accelerating payments on my mortgage. Instead, I've purchased equities with my spare cash.

Best wishes,

Mark.

What's your Plan B when equities go to zero ?

If surely, not when. Probably a small if too, assuming a modicum of diversification in the equity portfolio.

[moorfield]

If surely, not when. Probably a small if too, assuming a modicum of diversification in the equity portfolio.

Last year we could have cleared our offset mortgage with ISAs and SIPP lump sum (on paper at least, since we can't access the SIPP for another decade). Today we can't, now since the virus has emerged.

It's an exaggerated question of course, but I'd suggest one needs to be able to answer the worst case scenario question first before diverting that spare cash into equities. (Edit: In our case that would have to be sell Moorfield Towers and buy Moorfield Cottage.)

[Urbandreamer]

If surely, not when. Probably a small if too, assuming a modicum of diversification in the equity portfolio.

Last year we could have cleared our offset mortgage with ISAs and SIPP lump sum (on paper at least, since we can't access the SIPP for another decade). Today we can't, now since the virus has emerged.

It's an exaggerated question of course, but I'd suggest one needs to be able to answer the worst case scenario question first before diverting that spare cash into equities.

Personally my portfolio has recovered those losses. Then again I had no need to sell at the bottom.
I have seen the odd crash in the 30 years I've been at it. Indeed I expect to see a few more in years to come.

Worst case? Well I did own shares in a company that went out of business many years ago. That said, it wasn't the only company that I held shares in at the time. I seriously doubt that the likes of Foriegn and Colonial are going to go pop and their shares be declaired negligable value by HMRC. I suppose that it could happen, but just how likely is that?

[Arborbridge]

Whenever one listens to "experts" on Money Box or similar programs, their advice is also to pay down the mortgage. In my view, this is muddle headed, especially with today's low interest rates.

Agreed. With a mortgage rate fixed around 2 percent, I've not prioritised accelerating payments on my mortgage. Instead, I've purchased equities with my spare cash.

Best wishes,

Mark.

What's your Plan B when equities go to zero ?

They won't - or at least, if they do our form of society will already have been swept away. We will probably be cowering in fear of the resulting mob violence or totalitarian government.

Arb.

[Arborbridge]

Worst case? Well I did own shares in a company that went out of business many years ago.

Only one? You are doing well

[YeeWo]

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.

While most people who own property have done well, please don't discount Property going down in value. First place I bought went down 37% between 1988 and 1992, annualised 10%........