Buying flexibility

[JuanDB]

Not sure if this is the correct board. Apologies if not, please move as appropriate,

I am seeking thoughts / advice from anyone who may have been down the same road I am considering.

Personal situation. 45, married, two kids who will be leaving home within 3-5 years.
I am very securely employed, earning around 250-300k, more than half of which comes from restricted stock. Wife does not work.
Net worth is around £1.4m. 500k in house (4 figure mortgage remaining), 900k across DC pensions, SIPPs, ISAs and GIAs.
All the usual tax allowances are fully used each tax year. Pensions, ISAs, unsheltered dividends and some CGT harvesting.
I’m virtually financially independent and work optional, although no immediate plans to stop work, it is likely to happen in the next couple of years.

Having plugged away at the mortgage for 18 years, and being 6 months or so away from paying it off, I’m starting to think that I should be releasing equity from my house as a form of low risk leverage . I’m considering releasing around 40-60% of the value (200-300k) which I can borrow at 1.4% fixed for up to 10 years. The rationale is:

Interested rates are unlikely to reduce but may increase, in particular if inflation takes hold. I would expect cost of borrowing to be higher over the next couple of years.
The low current rates and long fix period significantly derisk borrowing
Given my age (45) I’m nearing the window where lenders probably won’t lend over a traditional 25 year mortgage duration.
My employer stock price is volatile and I currently have to sell in tax year windows which is a bit of a lottery. Having a big chunk of cash on hand allows me to divorce the restricted stock sale from the ISA / Pension deposit.
The majority of our investments are tax advantaged and I would hate to lose the tax shield we’ve built up by withdrawing funds early for any reason.
I believe I can significantly outperform the cost of borrowing without taking undue investment risks. Again this is derisked by the long mortgage fix period.
We’ll likely want to help the kids buy their first property. They already have investments towards a deposit but will likely need help with an additional cash lump sum. My cost of borrowing will be much lower than theirs.

I would plan to pay down the mortgage on a repayment basis. From earned income initially, then from deferred sale of restricted stock, ideally post retirement to drop from additional rate to basic rate tax, then ultimately from capital gains on the borrowed monies.

This all seems like a bit of a no brainer. I’m trying to assess risks and downsides. The monetary / investment risk seems low. I’m struggling to see any significant downsides.

I welcome the wisdom of the crowd.

Cheers,

Juan.

[Alaric]

This all seems like a bit of a no brainer. I’m trying to assess risks and downsides. The monetary / investment risk seems low. I’m struggling to see any significant downsides.

It's borrowing to invest. That works when the rate of return on the investments exceeds the cost of the loan. At some stage in the future you would presumably have to either roll over or repay the outstanding mortgage. What if mortgage interest rates were again 10% plus and this coincided with an asset crash?

[tjh290633]

My immediate thought is that the interest rate on the proposed loan is a red herring, unless you are not intending to repay the capital over the period of the loan. I think that you should consider the mortgage payments on a repayment basis over your 10 year period. Those are going to be in excess of 10% per annum, and your chances of beating that with your proposed investments are probably less than 50%. Marginal at best.

You might be lucky, but you could also be unlucky. The advantage of being mortgage free far outweighs the risk of taking on a loan which you do not need. Back in the happier days of tax relief on mortgage interest payments, the argument might be stronger, although still somewhat contentious.

Don't do it.

TJH

[EthicsGradient]

I think that you should consider the mortgage payments on a repayment basis over your 10 year period. Those are going to be in excess of 10% per annum, and your chances of beating that with your proposed investments are probably less than 50%. Marginal at best.

You might be lucky, but you could also be unlucky. The advantage of being mortgage free far outweighs the risk of taking on a loan which you do not need.

But looking at the total repayment each year would be the equivalent of looking at whether they could draw down the entire investment by a bit over 10% for 10 years, leaving nothing at the end. Which they probably could; in the end, the better comparison is whether they could average better than 1.4% in total return in investments over 10 years - probably, though it might be worth staggering the investments at the start in case of a one-off market drop right at the beginning.

[wanderer]

You say you are virtually financially independent and that work is essentially optional. If that's the case and you are earning 300k per year then wouldn't you be better off investing your earnings for the next couple of years rather than taking on the risk of leveraging up your main home?

[torata]

This topic was covered in the FT a few weeks ago, which might be worth a read.

Google "Borrow more against your property — or pay down your debts?" (Claer Barrett)
There's an associated podcast which is worth listening to as well as it includes the discussion with the guy in question.

The advice was basically 'no' in that case. One point in that article that you may not have considered is that banks won't lend to you via a mortgage if they know you're going to put it into the stock market.

torata

[TUK020]

One thing to consider is how the tax system interferes with this trade off.
2-300k is larger than you can quickly absorb into ISA allowances etc, so the investment gain you make on the funds is subject to taxation. This offsets the apparent attractiveness of this.
I have toyed with this subject in the past, and have repeatedly decided that being mortgage free is of value in its own right - no debt gives you flexibility.

A couple of other points:
- don't bank on when the kids move out. In addition to my own 3, I have now acquired a foster daughter and a son in law. The eldest of the bunch is 25, and I am still trying to work out how to get them to fledge off. Turning off the WiFi permanently seems a bit painful.
- you might want to think about maxing out the kid's LISA & ISA contributions as preparation for the day they get started on the property ladder.

[JuanDB]

Thanks all for the comments. A few follow up points.

The main issue I have is the volatility of my employers stock price relative to tax year windows. The price can swing 30-40% and does so regularly. To date I have been a forced seller in times of volatility to get inside the tax year. This borrowing divorces the contributions into tax advantaged accounts from the sales of the restricted stock.

My restricted stock is on a four year vest so today I can see vesting events out to 2025 that are guaranteed as long as I am in employment. This isn’t really borrowing money that I have to work out how to repay. It’s more paying to bring forward those vesting events to a timeline of my choosing. 1.4% seems cheap to do that. Hence the thread title - Buying Flexibility.

Being mortgage free sounds wonderful and I am nearly there. Tbh I could have already paid it off. The only reason I have it is because is comes with a line of credit which I would use except it is at 5.5% interest rate.

Re Kids moving out. If they don’t I will

Thanks for the input. It’s appreciated.

Thanks,

Juan.

[Spet0789]

Get an interest only offset mortgage.

My position is not dissimilar to yours. My mortgage balance is now down to about 3% of the value of my house. I continue to pay it down but I can draw back up to 30% of the value of the house whenever I like at just over 2% interest.

I would expect to be borrowing to invest over any sustained period but I can use this facility to smooth our cash flows from my income, which like yours are irregular.

The peace of mind I get from knowing that (within reason) I will not have any cash flow problems for the next 20 odd years (the term of the mortgage) is huge and it is a big component of my planning to retire early.

[JuanDB]

Hi Spet,

Thanks. I have looked at and ruled out offset mortgages. My plan is to use the funds as leverage to invest so would be largely exposed to the interest rate which, seems to be quite high for offset products. The best rate I can see is 2.5% fixed for 2 years with Clydesdale. It then reverts to 4.5%. Typical rates seem to be 3.5-4.5%. I can’t see anything with a long term rate in the 1.5-2% range. If you’re aware of anything please let me know?

My current mortgage (old woolwich product now with Barclays) has a mortgage reserve. What our American friends would call a home equity line of credit. I can borrow without notice up to about £80k however this is at BE base rate +5% so not particularly attractive for long term use.

Cheers,

Juan

[scrumpyjack]

It really comes down to your attitude to risk, and also your wife’s. I think she needs to be happy with it as well. It should not just be your decision.

In theory it seems attractive but when I was young in the seventies, all looked stable in the early seventies and then suddenly a black swan event, the oil price shock, caused inflation to skyrocket well into double digits, the stock market lost 70% of its value and interest rates went to double figures.

A repeat of that scenario may seem unlikely but your plan would be catastrophic if it did happen!

If I were you, I don’t think I would do it.

[Itsallaguess]

A couple of other points:

- don't bank on when the kids move out. In addition to my own 3, I have now acquired a foster daughter and a son in law.

The eldest of the bunch is 25, and I am still trying to work out how to get them to fledge off.

I see Stooz has updated the swear filter...

Cheers,

Itsallaguess

[wanderer]

The best rate I can see is 2.5% fixed for 2 years with Clydesdale. It then reverts to 4.5%. Typical rates seem to be 3.5-4.5%. I can’t see anything with a long term rate in the 1.5-2% range. If you’re aware of anything please let me know?

Coventry Building Society offset mortgages have a 10 year fix at 2.29% at 65% LTV or a 5 year fix at 1.29% at 50% LTV. Both of those have a 1k arrangement fee. Alternatively there is a 5 year fix at 1.65% at 50% LTV without any arrangement fee.

Where you might struggle is that these are remortgage rates and I'm not sure how they would look at equity release in that context. I know I had that problem when I tried to move to first direct some years ago - they would only remortgage based on the amount of debt currently outstanding on the existing mortgage.

[Hariseldon58]

Net worth is around £1.4m. 500k in house (4 figure mortgage remaining), 900k across DC pensions, SIPPs, ISAs and GIAs.

I’m virtually financially independent and work optional, although no immediate plans to stop work, it is likely to happen in the next couple of years.


The low current rates and long fix period significantly derisk borrowing

I believe I can significantly outperform the cost of borrowing without taking undue investment risks.
.

This all seems like a bit of a no brainer. I’m trying to assess risks and downsides. The monetary / investment risk seems low. I’m struggling to see any significant downsides.


Juan.

Bad stuff happens, unexpectedly and it’s not the bad stuff you worry about.

You think that making a positive return from investments is a given…..Markets can go down and stay down

You know that your companies share price goes down 30 or 40% but always goes up……. A turkey is fed and cared for every day until one day in December…

You can’t access your Pension for another 10 years…

Outside of your house you have 900k it’s a nice amount but not a lot for FIRE if you have been used to a six figure salary.

The additional return on 200k to 300k borrowed is not that dramatic when you do not have a cash fall back position.

Example. When Covid struck last January/ February I was in South America and got back after lock down had commenced, having a few hundred k in safe assets allowed me to feel relaxed about the situation and make a few useful investments by deploying some of that reserve.

The unexpected can happen, a robust financial strategy gives you peace of mind plus an opportunity to make up for the lack of returns on your reserve, it’s insurance.

I have taken a similar position ( 3 times in fact) but while they didn’t turn out badly, they didn’t make a fortune either, a disappointment !

I am playing devils advocate, but do consider your assumptions fully, I have seen similar suggestions online quite a lot recently, which is interesting in itself.

[Itsallaguess]

I am playing devils advocate, but do consider your assumptions fully, I have seen similar suggestions on-line quite a lot recently, which is interesting in itself.

I think the 'devils advocate' approach is completely the right one to take when met with someone who's left the casino having won the game, only to now be looking for the door back in...

Cheers,

Itsallaguess

[Wuffle]

Given that this is the Investment Strategy board rather than FIRE, I am going for it....
I just don't see how a discussion on risk can side step the wilful increase in financial risk that is ceasing work earlier than anybody needs to. There is your bad risk management right there. The mortgage thing is a sideshow.

W.

[JuanDB]

Some interesting comments and feedback. I do appreciate all the comments.

I’m not seeing anyone agree this might be a good idea, which is a slight surprise. If I was mid twenties with no assets behind me, no one would bat an eyelid and taking out a high multiple mortgage. In my case I’m talking about leverage around 1 years gross earnings and the feedback is this is high risk?

To Wuffles. That seems more an opinion than an objective statement. I know what enough looks like - why do something you don’t enjoy to win prizes you don’t want? Personally I don’t view retiring from current role as a permanent state. I will probably choose to work at some point in the future, I just plan to never have to work again. My skill set and experience are highly marketable, I have also started and exited more than one business. I’d back myself to do ok.

To IAAG. I haven’t left the casino yet. Remaining in the casino for a couple of years would be a condition of this move. Worst case is a couple becomes a few.

To Hariseldon. I haven’t stated any assumptions about markets. I certainly wouldn’t be going all equities, nor in any Big Bang moves. Whilst I earn multiple 6 figures, I don’t live on that amount. Annual spend is £30-40k. That will drop as the major life expenses fall away. I plan no drop in living standards or expenses when I finish work. The balance of expense will shift more to discretionary, experiential spend. Having tracked expenditure for 20+ years I know exactly what we spend, where and why, no surprises in store.

The nature of my employer is essential, national and international infrastructure. Too important to fail but Zero debt, highly profitable. Reasonable worst case is they get bought out and I was surplus to requirements. The restricted stock program rolls forwards and I’d be left with redundancy and a very large tax bill. If I die, the family is well provided for, beyond the value of the mortgage I’m looking at.

Thanks again for all the comments. They have given me cause to pause and reflect as the universal “bad idea, don’t do” has been a surprise. I have a meeting with the bank in a few weeks and will post back on the final decision.

Cheers,

Juan.

[Dod101]

I am a bit late here. When I was retired, in fact 10 years into retirement in the late 1990's I saw that I was sitting on equity just like you are and decided that I could release some. I have no idea how these things work today, but I took a mortgage and released well under 50% of the valuation for my house (which was mortgage free) In these days I was able to get a 5 year fix on the interest and with the proceeds bought another property as a buy to let. The income from it comfortably paid the mortgage and some left over for maintenance. After 5 years I repaid the mortgage and sold the second place with a very good uplift , in fact not far short of 100% gain. It certainly worked for me. I would regard property as a more secure idea than borrowing to invest, besides which I was heavily into the stock market as I still am, so I got a bit of diversity.

Again I do not know what the conditions are today but I was asked fairly detailed questions about what I wanted the money for, what plans I had for repayment and so on. As it happens I could have repaid the loan from other resources but there was no need for that. In your position, I would be inclined to think that borrowing against your current property could certainly work but I would be nervous of piling into the stockmarket with the proceeds. It is not a one way gain situation. If you do so, I would ensure that I had a clear plan to clear the mortgage without having to release funds from the stockmarket. You appear to be in a good financial position at the moment so why would you want to jeopardise that?

Dod

[Itsallaguess]

I’m not seeing anyone agree this might be a good idea, which is a slight surprise.

If I was mid twenties with no assets behind me, no one would bat an eyelid and taking out a high multiple mortgage.

In my case I’m talking about leverage around 1 years gross earnings and the feedback is this is high risk

With that comparison though, I think you're actually highlighting what might be making people suck their teeth a little...

You've got assets, and you're thinking about using an important one of them for leverage...

I suspect that if you had '1 years gross earnings' in a cash savings account, and were wanting to use that cash instead of using your home as leverage, you would have got a completely different response...

Cheers,

Itsallaguess

[JuanDB]

I’m not seeing anyone agree this might be a good idea, which is a slight surprise.

If I was mid twenties with no assets behind me, no one would bat an eyelid and taking out a high multiple mortgage.

In my case I’m talking about leverage around 1 years gross earnings and the feedback is this is high risk

With that comparison though, I think you're actually highlighting what might be making people suck their teeth a little...

You've got assets, and you're thinking about using an important one of them for leverage...

I suspect that if you had '1 years gross earnings' in a cash savings account, and were wanting to use that cash instead of using your home as leverage, you would have got a completely different response...

Cheers,

Itsallaguess

My view is that the house is just proxy collateral and the real leverage is against the restricted stock. It’s a bit of financial engineering to reverse factor future, contracted payments from my employer. The arbitrage opportunity is between the cost of borrowing and normalising the rate of return on the restricted stock, and the duration of the vest period of the stock (around 4 years covers it) Vs the duration of the fixed period of the mortgage at 7-10 years.

My rough maths indicates i’d need a 4.8% absolute return (can ignore inflation) to fully cover the mortgage payments without touching capital. A low risk portfolio like Golden Butterfly has returned 6%+ back tested over decades. De risk this by paying a couple of years of the mortgage from salary to reduce sequence of returns risk.

If that works, I’m golden and I get to hold or invest the restricted stock elsewhere. If it doesn’t then I use the restricted stock to pay down the mortgage. Either way I end up starting capital 2-300k larger than I currently have.

I should clarify, the restricted stock is in addition to the net worth I stated. I don’t include it in my net worth calculation as it is future income, same as I wouldn’t include future salary. It gets added to the net worth when it is fully realised. For example I have about 30k vested but not sold which is on top of the 900k of investment assets, about 100k gross (50k net roughly) due by end of calendar year.