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Investing versus my mortgage: how I discovered I’m not as brave as I thought

The enemy in the mirror is me

Two and a half years ago I’d saved enough in cash and index funds to pay off my mortgage.

I didn’t do it.

Instead I cooked up a clever-clever plan to slowly pull out of equities over the next eight years – hoping to squeeze a little more from the upside along the way.

I’d won the game but I kept on playing anyway.

The Investor asked me to tell you what happened next.

Here goes…

What happened next

What happened was that I found out a lot about myself – especially my ability to tolerate risk

A reminder: Half of my mortgage repayment fund was sat in cash, half in equities. The idea was that instead of wholesale withdrawal, I’d stage an orderly retreat that would put me 100% in cash by 2021.

But no plan survives contact with the enemy. Especially when the enemy is me.

When I sketched out my scheme, I thought the enemy was a remote nightmare scenario where Mrs Accumulator and I both lost our jobs while equities crashed like a meteor to Earth and interest rates plumed like so much radioactive dust.

And in 2013, the recovery from financial Armageddon 2008-style felt like it had some way to run.

I didn’t want to miss out on the boost that staying strong in equities could give me as I pushed towards my next summit: financial independence.

It was a calculated risk, and some readers warned me against it. Their concerns mostly related to a deep personal hatred of debt.

If you have it, get rid of it. Don’t take chances. Cut your chains as quickly as you can and get the hell out of there. Don’t saw halfway through the manacles then hang about pulling victory poses in your cell while the guards play cards next door.

It was good advice. However I felt that time and financial wiggle room was on my side.

Change of plan

The markets climbed. My portfolio was up 20% by the end of 2013. The rise continued as I made my first annual withdrawal early in 2014.

The sun kept shining. News bulletins proclaimed record stock market highs.

It was like watching a rich kid open yet another present: “What have you got me? Oh yeah, another record high is it? Thanks.” (Tosses away).

But I get nervous when things go too well.

And the stock market is a see-saw: As valuations soar, expected returns fall.

With expectations diminished by those record highs, it was time to rethink. Time to rebalance out of equities.

Time to take money off the table faster than a poker cheat in a Yakuza den.

By the time my 2015 withdrawal came along, my allocation to cash was already one year ahead of schedule.

There’d been a sharp, downward jolt September to October 2014. Call it a warning. I didn’t know what was going to happen next but salad days seemed less likely.

Equities marched on to new highs in May 2015. That was the last high they hit.

I pulled out another year’s cash in April.

My equities were now worth about one quarter of my mortgage.

Turmoil hit in June, August and September.

On my bike ride to work, I didn’t look at the rolling fields and trees. I kept playing my risk tolerance game

What if I lost half of everything from here?

A 50% loss would wipe out 12.5% of the mortgage fund. I could make that up in savings in less than a year. Rationally-speaking, there wasn’t a problem.

But there was.

I’d crossed an emotional Rubicon. I was taking risk I didn’t need to take. But it took the recent 15% losses to make me realise it.

What did the downside look like?

Painful.

What did the likely upside look like?

Meaningless. A few extra grand or so.

Investor know thyself

“I don’t understand why you’re doing it.”

The Investor’s words skewered me like a crossbow bolt, and not for the first time. We were spending another Sunday exploring the Goring Gap near Reading – the inspiration for Wind in the Willows – and hiking our cares away. Or, more accurately, earning credits for the inevitable post-hike nosh-up at a local pub.

Anyway, I mounted my defence. It was wafer thin.

Just as the hike excused our calorie splurge, so my explanations papered over my real position. That my risk tolerance had shriveled away now my original objective was achieved.

I was much less brave in the face of losses that I had no business taking.

I sold out the next week.

That was back in November. Six years early. The mortgage fund is now 100% in cash. No one can take that away from me now.

Not even myself.

It was one of the best decisions I’ve ever made. Like popping a pill marked ‘worry begone’. Now I’m back to gazing at the rolling fields and trees (/grizzling over some other aspect of life).

I got lucky. Large losses could have punched a hole in my assets and the wind from my gut. That would have been fine if my risk tolerance hadn’t changed once I’d mentally ticked the mortgage off as ‘done’, but it had.

Since then I’ve taken much bigger losses on my financial independence fund and not felt a thing. Because that’s risk I need to take and the day of reckoning is years away.

Hopefully this earlier skirmish is a lesson I’ll remember when the time comes to take that money off the table, too.

At the very least, I know myself much better than I did. The markets tend to force truth on a person.

Take it steady,

The Accumulator

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{ 46 comments… add one }
  • 1 ermine March 29, 2016, 9:35 am

    The difference between loss-aversion and potential gains writ large. Been there done that for exactly the same reasons 😉

    > The mortgage fund is now 100% in cash. No one can take that away from me now.

    Hmm. Remember Cyprus. Don’t just load the gun…

    It’s really hard to quantify the feeling of knowing you can hunker down, and provided you can still pay the Council Tax you can stall the wolf from the door, even if you only have the light from a candle and Aldi beans. That never happened to me, but it was in my imagination as I discharged my mortgage as the first priority in my FI escape plan.

  • 2 Mark Meldon March 29, 2016, 11:05 am

    Surely paying down/off the mortgage is, ahem, a “no-brainer” on a risk-adjusted basis? If I remember rightly, UK equity returns have averaged some 5.3% a year since 1900. Those are real returns after inflation, which itself has averaged some 3% to 4% a year over the same period. But we know that returns are not linear; ask any of my clients that have been fully invested since 2000.

    Let us assume a 20-year capital & interest repayment mortgage on a “floating rate” (“Standard Variable Rate”) of, say, 3.20% with the sum of £200,000 being borrowed. Ignoring future interest rate fluctuations, we can see that the monthly cost of such a loan is £1,142 per month, or £13,704 per annum. The average UK (male) salary is £29,300 gross so, after paying the mortgage there is £15,596 left to live on – that’s not a lot.

    If £200,000 magically appeared, I would have absolutely no hesitation at all in advising my client (I’m an IFA, remember) to pay off the mortgage in full. Doing so saves £274,080 in capital & interest payments over the 20-year life of the mortgage and clearly has very significant cash flow implications for the individual. Better in your back pocket than that of the bank!

    Break free of the serfdom of debt and you can then have 20 years of spending and saving towards the twilight years when you can burn brightly rather than glimmer in the gloom.

    Of course, what often happens is “thanks Dad/Mum/Gran/Godparent/Lottery; I’m putting the house on the market and buying a bigger/better/more expensive one!”

  • 3 ermine March 29, 2016, 1:34 pm

    @Mark is not the weakness in your argument that fact that over 20 years the value of the principal is reduced by inflation. I very stupidly bought a house in 1989 for £50k-odd, the bank of england tells me that would be roughly twice as much in today’s money. So the value of my debt has been reduced by half simply by sitting on my backside, assuming an IO basis.

    The value of the principal of the equivalent stock portfolio would be expected to increase by roughly GDP, accepted a lot of volatility though people forget that house prices also have volatility, it’s just that the market cycles are much longer. So it’s rational to go for the stock portfolio and keep the mortgage.

    Provided, of course, that nothing goes wrong in your life over those 20-25 years, because else you may become a forced seller, and stock market suckouts and the likelihood of you losing your job tend to be correlated, so you risk being forced out at a market low.

  • 4 Mathmo March 29, 2016, 1:46 pm

    I love this conundrum. Thanks for sharing with us your thinking.

    A bird in the hand is worth two in the bush. If you can make one heap of all your winning s and risk it on one turn of pitch and toss. Neither a borrower nor a lender be. Do aphorisms get us to the answer? I think not.

    So do you net the mortgage off the house and consider the net amount the “property holding” in a balance portfolio? If so, can you sell it to rebalance the portfolio? Is that really the exposure? Again, I think the answer is no.

    Do you consider the mortgage like a negative bit of bonds. The return is guaranteed and there’s no credit default risk on paying off your mortgage!

    I view this that the mortgage is leverage on the entire portfolio. The house – in its entirety is a large illiquid part of that portfolio and so should be disregarded altogether (you have to live somewhere after all) as should the imputed rent from the expenditure calculation in FI. It’s true you might elect to live somewhere cheaper to help you hit FI, but that’s a bigger decision than rebalancing. What is left is the leverage and the invested portfolio. My guess is that if you pay off the mortgage, you are disproportionately exposed to property and if you don’t then you are disproportionately exposed to interest rates.

    Then the question becomes – why would you leverage your portfolio? Well it’s a cheap source of funds that might help you invest for a long period to hit FI. 2% mortgage rate looks good with 5% investment returns. Against it: you might lose your home. Does the second outweighs the former? Well it depends on things like the security of your income stream, type of mortgage and your risk tolerance. Obviously mortgages are fine on your second etc house as these are property investments, but the comfort of FI is shallow must be stacked up against the insecurity of possible homelessness / renting.

    That said, I think paying off the mortgage is not necessarily a “peak” on the way to FI. If FI is the goal then assess everything as either heading towards it or away from it. If paying off the mortgage helps then that’s great. If it doesn’t then don’t.

  • 5 rg March 29, 2016, 1:48 pm

    I’ve a 6 figure mortgage worth about 25% of the value of my house, and about twice that amount invested in equities. I’m quite happy with a 2% mortgage liability versus the risk inherent with a balanced equity portfolio.

    I’d only pay off the mortgage if the interest rate rose above 4% or so.

    And a sum in equities feels more liquid to me, come the apocalypse (or job loss) than being able to release house equity.

    I know in a way that is folly. If I fully owned the house I would never remortgage to take out 6 figures, and I have not converted to an interest only mortgage.

    We all find our happy mediums, which may be different to other peoples mediums.

  • 6 Mr Zombie March 29, 2016, 2:00 pm

    Interesting how your risk tolerance changed as you crossed the threshold.

    I have a cheap mortgage through work (base rate). I took it out for as long a term as possible and invested the difference in equities. This gives us a fair amount of wiggle room in terms of monthly cashflow. But it is a risky strategy.

    The cross over point would be in about 2 and a bit years time, assuming no investment growth or increase in saving amount.

    My plan was to let it run, and pay it off in a few years time, benefitting from more gains…so to speak. Reading this does make me think it’s best to get rid of the debt as soon as I can!

  • 7 Mathmo March 29, 2016, 3:03 pm

    Simpler:-

    We know that the bigger a portfolio is and the longer you hold it, the more likely it behaves “well” and gives you a great return. (Diversification, Performance averaging).

    Mortgages allow you to hold a bigger portfolio for longer.

  • 8 IanH March 29, 2016, 3:30 pm

    “I’d crossed an emotional Rubicon. I was taking risk I didn’t need to take.”

    I find this a very interesting and useful discussion as it shows how difficult it is to pin down in advance one’s personal reactions to changes of risk under changed circumstances. In my own case I paid off the IO mortgage I had within months of getting to the point where my employer’s pension commencement lump would cover it. Reaching this threshold effectively triggered an FI event for me as it was within months of when I could take my pension early without actuarial reductions. But I didn’t have the experience of a great weight lifted off my shoulders, or the sense of emerging from a tunnel of debt into the sunlit mortgage-free uplands, probably because I’d benefitted from low interest rates for so long that the mortgage interest outgoing was pretty small anyway. I was much more motivated by taking the (slightly) early pension option to become free of employment obligations, even though I gave up several years of benefits I could have gained through staying in work.

    But now I am contemplating selling up to move into rental accommodation, and I am not sure how I will respond to this situation, as I have not rented for 32 years. I only live where I do because of my former work, and though I am settled in the Midlands my main family ties are in the SE. This means if I wanted to move nearer to them I will be very stretched to find somewhere I can afford that I would actually like to live in. From my pleasant 3 bed Edwardian terrace I would be moving to a 1 bed flat above a kebab shop, were I to wish buy a place. No way am I going to take out a mortgage, and I am persuaded that the property prices in London and surroundings are currently very inflated. Price to rent ratios in the town I am thinking of moving to are something like 25-35, so renting seems a good option to me. If I sell up and invest, combined with my SIPP I’d have a fund of about £430k to support renting. With local rents running at about £15,000 p.a. (£1200 pcm) I think this is just about sustainable from a £430k portfolio (3.5% p.a. initial withdrawals), but I’d have to have a fairly large exposure to equities permanently. For around £15,000 p.a. rent I can get a vastly better place than I can purchase (e.g. newly built luxury riverside accommodation at £1350 pcm), so that is a win, and I’d get to enjoy the benefits of being nearer family, so another win, but here’s the rub – would I be able to cope with the anxiety and worry I’d experience whenever the market plunges? Like TI, at present I’m unperturbed with market gyrations as they only impinge on my SIPP portfolio, which I don’t rely on for anything. If market movements directly fed into my ability to meet my rent I think I might be rather less than sanguine about them. So it is a difficult exercise in knowing one’s-self. Are these (financial) risks I really need to take, and are the potential (non-financial) benefits sufficiently valuable to merit taking them? And if I take them, could I live with the potential consequences?

  • 9 jj March 29, 2016, 3:32 pm

    Hmmm with mortgage rates below 1.5% and assuming expected equity returns of 5%+ in a tax free portfolio, I can’t see why you would pay off your mortgage unless your thought your ability to earn was in serious jeopardy. Whilst paying off your mortgage may seem the ‘safe’ option, if you have no liquid assets you can’t pay the bills when they fall due, keeping in equities gives some ability to release cash for the rainy day, all you have to cover is an interest only component, which at these rates is very low, and if worst comes to worst no one gets thrown out of their house for not paying a mortgage with low LTV.

  • 10 magneto March 29, 2016, 4:36 pm

    This issue seems to crop up regularly and may IMHO hinge on the job security of the individual. Some areas of thoughts :-

    + As pointed out the mortgage debt can be viewed as leverage for the whole portfolio not just the real estate.
    + Borrowing costs for real estate are low compared to other forms of debt.
    + When comparing investments v mortgage, turning to real yields can enlighten. The investor may remember that future mortgage payments will be in future devalued sterling, so inflation can be deducted from the apparent interest rate, when comparing to the other real yields.
    – With present relatively high valuations in stocks and particularly bonds, hanging on for further future capital gains might prove extremely foolish?
    + If a don’t know any better investor (a good thing?) aims for a well balanced portfolio with exposure to all four main income producing asset classes (stocks/bonds/real estate/cash), then the final decision comes back to job security.
    – Although buying on weakness since Aug 2015, this investor using valuation driven methods is presently light on both stocks and bonds. So TA’s outlook chimes!

    Am intrigued why TA is in cash rather than paying off the mortgage. Did I miss something?
    Keeping options open perhaps to take advantage of a major crash?

    Good Luck to us All

  • 11 Planting Acorns March 29, 2016, 4:56 pm

    @TA… Very much enjoy your articles. I didn’t read the Sep ’13 article until just now, and whilst I enjoyed this insight into your investing behaviour…I must say I’m surprised. The Sep’13 you seems much more how I imagine your attitude from having read this blog. This got me to wondering how I’ll feel when I’m in a similar position…I think I’ll adopt LISA’s from next year so at least some of my non-pension investments are safe from me losing faith 😉

    Of-course we are all different. I kind of aim to be mortgage free and FI the day my DB pension kicks in… My savings now are only a result of low interest rates and renting a room out … I shouldn’t be able to save what I do (or anything on top of the pension) so its all a bonus really…

    @TA @Mathmo… Seconded…why cash rather than paying it off?

  • 12 Mark Meldon March 29, 2016, 4:57 pm

    Ermine, I fully accept your point about inflation. I guess you and I are of a similar age (I’m 52) and can remember the day when our mortgage rate hit 15% or more and when inflation seemed persistent and here for life. The world now teeters on the brink of deflation, it seems to me, and that is most unhelpful to those of us, like me, who are still encumbered by a mortgage.

    If I am right in my gut feeling that low interest rates and persistent low interest rates are here for some time, then paying down debt, whether a “cheap” mortgage or otherwise, is clearly a sensible choice as the cost of servicing the loan is not eroded away by magic over time. I also remember what happened to house prices in the late 80s and early 90s; not necessarily something that all commentators here do.

    I suppose it’s a trade off between the “certainty” of the risk-adjusted return of paying off debt to remaining invested in, say, equities. I fully understand the sensible argument of having an interest-only loan backed up by some form of regular savings into equities (via an ISA, most likely), but such loans are rightly perceived as too risky by the FCA and are well-nigh impossible to source nowadays. Triggered by the so-called “endowment scandal”, virtually all mortgages are of the repayment variety today.

    As an IFA, I find it hard to square the circle between staying or becoming invested (no matter what in) and “clearing the decks” by paying off expensive, cash-flow gobbling, debt.

    Best

  • 13 dearieme March 29, 2016, 4:58 pm

    In principle I believe in “if you don’t need the return why take the risk?”

    In practice we didn’t pay off our small flexible mortgage as soon as we could have done, preferring to put money into use-it-or-lose-it tax shelters. Even with pension tax-free lump sums, we let in trundle cheaply on. Eventually it died of old age.

    Were we right? In retrospect, yes. In prospect? Dunno.

    I wonder how many people take unnecessary financial risks and succeed only in increasing their liability to Inheritance Tax?

    P.S. “nightmare scenario”: is it ever worth buying income-protection insurance?

  • 14 Mark Meldon March 29, 2016, 4:59 pm

    I meant ” low interest rates and persistent low inflation” of course!

  • 15 magneto March 29, 2016, 5:16 pm

    @ Mark Meldon
    “If I am right in my gut feeling that low interest rates and persistent low interest rates are here for some time, then paying down debt, whether a “cheap” mortgage or otherwise, is clearly a sensible choice as the cost of servicing the loan is not eroded away by magic over time”

    What we have here is gut feling versus RTM!
    This is one of the most difficult and important issues facing investors today.
    Inflation might surprise in either direction, and we don’t know when or how?
    Certainly not this investor!
    Yours Clueless.

    P.S. RPI now redundant apart from Gov’t debt, paints a slightly different picture.

  • 16 David March 29, 2016, 5:47 pm

    Thanks for writing this article @The Accumulator – this is a subject which often floats around my head.

    We are technically mortgage free in that our mortgage balance is 40% covered by ISAs and 60% covered by equity in a second property. Like @rg above, if I had a paid-for house I certainly wouldn’t borrow money to recreate our current situation. But at the same time I can’t bring myself to pay 28% capital gains tax by selling the BTL investment, and I also desperately don’t want to lose the tax benefits of a six figure sum accumulated in ISAs.

    But what I fear I am doing is letting the tax tail wag the portfolio/debt dog. I am not liquidating assets which could drop in value, in order to pay off debt which will never drop in (nominal) value, but which I must pay off if I am ever to reach financial security.

    I compound the problem by paying all my surplus earnings into my SIPP in order to avoid higher rate tax, which means I will always (until age 57) be forced to earn a big salary in order to meet a high monthly mortgage payment whilst saving for retirement.

    Like @ IanH we have further increased the complexity by deciding to move to rented accommodation. As we no longer know the value of our eventual “forever house” we don’t even know how much mortgage to pay off!

  • 17 ermine March 29, 2016, 6:31 pm

    @Mark > when our mortgage rate hit 15% or more and when inflation seemed persistent and here for life. The world now teeters on the brink of deflation, it seems to me, and that is most unhelpful to those of us, like me, who are still encumbered by a mortgage.

    Yeah, I remember that 14.something winter, hardly dared use the heating 😉
    Inflation and purely inflation bought me out of my stupidity of purchasing when loan to values were at an all-time high in the Lawson boom. And I was lucky enough to hold on to my job for the 20 years it took to become mortgage free.

    Who will be the fairy godmother, I wonder, for the good people buying in the SE or heaven help them, London, now? Yes, the affordability is good because interest rates are low, but a lot of tough times can happen in 20 years…

    I too wonder why TA is in cash. A house worth of cash is way, way over the FSCS limits, either he needs to salami-slice it across a load of accounts or he has to always be fearful of the bail-in haircut we seem to be hearing more about. Cyprus showed the way.

  • 18 thenumpty March 29, 2016, 8:01 pm

    I’m 2.5 years into my 25 year mortgage and have just started overpaying on top of the regular amount in the past year. I’m still saving into my S&S ISA and pension as well, and know that paying the extra into shares would likely mean an earlier retirement, but it feels good knowing it’ll be paid off a lot sooner. It’s also a guaranteed return, and therefore know I’ll be paying £x less per month in interest which is nice.

  • 19 Jeff March 29, 2016, 9:21 pm

    Maybe I’m missing something here.
    Once one has paid for a property outright, financial independence usually requires some additional portfolio of assets to bring in money. Such as a stock portfolio.
    Cashing in the existing stock portfolio to pay off the mortgage means all the ISA tax privileges built up over the years are reset back to zero.

    In my case, I paid off my mortgage in 5 years, then started assembling a stock portfolio after that from about 2000. In hindsight, I should have been paying the mortgage down over 10 years and starting my stock portfolio.

  • 20 Jonny March 29, 2016, 9:23 pm

    Wow! I really didn’t see that coming!

    I have a chunk invested in equities, that was intended to be used to make an overpayment on my relatively low-rate fixed mortgage. The initial plan was to hold for 5 years, and pay off at the end of the fix (with the option/understanding that if equities performed miserably, I’d keep the money invested until they raised again).

    Then doubt set in and I decided to withdraw approx 20% per year, to de-risk. However, last year when it came to sell my second chunk, the market was down and I didn’t want to sell for less than I had the year before, so I ended up keeping that portion invested. Fortunately I’m not checking the value regularly, so will revisit it in again in September, and hope things are doing better then, to allow me to sell off 20 (or perhaps 40%) more to use as another mortgage overpayment.

    I guess these things really don’t have to be (and shouldn’t be) set in stone.

    I also find the £10 trading fee really puts me off selling too!

  • 21 John B March 29, 2016, 9:29 pm

    Aren’t there 3 pots in play here, mortgage, cash buffer and equities. It would be odd to sit on a 2 year cash buffer and have to fund the gap between its paltry interest and the mortgage rate. Why not pay off the mortgage with the cash buffer and just plan to borrow more against the house if you have a rainy day? That rainy day might be linked to a housing slump and higher mortgage rates, but you should be able to get a loan as you’d not be borrowing anything like the value of the property, and it should be quick enough to arrange. You’d only need a 6 month buffer in cash then.

    The equity pot in unaffected by this, you are not borrowing to invest.

  • 22 JonWB March 29, 2016, 10:04 pm

    I think everyone would pay down the mortgage at 14%. Some would pay down at 0.5% and others even at -0.5%, with a certain cohort running the numbers at various percentages where emotion plays some part in their decision. What you want is to make good decisions based on your circumstances. You have to accept emotional limitations will play a large part in the decision for many people – this is a real handicap that a lot of people just can’t get past and it costs them in all aspects of their life. Too many people take on risk adjusted returns they shouldn’t (normally around property, the herd affect), but then refuse lower risk adjusted returns they should accept (long term saving in listed securities within tax wrappers). It is often the same in other aspects of life. If you have a partner with a very good job, it makes it far easier to take more risks with your career decisions/opportunities as if something doesn’t work out, it isn’t fatal and doesn’t put you under water. Too many people either turn down these sorts of opportunities, or have arranged their finances/lives such that they have to forgo them even if they do realise they exist – many are just too busy in their day to day lives and it passes them by. This compounding of opportunities is very, very powerful.

    If it is a choice between sleepless nights and worrying about the stock market, versus feeling free by being debt free, then pay down the mortgage. Likewise, it might be difficult if your partner/spouse has a very different risk tolerance to you as there is a risk of this leading to a significant change in the balance of a relationship. At a fundamental level, there is no need to differentiate between pots of assets/investment vehicles with labels, other than the holders emotional attachment to them – particularly if they are over the same sort of time horizon (e.g. both long term, mortgage pay down, investing for financial independence). If the individual(s) concerned can’t leave the emotion out of it or don’t want to, then logic, numbers and risk tolerance is not necessarily helpful. Warren Buffet freely admits his emotional attachment to his modest house (purchased for cash in 1958) cost him compared to renting and then investing in stocks. Whilst it isn’t a direct comparison with the current proposition facing @TA, it does show that even for someone like Buffet, emotional involvement can be a factor.

    We have significant interest only mortgage taken out 10 years ago (switched from repayment and extended term in 2010 just before the door shut on those kind of changes). We have 7.5 times the mortgage balance in tax wrapped investments (and this excludes the equity in the house) – all from saving and compounding PAYE salary over the last 10 years. We prioritise utilising all the tax wrappers for the family (2 children under 10). I do not rule out borrowing more by utilising additional borrowing/remortgaging to a higher LTV on the current house (in fact I think it is quite likely). I will only do it as it’s backed by a much larger portfolio and two large salaries. I wouldn’t even contemplate upping the LTV if I didn’t have a huge margin of safety.

    @David – The new flexible ISA rules open up a brilliant planning opportunity around this particular conundrum. From 6th April 2016 it is possible to withdraw and repatriate 100% of an ISA balance within any tax year (as long as the ISA manager allows it). This means that you can invest through your ISA for tax free compounding while interest rates are low, but then withdraw if interest rates soar, pay down the (hopefully interest only offset) mortgage to say £1,000 for 355 days of the tax year, then repatriate to the ISA for 10 days to ensure you don’t lose the ISA balance. Then over time you can use other savings to pay down the mortgage or revisit if interest rates collapse again. I like this as it provides a lot of protection in being bold and taking the risk from investing in a portfolio (it is also clearly easier to beat the hurdle of the mortgage interest rate if you are tax wrapped). If interest rates go to say 15%, it is very possible that the ISA portfolio craters at the time you need the capital, so it isn’t risk free by any means and you need to be mindful of inducing a forced sell at precisely the wrong time in a cycle. Still it is a useful option.

  • 23 Minikins March 29, 2016, 10:58 pm

    Thanks for sharing this. I think the clue is in the name The Accumulator (ironically). You must have been looking at the worst case scenario and whether you could then face looking at yourself in the mirror. Maybe not, but I could understand you might not be able to live with the regret of the potential loss of value in your portfolio over the next few years when it could have paid off your mortgage over any regret associated with possible loss of growth in your cash stash due to low interest rates and maybe even negative rates. Maybe this is too simplistic and a completely wrong analysis but I do appreciate that paying off a mortgage can be a very positive thing. I felt it a great weight off my shoulders, especially as I was the sole mortgage holder and rather concerned about what might happen if I lost my job. It’s a responsibility thing. How could anyone possibly handle a potential big loss with a name like The Accumulator?

  • 24 John March 30, 2016, 12:11 am

    @Mathmo: “My guess is that if you pay off the mortgage, you are disproportionately exposed to property and if you don’t then you are disproportionately exposed to interest rates.”

    You are exposed to property just the same whether or not you pay off the mortgage. If property prices take a tumble, no amount of mortgage helps with that!

    @TA: Very interesting read, thank you.

    I’ve grappled a bit with how to split surplus income between pensions, ISAs and mortgage overpayments, trying to balance the irresistible tax breaks of pensions (for someone in my position at least), the need for plenty of non-pension capital to retire well before minimum pension age and that I’d ideally like rid of the mortgage as soon as possible.

    For the time being, I’m first making pension contributions (via salary sacrifice) to get the employer match (net income of £58 foregone leaves £263.80 gross in the pension) and then sacrificing further income to relieve all higher rate tax (£58 becomes £113.80).

    I’ll need income post-55/58 anyway, the mortgage should be gone by then regardless, and with free money and tax relief adding up to 78% (with the employer match) and 49% (without) and hopefully no way withdrawals are taxed as heavily as that in retirement, I feel like I can weather lousy investment returns (perhaps) and a few decades of government toying with pension rules (definitely). Just need to watch out for and keep within the Annual Allowance and Lifetime Allowance.

    I’ve then split the rest between mortgage overpayments and ISAs in proportions such that the mortgage will hopefully be cleared at about the same time as I might hopefully have enough in ISAs to fund early retirement (about 12-13 years to go). Perhaps as that time horizon shortens I might have to re-evaluate and increase the mortgage overpayments, as there’s no tax advantage here.

    Like others above, I think I would struggle to put the lot into ISAs each month and then one day turn around and withdraw a big slug of tax-free ISA money to repay the mortgage (even if that’s tax-free too). Too much temptation to try and time the market, to kick myself if I repay and then see markets shoot up or if I stay invested and markets fall. Easier psychologically I think just to set aside an amount to overpay the mortgage every month and try not to think about what could have been in ISAs (and probably should be if only needing to beat 2.69% pa).

  • 25 Dave C March 30, 2016, 12:16 pm

    Excellent post – and intelligent/interesting comments, thank you!

    I decided to pay off my mortgage in my early 40’s, over 10 years ago. At that time, I was predicting a house price crash of -20%, so I sold a second property and used the proceeds to pay off the mortgage of my main house. After the ‘redemption’ I went for a pint of Guinness and it was the best ever 🙂 The other emotional factor for me was that having the mortgage and the extra property were ‘things to worry about’ which I did not need, so it freed me from that, and that felt (and still feels) good 🙂

  • 26 Moongrazer March 30, 2016, 3:06 pm

    An interesting read, and certainly provoked some thought in me.

    What does pique my curiosity is that you mention the fear of losing your mortgage pot to the whims of the market, but in the same article you then talk about your FI fund and not feeling a thing. What is the difference? Does the mere fact that you have two separate pots mean you see you risk on each differently? What makes (or made) you choose to invest in one pot rather than the other?

    At the moment I have a mortgage, cash savings and index funds in pension+ISAs. However, I’ve not specifically set aside one fund to pay off the mortgage early and another for FI; I simply have a target that I’d like to hit that would give me FI both by clearing the mortgage and by giving me enough income to pay the bills – and a fun allowance on top – and thus remove any need to worry about work.

    While interest rates on mortgages are low, I see no reason to deviate from this. Right now I tend to top up my cash and equities at a ratio of 1:2. Mortgage rates shooting up from 1.5% to 5% might of course change my mind. Then I might consider tilting the other way: focus on cash to get rid of the mortgage sooner. I might even sell out the index funds in ISAs to pay it off.

  • 27 The Investor March 30, 2016, 4:26 pm

    @all — Amazing how this question splits people. If you follow the link back to the original article (which @TA links to in the piece) you’ll see it was the same when he said he *was* going to keep investing. (i.e. Lots of people said he shouldn’t).

    In fact, I eventually closed comments on that post because it was becoming quite ill-tempered:

    http://monevator.com/not-paying-off-my-mortgage/

    Safe to say it’s a personal decision I think. 🙂

  • 28 The Accumulator March 30, 2016, 6:39 pm

    Hey, thanks all for your kind comments and thoughtful musings. A great thread and no sign of any fisticuffs that would force The Investor to shut us down.

    One or two have talked about 5% annual average return on equities and the long-term prospects of equities delivering positive returns over the course of 20 years or so. While true, the annual average return can mask a lost decade or two. And while, historically, equities have almost always provided a positive return over 20 years in the UK, that doesn’t mean your portfolio can’t be cut in half in year 19. Real recovery times can take several years or more, though they don’t normally.

    So I set that against the likely upside, which seems muted as valuations are high and particularly slight as I was due to have the lot out in 5 years anyway – withdrawing a chunk every year.

    Ultimately, the upside didn’t seem worth the downside, especially as a significant setback to the mortgage pot would equally be a blow to the FI pot.

    @ Magneto and a few others – I’m still in cash because I can earn more from interest on cash ISAs and what has come a ridiculously complex web of bank accounts than I pay out. It’s sufficiently spread to avoid any compensation complications. As long as that’s the case then it plays to jj’s point about not being entirely locked into an illiquid asset. It’s my own DIY offset I guess.

    @ Planting Acorns – yes, that version of me didn’t know how I’d feel once I’d achieved a big financial objective and how that would affect my risk tolerance. (Which is why I’ve been writing a fair bit on risk tolerance lately. It’s much less abstract now.)

    That version of me still feels the same way about the FI pot but I’ll be more wary of the run in this time.

    @ Moongrazer – the difference for me is that the FI goal is sufficiently far away that I’d still see a 50% hit on equities as an opportunity. I’ve still got less than I have yet to put in, so I’d be fairly sanguine about investing at cheaper rates, knowing there’s plenty of time to bounce back.

    I keep the two pots separate because it helps me to manage things more clearly. I have a clearer sense of how much there is to do to achieve FI with the mortgage monies squared away.

    @ David – You seem to have a good handle on your situation but I think you hit the nail on the head when you said: “I certainly wouldn’t borrow money to recreate our current situation.”
    There is perhaps some parallel between your current situation and dearieme’s Schrodinger’s Flat – you only know you were right in retrospect.

    @ Minikins – A very astute analysis. A perceived increase in job insecurity also played a role and nobody should doubt the emotional value of ‘really’ owning your place.

    @ Jeff – FI equity funds are being built up in SIPP. And there’s plenty of headroom in my ISAs these days too. Thanks George.

    @ JonWB – Very interesting. I definitely don’t have your margin of safety which I think makes for a more emotional response to a situation.

  • 29 theFIREstarter March 30, 2016, 6:41 pm

    Well, you’ve played it pretty perfectly with regards to the market timing, so no one can argue with that 😉

    As you are still in cash could you be tempted back into the markets if they drop, say, another 20%? Another dilemma emerges…

  • 30 Passive Investor March 31, 2016, 3:48 am

    Thanks for a really interesting article and comments. In my early 50s and having experienced 12% interest rates I went for mortgage pay off rather than maxing out on equity returns. I have never regretted the decision although I suspect the total value of my financial assets is now significantly less than it would have been with the bolder strategy of keeping mortgage debt. There is lots of wisdom in the discussion and for me the main points are:
    – risk tolerance changes with age and circumstances and at some level you never really know what yours is – you only find out in retrospect.
    – you can’t escape your own psychology / temperament however hard you try, so learn to accept it. You have to be able to sleep at night and if paying off the mortgage allows you do that then you have made the right decision FOR YOU.
    There are others but I am at risk of just repeating what has already been said above. Thanks again.

  • 31 ralu March 31, 2016, 12:13 pm

    Has it been so long already since that article? Wow, the years are getting away from us.

    Anyway, the great thing about life is that it does not move in straight lines. Just because something seemed like a good idea at the time, it does not mean that it is set in stone. We’re humans and learning and adapting is what got us at the top of the food chain in the first place.

    So, congrats for having the guts to try this in the first place and congrats for acknowledging that it wasn’t for you. You have proven yourself both courageous and wise.

  • 32 Mathmo March 31, 2016, 5:00 pm

    @John – the point is not that your exposure to property is reduced by paying off the mortgage, but that your exposure to everything else is increased by not paying it off: the money is invested, bringing the massive illiquid lump into some sort of balance with the rest of the portfolio.

  • 33 Nick March 31, 2016, 10:15 pm

    I agree that investing whilst in debt is unwise. However, there is a single exception: employee matching pension contributions. To turn this down is to turn down FREE MONEY and a guaranteed 100% return. But when they’re maxed out, I really think people should hammer down their mortages to zero. Investing is a lot more fun, but being debt free feels great, especially considering how much you can invest when you (and not your bank) really own your home. The Accumulator, before you rush to pay off the mortgage, you might want to look into contributing to your employers plan first.

  • 34 Chris April 1, 2016, 12:10 am

    It’s all very easy, really.
    I have a £2m house and £3m in equity investments (purely stocks and shares).
    I regard this as a traditional 40/60 split between fixed interest and equities. I own no bonds.
    Consider the 40% not as the value of the house, but the fixed interest I save in not having a mortgage (that’s the same as earning that amount on a bond and then paying the mortgage).
    And I sleep really well.
    Easy!
    .

  • 35 The Rhino April 1, 2016, 10:19 am

    @Chris £5m net worth, april fool?

  • 36 FI Warrior April 1, 2016, 10:49 am

    No investment returns taste as good as mortgage-free feels? (to sleep well) & no coffee after 8pm 🙂

  • 37 Jane April 1, 2016, 12:51 pm

    Everything is sooo much easier in hindsight, isn’t it ;).

    I paid off my mortgage 8 years into its 15-year term. For me, paying down the mortgage was an easy way to start getting serious about transforming my financial position. At the time, I had small savings and no investments.

    Killing the mortgage had easily-measured results and immediate gratification in the form of the little slip they gave me with my lower balance and new, short term printed on it. I could pay as little or as much extra as I wanted from my budget each month, so it was very simple.

    I don’t pretend that I carried out any real form of intellectual examination or fiscal analysis when deciding to pay off the mortgage first. But I knew that I really, really hate debt.

    Somehow, paying off the mortgage early got me locked into putting aside a large proportion of my income towards improving my financial position. So, once the mortgage was dead, I easily transferred that zeal into saving and investing. Being mortgage-free felt (and still feels) fab.

    I could never go back to renting; I like to know I own my home. And, here at Schloss Jane, if we want to paint the kitchen cobalt blue or drill into the walls to fix up a large picture, then we expect to be able to do so without having to ask a landlord’s permission :).

    Plus there are tasty tax-free sums to be made from getting a lodger, should that become necessary at any stage. Try asking your friendly landlord to agree to that!

    Jane

  • 38 Matthew April 1, 2016, 1:12 pm

    So, to sum up, due to recent events, the fear of losing some of your own money has now taken over from the greed of trying to use other people’s money to make you richer.

  • 39 magneto April 1, 2016, 4:20 pm

    @Chris
    ” and £3m in equity investments (purely stocks and shares).”

    Well done on FI!
    No cash?
    How are “stocks” v “shares” differentiated?

    Think it was Mr Darling(?) in Peter Pan who would come home and say “stocks are up today, but shares are down”, or on another day say the reverse!

  • 40 The Accumulator April 1, 2016, 6:07 pm

    @ Nick – you are right about taking full advantage of employers match, which I do.

    @ Matthew – when you invest, it’s your money on the line not someone else’s. You invest your capital to assist a business in meeting its objectives. The return is what you earn for taking the risk that they will fail / pay themselves enormous salaries with your money / perpetrate a giant fraud etc.

  • 41 Ian April 1, 2016, 8:09 pm

    The Accumulator,

    I think Matthew’s point was that the money your were investing was not yours in the first place, hence “other people’s money” (borrowed from the bank).

  • 42 Chris April 1, 2016, 8:55 pm

    @ The Rhino — not an April fool (it’s true). But the message is not dependent on the absolute numbers. Message is the same if you have 200k+300k

    @ Jane — absolutely agree, clear the debt and you have many more options. Tell the landlord or the bank to sling their hook!

    @ magneto — I’m still working, love my job. Cash is minimal. “Stocks” because I have some on NYSE but indeed they are shares.

  • 43 old_eyes April 1, 2016, 11:19 pm

    It is bound to be a complex mix of personal attitude, circumstances and what you think the future might hold.

    In 2001 I took redundancy and started two small businesses. I had a significant endowment backed mortgage. I might get misselling compensation (did eventually), and the businesses might go great, but interest rates could soar and I did not like the uncertainty.

    So I concentrated on controlling costs and paying down the mortgage to get debt free so that I would not get hit by interest rates spiking whilst I had not much that much income.

    So no savings except paying down the mortgage. Once that was out of the way I started to save. Huge relief that that uncertainty had been put away.

    The businesses went pretty well, but later I took a full-time position with one of my clients because the pension offer was outstanding, the salary OK, and the work very interesting.

    Having built pension across my various periods of employment up to the lifetime limit, now looking at reversing back to restart one of my earlier businesses having achieved something close to FI.

    With hindsight I could have got to a better place ultimately, but I carried hte scars of spiking mortgage interest rates, and as the only earner in the family I had to make sure we could house and feed ourselves.

    I could not foresee the interest rate slump, and I am not sure anyone else could.

    I played the hand according to my family needs, the income I could be sure to achieve, and a belief that one of my major risks was an interest rate jump.

  • 44 Nick 2 April 1, 2016, 11:32 pm

    All this talk of paying down the mortgage.

    Supposing the FTSE dropped 1000 points (or more)? If you had an interest only mortgage at low rates it’d be tempting to move in the other direction. Take a good slug of what you’d already paid off and whack it in the stock market to get the benefit of the low prices. Hell, use carry forward in a SIPP and get the tax relief on top.

    Bit of a calculated gamble but could pay off…

  • 45 The Accumulator April 2, 2016, 11:40 am

    @ Ian – the mortgage debt was amply secured by the value of the house.

    @ Old eyes – sounds like you played your hand well. I don’t think anyone should beat themselves up for not playing the perfect game which can only be known in retrospect. The thought of spiking interest rates fuelled my desire to clear the mortgage too. Interest rates didn’t spike but the prospect still put me on the right path.

  • 46 Planting Acorns April 3, 2016, 4:37 pm

    This article has led me to have quite a change of heart.

    I was putting £700 a month into an ISA, but now I’m overpaying my mortgage by £400 a month and reduced my ISA subscription to £300.

    The £300 figure is not picked out of thin air, it is the maximum LISA subscription (if I add a little bit during the year as well) from next year…
    …I figure a LISA has to outperform paying off the mortgage over the long term (?!!!) and I will welcome the imposed discipline the restrictions will impose

    …my mortgage term has dropped from 29 to 16 years… What I’ll do when its paid off I don’t know, but I guess that’s a ‘first world problem’ ;0)

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