You don’t need to be paid-up member of the Monevator mafia to recognize the pain of rising interest rates [1].
All you need is a mortgage.
Rates soared in 2022. And anyone coming off a fixed-rate mortgage they’d bagged in the near-zero era [2] found they were on the queasiest roller-coaster ride since a post-beers jaunt at Munich’s Oktoberfest [3].
That includes me. I got my mortgage in 2018. The rate was 2%, interest-only, fixed for five years. Due to my unusual income and asset profile I had to literally write to the CEO of a bank [4] to secure it.
Thankfully, the CEO immediately saw the sense. But please do keep this in mind with what follows.
If you’re a vanilla mortgage customer, then you’ve far more options for dealing with rate volatility than me.
I wrote about stress testing [5] your mortgage in June 2022. We also ran through a mortgage risks checklist [6]. After doing your sums, you might well have concluded an early repayment charge was worth paying to lock in a new deal before rates rose further.
But I was too nervous to prod my bank. In fact, I wasn’t 100% sure what would happen when my deal expired. The CEO had left. The bank seemed more risk averse. Would it do something mad like ask me to repay in full? (On the face of it against the 25-year term, but you never know.)
A few inquiries established that other banks still didn’t want my custom – not any more than five years ago. Shopping around like most people wasn’t an option for me.
So I waited for my automatic three-month ‘remortgaging window’ to open. I hoped to snag a new rate with a few clicks via my bank’s online platform. All without a human staffer raising an eyebrow.
But then came Liz Truss.
Budget bazooka
The Tories have given me many reasons to regret my rare vote for them in 2010.
The Referendum. The hard Brexit [7] interpretation of the close result. Boris Johnson.
“Hold my pint,” said Liz Truss, before unleashing her Mini Budget [8].
Already climbing, bond yields and swap rates [9] soared just as my remortgage window opened. Every time Kwasi Kwarteng spoke, I needed to find another £100 a month for the next five years.
Can you spot the Mini Budget below?
[10]Truss and Kwarteng weren’t responsible for all that climb. And yields remained elevated even after they got their marching orders.
But that extreme spike, with no signs of stopping? Lenders slashing [11] their mortgage ranges and hiking rates on what was left? Pension funds on the point [12] of blowing-up?
The worry felt by ordinary people having to make a huge long-term decision with the serenity of an engineer using a slide rule on the dodgems?
That was made in Whitehall [13].
Up, up, and away
Even before my remortgage window opened, I was watching swap rates and daily visiting my bank’s (admirably transparent) mortgage website page.
For a good while its relatively low rates didn’t budge.
I wondered why.
Were customers truly being offered these rates? Did it have some tranche of cheap funding to work through? Was it desperate for market share?
All very interesting. But what I should have been doing was grabbing its five-year fixed-rate – then under 4% – with both hands.
Sure enough, one day I refreshed the rates tab to find all its mortgages had jumped up by more than a full percentage point.
Indeed at its worst, a five-year fixed rate for my loan-to-value rose to well over 5%. That compared to the 3.5% I was modeling in summer, and of course the (now fantasy land) 2% I was coming off.
The rate hike would pump-up payments on my chunky interest-only mortgage [14] overnight from much less than £1,000 a month to more than £2,300.
Now, it’s worth reminding readers – especially if you haven’t read my mortgage origin story above – that at all times I had far more than sufficient assets in my ISAs and elsewhere to pay off the mortgage completely. I could use my assets to pay the monthly repayments too.
So this wasn’t an existential threat.
It was, however, a sucker punch.
Like most stockpickers I’d gone from giddy markets and a frothy portfolio in summer 2021 to a seriously battered warchest. Now I faced a squeeze on my cash flow too.
To compound things, I’d eased off freelance work in those heady 2021 days. So I had less cash coming in to call upon. Maybe I’d end up drawing down my portfolio years ahead of schedule.
Thankfully, while I fretted about all this Truss was ousted and swap rates [9] finally eased. That implied mortgage rates would soon come down, too.
I decided to wait a while longer. I even gamed out paying my bank’s Standard Variable Rate (then well north of 7%) for a few months if it looked like rates would fall rapidly – though going on to the SVR would be heinously expensive, at more than £3,000 a month.
Mortgages and emotions
Despite seeing light at the end of the tunnel, I had to concede all this was stressing me out.
Which surprised me. I’ve many years experience of juggling my net worth and more recently running a portfolio an order of magnitude (and then some) bigger than my best-ever annual earnings.
One time I liquidated half my tax-sheltered portfolio in a morning – and then headed out for a jog.
I’m not saying this as a flex. It’s just to highlight that I’ve done my shift in the trenches with big financial decisions – and I’m usually pretty rational about finances and investing.
But this mortgage rate volatility had given me the willies.
I even called The Accumulator. His sage advice was to pay off some of the mortgage while I waited to see where rates went. And to pay attention to how it made me feel.
Maybe I could pay down some more if I felt an overwhelming sense of relief?
Or maybe not, if I didn’t.
Fortunately, I still had a big chunk of cash lying around from my sale of unsheltered shares in Spring 2021 – especially from dumping a massively over-sized Amazon position.
I had done this selling partly fearing a capital gains tax [15] hike, and regretted it when CGT rates were left unchanged.
That regret was eased when tech shares plummeted later in the year.
Now I was actually grateful to my former self.
I paid off 10% of my mortgage balance and sat back to enjoy the endorphin rush.
But there was none.
The projected monthly mortgage payment amount dropped by a couple of hundred quid or so, but to me it still looked like I would be paying out the equivalent of a foreign holiday a month out of sheer bad luck, given how I’d unwittingly anchored to my previous lower rate.
Also, I missed having all that cash to hand. It had stood ready to help with those higher bills, for one thing.
And there were other dramas on my way to remortgaging.
For instance, the bank’s online platform borked, and for a few days I thought my account had perhaps been flagged for investigation. I’d discovered I could ‘bank’ a mortgage offer and then wait to see if rates fell further, but these technical issues complicated even that.
I ended up talking with staff after all. At least they reassured me that I was definitely going to be able to remortgage.
Finally – after just a month on that ball-breaking Standard Variable Rate – I refreshed the mortgage page to saw a new five-year fix at just under 4.5%. I’d pay a little over £1,600 a month.
I checked the URL and reloaded. It was still there. So I did the necessary, and finally felt some relief.
Of course a few weeks later my bank was offering well below 4% for the same fix! Which is entirely on-brand for this saga.
But at least the 10% I’d paid off wasn’t a wasted experiment.
Only by making this payment had I put myself into the bank’s best loan-to-value band [16]. Which was what had enabled me to bag its best five-year fixed rate.
Small victories.
Late to the party
I’ve gone into all this biographical detail because some of you have been reading about my mortgage adventures for many years now. A few of you asked about my remortgaging, too.
In fact I’ve previously had to explain in Monevator comments why I wasn’t remortgaging in Summer 2022.
While we do always need to beware hindsight bias – almost no-one predicted what rates did last year – I believe if I hadn’t been nervous about rattling my bank, I would have remortgaged early in June or July.
After all I was writing those stress-test articles (linked to above), and I’d warned about the regime change [17] to higher rates several months before that.
Remortgaging in summer would have secured 3.5% fixed for five years – and maybe more sleep.
And it’s that sleep point which is motivating my slightly self-flagellating tone today.
A mortgage is still a debt
To be clear, I have never been against paying off a mortgage. My articles on investing instead [18]have invariably noted that paying down the mortgage is usually a sensible decision for most people.
That’s true even when the mathematics say otherwise – inspiring more risk-hungry souls like myself to see mortgage debt as cheap funding for investment.
And I knew a big reason to pay off early was the emotional dividend. Not being stressed about being on the hook for a mountain of debt – nor even worrying about the monthly repayments.
However it’s one thing to know something and another to live it.
I’d already learned that carrying a big mortgage potentially affected my investing. (I partly blame my huge Tesla investing misstep [19] on getting used to being a borrower.)
But that dread I felt during the remortgage process, of being at the mercy of chance – and political ideologues – was far more unpleasant than I expected.
As a lifelong debt hater [20], I’d highlighted to a skeptical friend when I took out my mortgage in 2018 that for the first time I’d opened up a path to going bankrupt (however unlikely). The potential was now there for my mortgage to outweigh my assets in a 1930s-style crash, putting me underwater.
So I was alive to my aversion even to mortgage debt, which is by far the most palatable [21] kind of borrowing.
Yet when things got hairy, I’d discovered I felt threatened by the mortgage in a way that I’ve never been worried by, say, a bear market [22].
Admittedly, paying down £50,000 didn’t do much to alleviate things. I’m guessing there’s something binary going on between having any debt and none.
But that was a lesson too.
Again, I’ve long known retaining a big cash cushion was reassuring, even if it’s theoretically sub-optimal.
But I missed it more than I anticipated once it was gone.
So I’ve changed my mind about some things
Despite this rather emotional journey, I’ll keep running my mortgage for the foreseeable.
However the episode did result in some changes to my portfolio – I now maintain an explicit buffer of lower-risk assets, partitioned from my usual investing antics [23] – and also to my long-term thinking.
I can’t now imagine going into true retirement with the mortgage, for example. Before I’d wondered whether I’d ever pay it off, versus letting it dwindle into inflation-adjusted insignificance if I could.
So let this be a moment for you pay-off-the-mortgage militants to enjoy a bit of schadenfreude.
Like I said, I never thought paying it off was the wrong decision for anyone.
But I do now feel it’s a bit more right than I did before.
Why I stayed invested and kept the mortgage
Given the finer margins of investment returns versus the higher cost of debt – not to mention my remortgaging drama in the midst of market chaos – why didn’t I just get shot of the thing?
Again, paying it off [18] would be perfectly sane.
However for various reasons I didn’t.
It’ll probably still be more profitable to invest. Even on standard expected returns [24], my portfolio should still outperform over the next 20 years if tax-sheltered. However it’s a far closer call – and paying off a mortgage is a sure thing, versus uncertain investment returns. So it’s my own active track record [25] I’m looking to, personally. This is holding well into double-digits per annum even after a terrible 2022. Fingers crossed. (Try our spreadsheet [18] to explore the maths for yourself.)
Retaining tax shelters (ISAs). This has always been a prime motivation for my having a mortgage. If my portfolio couldn’t be tax sheltered in ISAs, I’d probably ditch the debt. I’d also consider doing so if annual ISA allowances were unlimited, on the grounds I could rebuild the shelter later. But the ISA allowance is a use-it-or-lose-it affair. Who knows where my finances will be in a decade or two? If I’m lucky though and I continue along the same track, I’ll be pleased to have built up a seven-figure tax-shielding ISA fortress. (See Finumus’ article on borrowing just to fill your ISA [26] each year.)
It’s a hedge against hyper-inflation. We need to do a proper article on this, because you can tie yourself in knots. High inflation quickly erodes the ‘real’ value of debt in today’s terms. Hurrah! But what if whatever you spent the mortgage on languishes? If house prices fall or are stagnant, was it still a hedge? (I think so…) But I’m invested, too – so what about market returns? Or what if incomes rise fast, making it easier to pay off? Where do taxes fit in? (Inflation ‘gains’ on eroding debt aren’t taxed…) Broadly, I see my big mortgage as a hedge [27] against high inflation. It aligns me too with the government, which also has a debt problem. The cost is extra risk – though inflation does diversify my need to achieve high investment returns. (Everyone with debt ‘earns’ when higher inflation erodes its real value, regardless of skill.)
I might not ever be able to get another mortgage in size. This won’t apply to most. But unless I decide to ramp up my income massively, I’ll never be able to replace this mortgage. (Recall: I had to go to a CEO for it.) Even if I was earning the six-figures required, I’d more likely put most of my earnings into my SIPP – at least while the lifetime allowance is in abeyance.
I’m not running a fund professionally. Very personal. A few years ago I threw in the towel on the idea of running money professionally. A story for another day. Anyway, I sort of see the mortgage as my nod to running Other People’s Money. My bank’s money! It’s my small way of using external assets to grow my wealth.
More than a feeling
I don’t fault anyone whose response to 2022 was to pay down their mortgage, pronto.
Even more power to you if you saw this coming and did the deed earlier.
For now I soldier on – though this may change if and when the facts and my finances do.
Or if Liz Truss somehow gets back into office. (I think I’d sell my flat and emigrate.)
Having dealt with the emotional and personal side, I’ll look at the numbers more generally in a fortnight or so. Subscribe [28] to our free email updates to ensure you see it!