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Why I’m not paying off my mortgage

For a brief moment I felt the joy of clearing my mortgage early. Now I have some explaining to do: because I’m not going to pay it off after all.

I have the opportunity. I own the full amount of my mortgage in cash and index trackers – split 50:50. The simple thing to do would be to flog off the trackers and hand over everything to the bank with a cheery: “Thanks for the loan, pin-stripes, you’ll never hear from me again!”

That would be simple. That would be safe.

It’s got a lot going for it.

But I can’t do it. Not with interest rates at an all-time low.

The opportunity

Interesting times

This feels like a historic opportunity to me. A chance to earn more by staying invested in the market over the next 10 years than I could gain by removing the mortgage-leech that’s latched onto my cash flow.

My assets currently yield double the amount I’m paying to service the debt. That alone stays my hand.

But this is a story about trading certainty for potential.

My current mortgage interest rate is 1.24%.1

The FCA is projecting nominal UK equity growth rates of 6.5% to 8% over the next 10 years. That would comfortably spank my tracker mortgage, as long as interest rates don’t go beserk.

Liquidating my equities now will deny me the potential for a decent return from the stock market for the next few years.

It would take several years to rebuild my position and I’ll always be saddled with the opportunity cost if the market marches on.

Yes, I could pocket the guarantee that my mortgage can’t get back off the floor like a B-movie baddie, but that comes at the expense of diversification. Most of my wealth would be concentrated into one, large, illiquid asset. With curtains.

And that asset comes with more baggage than the Sultan of Brunei. I suppose we could sell the house in the event of a crisis but the emotional fall-out would be huge.

Diverting cash or equities from the ‘mortgage jar’ would stick in the craw too, but at least I can do that in small chunks. It’s not like I can sell off the spare room to cover a period of unemployment.2

So the plan is to keep building my cash holdings over the next seven to eight years until I eventually hold my entire mortgage balance in safe assets.

Meanwhile, the equities that are currently earmarked for the mortgage gradually move into the retirement jar as they are supplanted by cash.

I win if they bring home nominal growth that outstrips my mortgage interest rate.

What does disaster look like?

I’m taking a risk here, I’m not kidding myself. There’s a danger of trying to be too clever and The Investor has neatly stacked up the case for investing versus mortgage taming before.

But risk needs to be couched in personal terms, and for me disaster is a five-way car crash that looks like this:

  • Losing my job.
  • Losing my redundancy pay.
  • Not finding another job.
  • Ms Accumulator losing her job, too, and not finding another job.
  • Interest rates rising like a Saturn V rocket while equity prices plummet like Beagle 2.

Now that would be a divine comedy roast with sauce, but I reckon the risk of it all happening at once is relatively low. (At least I’d make a few quid as a cautionary tale in the newspapers, I suppose.)

If equities dip then I’ll be back in the mortgage red but I’m happy to ride that out. I only really need the equity funds in a hurry if I can’t service my interest payments3.

Of course, a serious crash is the bunkmate of mass unemployment so it’s worth noting that equities may offer scant protection just when I need them most.

If the scenario is soaring interest rates then I have a 50% cash cushion and a high savings rate to protect me.

As long as I remain in work, then I can always ease the pain by diverting monthly income not needed for essentials. That cash cushion should increase and I can always sell the equities if things get desperate.

Again, let’s acknowledge that equities are about as steadfast as a celebrity’s entourage once they can only get bookings at Butlins. The stock market is liable to be hammered when interest rates spiral so I could be forced to take agonising losses if things really go awry.

Is it worth it?

If I have seven years of bad luck and the markets decline then I’ll forever lambast myself: “You should have sold the trackers, paid the mortgage and invested future cash streams at ever cheaper prices.” Or words to that effect.

Psychologically I could rue this day for the rest of my life.

And there will be scares along the way. Scares that could last for months or years. I don’t think I’ll panic. I believe I’ll keep on paying down the mortgage like everyone else while waiting for equities to come back.

Still, you can’t be sure.

Lining up the negatives like this is another way of testing my resolve and I must admit the “No” camp looks strong.

Especially when you consider that any triumph is likely to be small in comparison to the potential for failure. That’s humans for you. Hardwired to hate loss more than we love gain.

But I don’t take many risks. This is one I understand and am well prepared for. The satisfaction of being mortgage-free is not as important to me as knowing I have the resolve to get there.

I can be patient a little longer because the real win is achieving financial independence as soon as possible. That’s something I’m ready to throw the dice for.

Take it steady,

The Accumulator

  1. I have a lifetime tracker: 0.74 over base. []
  2. Sure I can rent a spare room, but you get my liquidity point. []
  3. My mortgage is interest only. []

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  • 1 living cheap in London September 24, 2013, 11:49 am

    Long time reader, first time commenter…. 🙂

    Hi Monevator,

    I think my situation is building to be quite similar to yours. We have an offset mortgage at base rate +1.09% for the term, & are now in the good position of having the mortgage fully offset with cash.

    A couple of weeks ago I set the offset to lower my monthly payments, with the view that the spare cash can be used to buy long term holds in the stock market.

    Mrs LCIL & I are both lucky in secure employment, so don’t feel too much risk in the situation. We also bought our house back in 2002 so have a lot of equity there too.

    I was chatting with Ermine on this just recently too on his post:
    http://simple-living-in-suffolk.co.uk/2013/08/why-your-spending-may-not-be-lower-in-retirement-in-future/#comments

  • 2 Aspis September 24, 2013, 11:51 am

    I wouldn’t call not getting rid of your mortgage “throwing the dice”, it’s more like a calculated risk providing the highest possible expected return.

    But mortgage interest rate at 1.24%? :O That’s ridiculously low. In Norway the interest rate is about 3.5% at the time.

  • 3 EllPol September 24, 2013, 11:56 am

    It’s really interesting that you should discuss hating loss more than liking gains. I recently read “Thinking, Fast and Slow” and it has a section all about that which is very thorough!

    Also, I’ve just taken out my first mortgage and I plan on doing the exact same thing; 30 years @ 3.19% …I can’t complain!

  • 4 BeatTheSeasons September 24, 2013, 12:13 pm

    Good luck to you.

    I think the biggest risks are the personal ones. If one of you, god forbid, had a serious health problem then you might both have to give up work at the same time. I guess you could insure against this.

    Why the assumption that the spare money should be invested in equities? You could put a proportion down as a deposit on a second property and benefit from 3x the capital growth of that asset due to the leveraging at 75% LTV.

  • 5 Greg September 24, 2013, 12:22 pm

    Seems an absolutely clear choice to me, though I’m less susceptible to the emotional aspect than most.

    Perhaps the active space can help here? (There’s the min vol ETFs but I’m uncomfortable with their holdings.)

    You can hedge some of your risk by investing in funds that will do ok if rates rise. eg. Floating Rate loans funds. (Though these are still a niche). What about AEFS or NBLS? Similarly, there are some convertible bond funds (M&G do one & there’s a new CEF: JGCI) which should give a bit of downside protection.

    There are the wealth preserver ITs like PNL, CGT, RICA & possibly RCP. (There are some decent OEICs too.)

    Perhaps infrastructure would help too – they have pretty much guaranteed revenue streams.

    Finally, there’s the more esoteric stuff like BACT.

  • 6 PC September 24, 2013, 12:56 pm

    I’ve come to the same conclusion (as @accumulator)

  • 7 The Investor September 24, 2013, 1:18 pm

    If I had a mortgage rate of 1.24% I’d never pay it off.

    That’s a far lower rate than the rate of inflation. Let the price of bread take the strain, and buy your house for you!

    Even if/when base rates rise, I think I’d need to see 3-4% base rates at least before I risked trading in such a valuable asset, assuming it’s a lifetime tracker.

    In short, as we’ve discussed before I’m insanely jealous. 🙂

    But that’s me, I’m a born hedge fund manager in my spare bedroom. And as I’ve written before I’d not argue with anyone who wanted to clear their mortgage with the decision (although I might try to explore their motivations and gently outline the alternatives first).

    With respect to your awesome financial freedom plan, I’d make one observation, which is that with ISAs you have some optionality with the equity portion that you haven’t really discussed here.

    With ISAs, you have more control over the ongoing asset allocation, as well as when you can get your hands on the cash.

    This means that if shares were to say double over 3-5 years, you could sell ISA-d equities and add the proceeds to the cash, and if you’re minded to pay off the mortgage. Or else if the mortgage rate was still so trivial, you could double the cash horde and continue to run the mortgage alongside the reduced equity portfolio, safe in the knowledge you can now pay the entire mortgage off tomorrow and the shares can be as volatile as they like.

    I understand in your case the pension maths is just too compelling — and indeed likely makes it all possible — but it may be something worth other readers thinking about as they devise their own plans.

    The key point is equities don’t deliver their gains smoothly, so you might want to lock in early success, rather than suffer sequence of returns risk.

    I suppose one way you could modify the plan would be to put some big chunk of your pension into short-term fixed interest if equities were to double swiftly, and then wait to use the tax-free lump sum to pay off the mortgage? To some extent that sets your FI age to 55, although you could perhaps build up a living expenses fund to cover you pre-retirement if times turn out to be better than expected and you can manage it.

    Lots of options! 🙂

    On a related note, clearly you want to continue adding to the cash horde to eventually match the mortgage outstanding, as opposed to adding the extra savings to equities, else you are further increasing the ‘gamble’ (although in my case with your mortgage rate that’s probably what I would do…But that’s an entirely different kind of bet.)

    If share prices were to halve as opposed to double, though, it would be a shame if you couldn’t redeploy cash back to shares? Perhaps by moving some of the cash into ISA-d trackers?

    Buying cheaper is one of the best and only antidotes to bear market blues, so it might be worth thinking about in advance.

  • 8 HalfFull September 24, 2013, 2:21 pm

    I was in a similar position with offset interest only mortgage and did some calculations. Keep the cash in the account and not pay the mortgage or take it out and invest and pay the mortgage or do a bit of both. The best result I came up with was like ‘life-styling’ a pension – start with more in equities and less in the offset mortgage and slowly increase the cash in the offset until after about 22 years I had enough cash to fully offset the mortgage and an equity portfolio. At 25 years I paid it all off.

    This meant the greater risk was in the earlier years when I was younger and also I didn’t have to sell any equities to pay the mortgage off at the end. It may not have been the best investing position but it meant as time went by there was less to pay each month and the risk went down as you never know what the future interest rates will be. Also at the time the interest rates were higher than now.

    With an offset mortgage you should to add your tax rate back into the interest to see how much you are really ‘saving’ buy putting cash into the offset mortgage account. It may just reach or exceed the inflation rate.

  • 9 SemiPassive September 24, 2013, 2:51 pm

    Hmm, with a piffling 1.24% interest it is a no brainer unless you think markets are at a lifetime high.
    The dividend yield alone on the FTSE is 3%, and inflation.
    With a 3% mortgage rate (which it is currently) I’d be 50/50, and at 4% I’d choose to clear the mortgage debt instead, but then I’m a bit more pessimistic on that predicted 6.5-8% average stockmarket gain over the next decade.
    Also the bulk of my investments are in SIPP rather than ISAs so don’t have the optionality – apart from the 25% TFLS at 55, if it still exists by then.
    I also doubt I’ll be in my current line of work past 50, which also gives me a Pay Off The Mortgage first bias.

  • 10 peas & gravy,Davy September 24, 2013, 7:11 pm

    having the confidence to think longterm is a strength which I don’t have,I see a mortgage as a debt and paying it off quickly as possible is something I have control over.

  • 11 Emanon September 24, 2013, 8:07 pm

    Why not just diversify your ‘Life Risk’ and start to pay some of the cheap mortgage debt off. You can still keep your investments going at the same time.

    Out of curiosity how is the 50% of your cash managed? ISAs?

  • 12 Mr Careful September 24, 2013, 9:14 pm

    Too risky for me. Your mortgage rate is low, yes, but is a tracker and rates can only go one way. Your return on cash is likely to be minimal. Your equities could plunge overnight. Keep 12 months spending in cash, pay off the mortgage, and then build up an equity portfolio. A bird in the hand…

  • 13 The Accumulator September 24, 2013, 10:06 pm

    Good suggestions all. Much appreciated and interesting to know how many are in a similar position.

    It’s certainly not a no-brainer because it’s a tracker – interest rates could go berserk (unlikely though that seems right now) – cash could beat shares over the next 10 years, one of us could need long-term care by the other as Beat says and so on.

    There are any number of ways to unravel the position, and the emotional pull of safety (as referenced by Peas & Gravy) is strong.

    Frankly, the downside is bottomless compared to the upside, so if viewed through Bernstein’s Pascal Wager lens, you’d definitely pay it off. Sadly I’ve got to be clever-clever and we all know how often those types get their comeuppance.

    @ The Investor – the ISAs will gradually be sold down into cash enabling me to store the equivalent amount in pensions, get the tax relief, retire earlier. (pretty much what HalfFull did, I think).

    I hear what you’re saying about the optionality, that will come by holding the cash for as long as it beats the mortgage. If there was a massive crash, I’d definitely consider piling back into shares, but I’ll be devoting by far the greater part of monthly income to shares via the SIPP already.

    One thing I sense is the danger of trying to finesse the gains to a needle point and ending up stabbing yourself. At some stage it’s wise to bug out. That point would definitely come for me before it would you. Again, as Bernstein says, once you’ve won, stop playing the game. As my mum would say, stop pushing your luck, buster.

    @ Beat – good thought about the property empire. It’s not for me, but it’s worked well for a lot of people I know (in the Nineties and early Noughties, though).

    @ Eamanon – ISAs, NS&I index-linked certs, regular savers, a ridiculous range of current accounts with bonus rates that beat sheltered cash.

  • 14 Big D September 24, 2013, 10:18 pm

    I’ve deliberated over this choice over recent years, and went the opposite route – pay the mortgage off first and then turn my attention to FI investment through equities.

    Admittedly, my mortgage rate was over 4% so the numbers weren’t stacked so favourably towards investment.

    However, the main reason for my choice was that I found attacking this ‘evil debt’ provided me with more motivation and greater discipline to save since the target was very tangible. I personally find it harder now to save as much as I can towards investment as it is something which is somewhat open-ended and the level of progress is prone to go up and down every month.

  • 15 TheNextBranson September 25, 2013, 12:33 am

    hi my 1st post
    great site by the way

    PAY OFF THE MORGAGE
    and that’s coming from me who was mortgage free 5years ago best feeling ever, however im new to investing and passive in a HYPish isa,my point is this “never invest with debt” look at Lehman Brothers yes they made bad investment but it was the borrowing that them bust,and warren buffet would never borrow to invest,which is what you will be doing if you don’t pay it off, cheap debt is STILL debt.

    many thanks for a great site and good luck

  • 16 Passive Investor September 25, 2013, 4:39 am

    With a mortgage rate that low I can see the temptation. Though given that the interest is paid out of taxed income it isn’t quite as low as all that.

    Your personal circumstances – income relative to mortgage, amount of equity in the property, prospects for rising salary, job security all as you say are important in the decision.

    My main concerns are that the estimates of share growth seem very optimistic compared with those made by others, as The Investor says you are tied down in a SIPP, and interest rates could be much higher in a few years. You also seem to be advocating a 100% equity allocation.

    I would ‘stress test’ the decision with a scenario of 5-6% base rate (not high by historical standards, a salary and house prices that haven’t kept up with inflation and a 25% fall in equities. This may not be a likely scenario but is not such a long tail risk either.

    I wonder if you have considered taking some risk off the table by say paying off a third of the mortgage?

  • 17 ermine September 25, 2013, 9:54 am

    Congratulations – this sounds like a great way to go for someone at your stage of life.

    I discharged my mortgage early for all the reasons MrC, TNB and PI cited, and also because it’s partly an emotional decision. I was very fearful at the time, even though I was also ramping up equity investment.

    The balance shifts towards paying the mortgage off as you get older – for instance I have no working life left as an early retiree so I would favour paying off the mortgage to derisk. People who are closer to the end of their working lives need to derisk much more than you and TI who still can compensate for most of the risks you identified from future earnings if something goes belly-up.

    A special case is someone wanting to retire early, particularly pre-55. They are probably much better off taking the TA route of keeping the mortgage because they can use their cash savings to bridge the gap to 55 when they can get hold of their 25% pension commencement lump sum, which is then applied to the mortgage. That effectively gives you a 20%, 32% or 40%+ bump up on paying the mortgage from the tax you save, and smooths your income between early and post-55 retirement.

  • 18 The Investor September 25, 2013, 10:29 am

    I wonder if you have considered taking some risk off the table by say paying off a third of the mortgage?

    As I read T.A.’s plan, he is already 50% in cash, and he will be adding to that cash pile annually (plus it will grow slightly ahead of the mortgage interest, even after tax, especially as some is in ISAs, special rates etc).

    So he could pay 50% off tomorrow, and this will only rise over the years ahead. I think this mitigates a fair bit of the base rate risk, as he could immediately massively reduce both his outstanding mortgage and his payments.

    The equity portion is where the risk is, IMHO. I take what you’re saying T.A. about finessing the needle, but in my view there are two needles with equities — total return, and timing of return. The risk is that you are unable to keep making cash savings towards your mortgage (due to some unforeseen event) plus the market tanks for a decade.

    Even in that case, you’d have options. Plus with dividends reinvested, the market would really have to fall hard for you not to be able to cover your mortgage by 55. (Remember, counting reinvested dividends even the ‘lost decade’ for UK shares from 2000 to 2010 was no enormous deal).

    I really don’t think you’re taking much risk at all, except “life risk”, which we all take every day. And you have to take some of that to do something audacious, I think we’d all agree.

  • 19 L September 25, 2013, 10:44 am

    Congrats TA.

    One additional aspect to consider is the timing of your decision to pay off the mortgage. i.e. if you pay off your mortgage now, you somewhat simplify your future planning regarding retirement by taking the complex cards off the table. The converse is that if you decide not to pay off your mortgage, you postpone the decision to a later date and I imagine that your decisions around planning retirement are made slightly more complex by having to factor in your mortgage, housing situation and rates (I know that these will come in to play to some level, but of course the stakes wouldn’t quite be as high).

    We can be as rational and as calculated as we want. However, when it comes to our homes and loved ones, these decisions carry much emotion (as well they should!). You should consider the ’emotional gain’ you may receive from paying off (as ermine et. al explain) when calculating what your preferred option is.

    I wish you all the best.

  • 20 Passive Investor September 25, 2013, 10:44 am

    I misread – 50% cash getting higher rate than the mortgage removes a lot of the risk I agree.

  • 21 John Newton September 25, 2013, 10:52 am

    Sound very sensible. The only question that remains is – which provider offered a mortgage at that rate? And is it still available?

  • 22 Len September 25, 2013, 11:47 am

    I am much older than you (75), and reached the position of being able to pay off my mortgage some years ago. I just couldn’t bring myself to hand over all that cash to the Building Society because, in the event of an emergency, I wanted it to be under my control. So I converted my mortgage into an offset, and now have a savings account and no mortgage payments. In the event of my demise, of course, the lump sum is available to redeem the mortgage. Interest rates can do whatever they like since the amounts earned and paid will track the same. Another big plus is that, since I am not actually receiving any interest on my savings, because it’s balanced against the interest paid, there is no income tax to pay.

  • 23 dearieme September 25, 2013, 1:06 pm

    Edited from my comment on your previous post on this topic.

    We had reduced our outstanding balance to about £100 in 2007. … USED part of pension tax-free lump sum.

    Then, exploiting the fact that it was a flexible mortgage, we put it back up above £20k, because we had a good use for the money. … INDEX-linked Savings Certificates, gold ETF

    Now it’s back down to about £100 again … SOLD most of the gold ETF back in the Spring. Still got the ILSCs.

    and will be paid off entirely in the next few months. It would seem that we are less emotional about these things than you are. … AS our good Cash ISAs mature, will probably invest in the Harry Browne Permanent Portfolio, i.e. initially into equities and bonds.

    It takes all sorts. … NO change there.

  • 24 The Accumulator September 25, 2013, 1:58 pm

    @ Big D – excellent points, especially about the psychology of saving for a tangible target. Part of me would prefer to clear it, but the opportunity is too good for the devil in me too ignore.

    @ Passive – the interest is so low (as is my savings rate) that I can pay it out of personal allowances, but your point is well made: it’s a factor to consider and will make a difference (to me) once inters rates rise.

    I’m not tied to a SIPP. The mortgage is covered. The equities slowly move to cash, plumping up the cushion. If equities crash and that causes me a problem then more monthly income can be diverted away from the SIPP to covering the mortgage. Of course, lose the income and the equities whilst rates are rising and I think we’ll be able to say: I made a mistake.

    To anyone in this situation, I advocate whichever asset allocation is line with your risk tolerance.

    The equity forecast by PwC for the FSA (as was) is relatively conservative though not the lowest you can find. Whatever, it will be wrong, I’m not relying on it, it just illustrates the opportunity.

    I really like your stress test idea. Think I’ll sketch that out for myself.

    @ L – you are like the angel on my shoulder while The Investor is like the devil. My head is overruling my heart on this one. We’ll see if I have the courage to see it through as and when times get tough.

    @ Ermine – totally agree about the lump sum.

    @ John – sadly that offer went a long time ago. They pulled it in 2008 while my application was in the post. Luckily for me they honoured it. It’s a lifetime tracker and there were previous iterations that were even better. Would be interesting to hear from someone on a better rate. I did hear of a few people who were reputedly on base rate minus a percentage but I don’t know if those were lifetimes. I assume not, and if so those people are presumably being offed by black ops squads as we speak 😉
    I think we’ll have to grow very old before we see the likes of those mortgage deals again. The good news is I’ve made plenty of financial mistakes in the past to balance out the cosmic luck I enjoyed on the deal.

    @ Len – a very interesting wrinkle. Is there no point when the mortgage expires and you can’t get another?

  • 25 Cru September 25, 2013, 4:12 pm

    It all boils down to how much of your income your mortgage eats up. If your mortgage is only a quarter or less of your pay each month, it makes perfect sense. Me? The opportunity cost is not having twice of my income available.

  • 26 Topher September 25, 2013, 5:32 pm

    I was lucky enough to get a cheaper deal than TA, also in 2008. It is a lifetime tracker at base rate + 0.23%. Also was pulled very shortly after my application was accepted. The bank were also kind enough to let me move this mortgage when me and the mrs moved to a larger place a couple of years ago. We borrowed more at base rate +1.99%.
    When rates go up I’ll pay down the more expensive one, but rates will have to go up a LOT before it will be worth paying off the cheap one.

    Also, I’ve been reading for quite a while and you guys are doing us all a massive service with this great website – it is very much appreciated!

  • 27 jonny September 25, 2013, 6:07 pm

    Being a relatively rookie (passive) investor or almost 3 years, I’m more of a heart man myself (though not in the Hannibal Lecter way).

    I’ve recently had the opportunity to make a large overpayment, and re-mortgage locking in a 2.69% fixed rate for 5 years – which I took.

    Having such a low fixed rate does make equities more appealing, though my ‘heart’ keeps telling me how wonderful it will be to own all the bricks that make up my house, and the land it’s on! Not to mention the security gained by actually doing so. I guess that’s a reflection of my tolerance to risk.

    However, over the next 5 years I do plan on using any excess cash to both overpay the mortgage, and invest in equities (when unsure in situations like this, I tend to split my money between the options, to diversify both loss & lost opportunities)…

    P.S. Whilst you didn’t explicitly say it in your last post (I don’t think) I got the impression reading between the lines that you hadn’t actually paid it off 😉

  • 28 The Accumulator September 25, 2013, 6:53 pm

    @ Topher – thanks for sharing, the best rate yet! Glad you like the site.

    @ Jonny – Ha, ha, very perceptive. Re: the split decision, I did the same up until now: 50/50 cash/securities. If it’s good enough for Markowitz…

  • 29 SemiPassive September 25, 2013, 6:59 pm

    Any ideas of freezing SIPP contributions and making additional mortgage payments instead are now on the backburner until after the next general election. Ed Balls has announced a policy to end or equalise the top rate of tax relief on pension (I read make it 30% for everyone?). That matches LibDem policy, and even some tories are discussing it in think tanks.
    I’m not sure how they could do this easily given the additional complexities of salary sacrifice/employer company contribution/ltd co owner co-contributions.
    So will make use of them for the next couple of years and then just let it all compound up while concentrating on the mortgage. The when that is paid off will review the best option for providing FI.
    Sorry if a bit off topic, but it has a bearing on decision making.

  • 30 SG September 25, 2013, 7:45 pm

    Nothing much to add, except that this seems a clear case of it being better to travel than to arrive. In my case, the mortgage rate is just a standard SVR of 2.5%, but I feel no need to pay it off since I know I could quite easily.

  • 31 Steven Green September 25, 2013, 8:16 pm

    I had enough money in shares to pay my mortgage off 6 or more years ago, but I couldn’t bring myself to sell up and pay everything off.
    I carried on investing and over paying my mortgage keeping my slush fund in the offset.
    Eventually I got made redundant and there was enough in the offset to cover the mortgage, but it took me another 8 months to finally do it, and just after I did I found a fantastic investment property that could have used the offset money, never mind!
    Not paying it off didn’t do me any harm and has probably doubled my investment wealth, and if you also carry on over paying your debt you hedge your bets.
    Although my income from investment property has always been more than my mortgage payments so I suppose I have never had to use my wage income to pay the mortgage.

  • 32 Len September 26, 2013, 9:47 am

    Whether you have redeemed your mortgage or not, that time will come for everyone. I converted to an offset to have the best of both worlds. No mortgage repayments, which gives me extra tax-free income, and a wonderful feeling of freedom, while still having the lump sum in case I need it. It’s not necessary, of course, to have the full amount in order to offset. Any money you have can be used to reduce your payments. Some people use lump sums to overpay. I don’t see the logic of that. You might find that some time in the future you need it. Also, there are no tax advantages.

  • 33 Dave September 26, 2013, 10:13 am

    @accumulator I wonder if writing for a blog whose tagline is “Motivation for Investors” might lead to a greater behavioural bias towards investing over saving/repaying debt. Not that biases are necessarily right or wrong, but perhaps part of the reason you blog is to tie yourself into a greater level of investing than you might otherwise do.

  • 34 PeteW September 26, 2013, 6:00 pm

    I’m in the same position as TA, my life time tracker rate is base +0.55% so paying 1.05% at the moment on my IO mortgage for the next 18 years.
    I also have the same dilemma. I have enough cash to cover the mortgage today, and a fair bit in equities, albeit in a single company that I work for, risky but I am comfortable with that. I need to beat 1.8% saving rate to cover my mortgage cost (excluding inflation) so for the last 3-4 years my bank is paying me to live in my house.
    I’m reluctant to give up this cheap loan rate, I do have the ability to pay back the debt and re-borrow on the same terms, but my bank is the one with a large debt at the moment so that may change later.
    I am happy with having the cash, mostly easy access so I can quickly reduce the debt level from day 1 and totally within 6 months. I have a third in cash ISAs so are keen to keep the tax free status at the moment. I’ve keep cash for the same disaster reasons as TA too, losing my job, redundancy pay off, I have no partner at the moment so it’s all down to me.
    I’ve thought about BTLs, but can’t seem to make them pay vs the hassle. Although the ability to have a different income source when I retire is very appealing.
    Finding decent savings rates are becoming harder and harder I have about a year before any fix term bonus rate expire so then I’ll need to make some decisions. Decision decisions!!

  • 35 The Accumulator September 26, 2013, 9:27 pm

    @ Dave – you’ve put your finger on something there. The blog, the wisdom of this community, it has changed my behaviour. There’s a feedback loop in play too. Researching the nature of the market for the blog has raised my risk tolerance. Perhaps in the way that hours of practice helps a golfer prepare for a pressure shot to win a Major i.e. it bears no comparison at all to the duress they’ll face but adds to their resilience. Makes it more likely they’ll be able to run through a well-oiled routine that blocks out the flight instinct and prevents them going to pieces.

    @ Pete – a nice problem to have as they say!

  • 36 ralu September 28, 2013, 8:19 pm

    Long time reader, first comment:

    I would pay the mortgage if I were you. You are basically investing with borrowed money at this point, it does not matter if you are paying 1% or 5% for the money you have borrowed.
    The way I see this, you are taking money from your family that should be used to finance a basic need (i.e. shelter) and throwing it into your hobby, “investing”.
    Now if you don’t consider investing a hobby, but rather you consider yourself a professional investor, then that changes the matter a bit. If you have a long time track record of successful investing (>10 years), and you can show a good profit for those years, then by all means, go ahead and bet the farm. I am a hobbyist investor and I know my limitations, but you might be different.

  • 37 Drone October 3, 2013, 10:56 am

    Is there a difference between:

    1. Deciding to invest a sum of money rather than paying off your mortgage
    2. Deciding to mortgage a mortgage-free house in order to release funds to invest

    Although both are functionally equivalent there appears to be a psychological difference to me. 2 seems like riskier behaviour – in reality it isn’t of course.

  • 38 Passive Investor October 3, 2013, 11:28 am

    @drone – I am with you – I just don’t see the difference. Outside the current situation of ultra low interest rates and TAs favourable circumstances I always favoured paying off the mortgage. The only additional consideration would be the ISA allowance which can’t be carried forward. Ie depending on interest dates / personal
    circs may make sense to me to invest via the ISA.

  • 39 The Accumulator October 5, 2013, 2:56 pm

    @ Drone – you’re essentially right, but there is a difference. In scenario 1. there is an end game in 2. there isn’t. In other words, because the circumstances are favourable, I’m delaying the pay-off, but there is a clearly defined point where I say, “I’ve done enough, and I’m not taking that type of risk anymore.” Scenario 2 is open-ended (as stated) therefore the goal and end-game are undefined and the risks of matters spiralling out of control are greater.

    I wonder if any of the guys with the full balance of their mortgage sitting in an offset account plunged into the market in 2009.

    @ Ralu – I understand your reservations. No money is being taken from my family though. Instead of money going into cash (or property) it’s going into equities for a while longer while circumstances are favourable. I could put it into meals out, holidays or new cars. Would this be less reckless?

  • 40 Emanon October 5, 2013, 3:26 pm

    What was the ratio of your mortgage to your salary. I’m in a situation at the moment where I am thinking of selling my London flat and moving to the outskirts of London, the options are too sell the flat, take the profit and run or try to keep the flat an still buy a house. If we can keep both it feels like a no brainier but for some reason I feel as though I’m not looking at the problem well enough….

  • 41 ralu October 5, 2013, 6:45 pm

    As am I am currently in the process of liquidating my investments in order to for my husband and I to build our house without taking a loan, you can guess I’m not going to change my mind on the how I view the situation :).
    I’m an active investor and I’ve been investing for 2 years. I don’t kid myself about it, it’s a hobby that makes money. I’m either at the index or beating the index, but since the time scale is so small, I consider myself just lucky. Also, given that the last 2 years have been good for everyone, I’m just the small boat that got lifted with the tide.

    I’ll tell you the same story I told myself when I started selling my stocks (which, by the way, I didn’t really want to do). First of all, the money is not all mine, I’m just the investor, half of the money is my husband’s. So right of the bat, I am accountable to how I invest towards him. We always joke that I should send him an annual shareholder letter, like Buffet does. Although I think I know what I’m doing and I don’t think I would panic should the market go down 50%, but rather buy some more, my husband does not have the same appetite for risk as I do. We would be in a big trouble if at some point he would start to get the creeps because half of our money would be gone, and it would not be fair to him to push him in an investment that does not suit his risk profile.

    As one of the commentators before me noted: if your house would be paid off would you be willing to take a mortgage on it and then invest that money on the stock market? Would your wife also be willing to do that?

  • 42 The Accumulator October 5, 2013, 8:47 pm

    @ Ralu – This is an interesting discussion and I appreciate your views. Moreover, I feel a strong emotional tug towards your position.

    I would not take out a mortgage on my paid for house to buy shares, as indicated in my previous comment. But I might well take out some cash from an offset if share prices were on the floor. I appreciate that this is a logically inconsistent position, but psychologically there is a difference. In scenario 2, I am choosing a different asset allocation with money that I still view as mine. I’m using leverage and that comes with potential risks and rewards. I doubt I’d do it with more cash than I could pay back in a year. Tops. In other words, I wouldn’t bet the farm.

    Ms Accumulator is fully engaged with and approves of all decisions made on our behalf. I like your idea of an annual shareholder letter. We at least have a conference, and it’s more than annual 😉

    Your point about investing as a hobby is interesting. Most people have hobbies that lose money and have zero chance of making any. And they do this while having mortgages.

    My level of interest in investing does make it a hobby, I agree. But I’m investing for a purpose, not to pass the time. As a passive investor I’m the recipient of the market return. It’s not skill, it’s not luck, it’s just discipline. Over time I’ll do all right, unless we all get very unlucky.

  • 43 The Accumulator October 5, 2013, 8:54 pm

    Ooh, I meant to add, good luck with building your house. I hope to build my own one day. If you have any recommended links, please share.

  • 44 ralu October 7, 2013, 6:53 pm

    Thanks. Here’s where we got our inspiration for the house plan : http://www.thehouseplanshop.com/
    And good luck with your investments as well.

  • 45 The Accumulator October 7, 2013, 8:43 pm

    Thank you!

  • 46 Jim Lad October 8, 2013, 2:17 pm

    Another really interesting post and comments, which I have been digesting again.
    My DW and I are in a similar position to TA and are adopting a similar stance. We have an offset tracker repayment mortgage from 2005 on a second home in the SW which we intend to retire to at some point after FI has been secured. The mortgage interest rate is 0.9% over base and we are overpaying by £500pm (which hedges the position). We are within 3 months of having enough cash in the offset coupled with investments to be in a position to pay off the mortgage. We do not intend doing so in view of the relatively benign rate (and nature of the arrangement as a HRTP) and because this would necessitate realising our S&S ISA’s which we plan to use to supplement our retirement income. I calculate that we will have enough in cash to pay off the mortgage in October 2016. That will test the mettle though at that time. I must review this discussion again at that time in the light of developments and the prevailing winds.
    Best wishes
    Jim Lad

  • 47 emanon October 25, 2013, 10:40 am

    Hello Monevators

    I have a friend who like me is new to the world of personal finance and is a confusing situation. I hope you don’t mind but I was hoping i could pick the minds of the monevator readers and see they would problem solve the below scenario:

    said friend is 30 and married. They have a combined gross salary of £100k p.a. He has a property that he purchased on his own for approx £365k in 2010 with a 100k deposit. The value of that property is now estimated at £550-£600k. They are on a re-payment plan.

    He is now thinking about the future, a family and more space. The next house move will more than likely be just outside of London in Hertfordshire for approx £600 – £650k

    His goal is financial independence. He believes the London flat would be a nice asset to hold on to in later life, if at all possible. The aim is to pull out equity and buy a new house outside for around £600. The flat would probably have a monthly rental income of £2,000 which could be used to start the re-payment cycle once again. The flat is 20 minutes from Oxford Street.

    The obvious dilemma is which route to go down

    Route A – Sell the London property, take the capital gains and buy a family home outside of London. There would be more than enough money to perhaps invest a sizeable chunk into his and his wives ISAS/SIPPS, approx £70K and they would still have a small mortgage that is manageable. A humble low risk perfectly viable plan.

    B- Keep the London flat. Take on the bigger mortgage with the new home, if possible. Work hard – although Mr Friends Wife would probably have to stay in employment whereas in scenario A she would be able to fulfil her dream of being a housewife and get away from the grind. He would also like to help her fulfil this dream.

    What would you do?

  • 48 BeatTheSeasons October 25, 2013, 11:03 am

    Hope the following is helpful – NB it’s not financial advice etc, also banks are very pedantic and there are lots of little pitfalls all along the way.

    You don’t say how much of an outstanding mortgage there is left on the flat, although it started 10 years ago at 265k so depending on rate and term should be a decent amount lower by now.

    If the flat is being kept as a source of retirement income then getting it in joint names may be sensible to equalise future tax liabilities and make maximum use of allowances. If he remortgages to a ‘let-to-buy’ mortgage then he can do what’s known as a ‘transfer of equity’ at the same time and get the property into joint names. With the mortgage now below 250k then there should be no stamp duty to pay but some legal fees.

    Affordability on ‘let-to-buy’ mortgages is as per ‘buy-to-let’ i.e based on rental income. Deals vary but typical is a notional 5% rate with 125% coverage. This means your friend could borrow 384k against the flat being well within 75% LTV and as 384,000 x 0.05 x 1.25 gives annual rent needed of 24,000. This is interest only by the way, as there is no need to go onto repayment with a rental property.

    With the new residential mortgage some banks will lend 5 times joint income and you’d have a decent deposit from the equity released from the London flat so the expensive house in Hertfordshire is definitely “affordable” (ha, ha).

    Now, here is where I’d respectfully suggest that your friend and his wife choose between their dreams of financial independence, being a housewife and buying the enormous house in Hertfordshire. Because they’re mutually exclusive, at least in the short term. Whereas if they kept the valuable flat and bought something more modest to live in outside of London they’d already have a significant pot of FU money right now.

  • 49 emanon October 25, 2013, 12:25 pm

    @BeatTheSeasons

    The mortgage was taken out in 2010
    borrowed: £276K
    outstanding: £269K
    current rate: 3.64%

    The idea of moving outside of London into Hertfordshire is their idea of the modest move you mention. Granted the price range they are looking in is still quite high at £600-£650k. Access to London is still a factor in their careers at this point.

    I guess they would also have a significant pot of money for their Financially Independant Future if they just sold the London property, cashed in on the capital gains, using it to pay the new purchase and a nice chunk dedicated towards their SIPPs and ISAs. The question is would any SIPP/ISA investments with the capital gains invested into his/her portfolio yield a better return than the potential future capital gains on the London property? It’s difficult not to be provoked by a sale considering the fact that in 2010 said property was £365 and is now £500k+

    What are the benefits of moving the London flat in both names? And why do some brokers not recommend they change their mortgage to a buy-to-let due to higher rates?

  • 50 BeatTheSeasons October 25, 2013, 1:01 pm

    If your male friend continues working while his wife becomes a homemaker then it would be advantageous if she could receive rental income against her personal allowance instead of her husband paying higher rate tax on all of it. And thinking longer term he is likely to build up a bigger pension pot, so again it’s about equalizing future incomes. Also there are capital gains allowances to think about, but that’s a specialist area so they’d need advice, preferably in the planning stage not just before they want to sell the flat in the future.

    The mortgage rate they are currently paying is terrible considering the low loan to value ratio. Even some buy-to-let rates are comparable! If they plan to rent the flat out on a residential mortgage they would need to gain the lender’s consent for this, and each bank and building society has a different policy.

  • 51 emanon October 25, 2013, 1:14 pm

    The mortgage is up for its 2 year review in Jan 2013. They hope to lock in a very competitive rate for the next 5 years, but what classifies as a competitive interest rate for this type of LTV in the current financial climate?

    moving the property in both names makes sense. I cannot believe he hasn’t done it yet!!

    The climb towards FI would be quite tricky without selling the London property? Especially if they lose an income stream from the wife. He would then be left to pay for a mortgage on one salary when they signed up to the mortgage with two salaries. It would appear they can’t have their cake and eat it…. Unless they reduce the value of the new property they are interested in. Mr Friends Wife might turn into Mrs Bruce Banner

    If they were to keep the London flat, why would a interest only loan be the way forward? Wouldn’t it make more sense to try and pay some of the loan off with the rental income – if possible. Or is the point of renting it out for retirement to build up the capital gain?

  • 52 emanon October 25, 2013, 2:28 pm

    When you look at this situation on paper, in order to maintain the London property and the new purchase in Hertfordshire there is a lot of risk, it would probably be manageable but like you say, a small blip and the whole thing would go into disarray. The only salvation in the event of something going wrong would be to sell the London property and claw themselves out of whatever bad situation they may encounter along the way.

    Otherwise i think just selling, buying a new house and keeping a nice bit of money for investing into ISA’s SIPPs would be the best way towards FI

  • 53 offsetter October 30, 2013, 10:53 am

    Thank you for a good article. I have mulled over this dilemma although the promised land is still a few years away for me.

    I would pay off. A mortgage makes all expenditure more expensive. That £1 spent day today on a can of coke is actually costing me £1.25 if I delay paying off my mortgage for another 20 years. This annoys me, if irrationally !

    Investing money from a mortgage gives me access to gearing so gains and losses are amplified. But gearing can be achieved by investing a smaller amount in a more volatile investment (i.e. more % in equities, emerging markets, less in bonds).

    keep up the good work !

  • 54 Andrew Hallam February 7, 2014, 9:51 pm

    It always amazes me that some people like yourself try to tell people that it’s better to invest money while their mortgage interest rates are low, instead of paying down their housing debt.

    My take is make up ground when the going is good. With low interest rates you can reduce debt more quickly before eventually getting hit with higher mortgage rates. Kill the debt as fast as you can—and ignore the noise. Low interest rates are great for paying off your house.

    Call me a wimp if you like, I don’t care. If I owed money on a house—or on anything else—I wouldn’t invest a penny. I’d be paying that down as aggressively as I could.

    There’s no such thing as good debt. So if you haven’t done it already, avoid the distractions of gold, stocks, and rapidly rising real estate….until you’re 100% debt free.

  • 55 The Accumulator February 8, 2014, 8:53 am

    Andrew, why would I call you a wimp? Your viewpoint is totally reasonable and would be the right choice for many people. But I don’t think I’m telling ‘people’ it’s better to invest money instead of paying down the mortgage while interest rates are low. As mentioned, I’ve split my cash 50:50 between paying down the mortgage and investing. The invested component is now effectively going towards my pension. As my pension funds increase then I’ll decrease the invested component in my ‘mortgage jar’ and use the proceeds to chip another chunk off the mortgage. Effectively, this is the same as taking any new income I have and splitting it between mortgage repayments and pension contributions.

    Are you suggesting that a person shouldn’t invest into a pension until their mortgage is paid off? I think that all or nothing approach to debt is likely to mean giving up on the benefit of long-term equity returns and tax breaks, given it takes 20 – 25 years to clear a mortgage on average.

    I seem to remember from your book that you were investing from an early age? Did you buy your first house outright with those proceeds? Apologies if I’m misremembering, I don’t have your book to hand. I gave it to a young member of the Accumulator clan who is now furiously saving for their first house and pension and is generally on the right track. Cheers for that!

  • 56 Andrew Hallam February 8, 2014, 11:58 am

    The Accumulator, when I had a mortgage, I did have existing investments and I didn’t sell my investments to pay it off, but I didn’t invest a fresh penny during those few years (nothing like the 20-25 years you suggest, I hasten to add).

    I wanted to invest. I researched stocks, still, constantly. And it was like torture. And I came up with every rational reason not to pay the mortgage down with every penny, but in the end, I put every penny on the mortgage. The thought of having debt was more oppressive than anything. A friend of mine once said, “Andrew, if you fully own your home, it doesn’t matter what kind of financial armaggedon may hit—you can live off what you grow in a greenhouse” He was only half-joking, but he lived by that and he paid off his house in his 30s (he’s an engineer) And it made sense to me. He also hated debt and threw money at his mortgage like a madman. But today, with a couple of young kids, he finds himself able to invest about $36,000 a year–thanks to no mortgage liability. I think what a person chooses to do will always come down to their personal comfort level. If I bought a house today, I would buy with cash. I know that this would oppose the logic you presented (and it is good logic) but I don’t ever want to owe money to anyone again. I think most people have become too comfortable doing that, and they rationalize reasons for it.

    That said, there can be a happy medium, and if you’re happy with that then good luck to you. But by now, you likely realize that I’m a man of extremes!

  • 57 The Accumulator February 8, 2014, 2:13 pm

    I accept that as a society we’ve become drunk on debt and I can appreciate your clarion call from that perspective. But if you are Andrew Hallam, The Millionaire Teacher, and apologies if you’re not, then I would say few people could do what you did.
    (That’s why I mentioned 20 – 25 years as the average pay-off period for most, rather than for you).

    Though I applaud your success, your personal prescription was tough. Especially the early years. I remember reading what you went through and thinking, “Bloody hell, that’s hardcore.”

    It would have been too tough for me, even if I’d been that far-sighted at a similar age. Also, Mrs Accumulator was around at the time and I don’t think she’d be here today if living without central heating during the winter had been on the agenda 😉 And I say that as a couple who live on less than 50% of our income.

    Nonetheless I hugely enjoyed the book and can see how an uncompromising attitude can pay-off, if you can take the pain.

  • 58 Simon March 19, 2014, 4:05 am

    I like your argument, and although your property exposure is fixed, it’s not a binary decision between cash and equities. As long as you maintain the mortgage (which seems to be a no-brainer), you could go 25%cash, 75%trackers, or any other combination if you thought 50% tracker was too risky for your personal situation.

  • 59 Drone April 15, 2014, 12:33 pm

    This dilemma has just been thrown into sharp relief for me. I’m 46, mortgage free and am planning to retire as early as I can – current projection is around age 55. However, for reasons associated with a growing family I need to buy a bigger house and acquire a mortgage (somewhere around a modest £70K). My dilemma is whether to pay down the mortgage asap – which is my natural reflex or instead pay more money into my pension and get an instant 40% uplift so that I can then use my 25% lump sum at 55 to pay off the mortgage. Bit of a headscratcher really.

  • 60 The Accumulator April 15, 2014, 6:21 pm

    Intriguing. My mortgage is interest only. I guess you’ll have to get a repayment mortgage and repay at least some of it while being taxed at 40%?

    In your case the timeframe is so short that it’s the tax uplift rather than any growth that’s important. A short-term bond fund would give you the uplift and protect you from volatility. That’s not advice, btw. Just a thought. Would be well worth working out the sums and totting up the risks at the same time.

  • 61 Lee April 23, 2014, 11:35 pm

    I’ve been having this exact discussion very recently – do I pay off my mortgage, or buy more houses.

    I’ve got a mortgage of £270k. Monthly payments of £1300pm for 35 years – total: £546,000.

    So if I pay off my mortgage I get an early repayment fee – but it’s not going to be near that amount – so in a way – paying off the mortgage is saving me maybe £150k interest.

    Alternatively – £270k (+ early repayment fee) would let me buy 3 cash properties at £90k each. (Possible round here – £80k + £10k for referb). These properties would earn £450pm rent – paying my mortgage (maybe a little extra from me)

    The advantage being that at the end of my mortgage instead of my money being in my house – I’d have 3 houses to sell, or keep renting.

    I’m probably over simplifying it. I would like to know how to work it out correctly. But does this idea sound possible, or have I worked it out completely wrong?

    Maybe the answer is to pay off the mortgage – then buy property with the money that has been saved not paying the full £546k repayments.

  • 62 Jonny April 24, 2014, 8:59 am

    @Lee

    £270K+ to invest. A nice predicament to be in!

    You’d be better having mortgages on the rental properties, as you can then offset the interest paid on them (the mortgages) against the tax you’ll pay on the income coming from the property lettings. You can’t offset the interest on your residential mortgage against tax.

    You can still use the income to pay off these mortgages (with repayment mortgages) meaning you’ll still have 3 more houses at the end of it all.

    However, managing a single property can be a huge amount of hassle (maintenance, problem tenants etc, void periods etc). Managing three I’d expect even more so!

  • 63 Lee April 24, 2014, 9:35 am

    Thanks so much for the fast reply 🙂

    I’m actually a terrible investor – but love reading your site. My goal is short-term, and I’ve not got any stocks or shares – or pension plans. I don’t have any isa either.

    What I’m doing is putting all the money I get into property – I’ve got 8 mortgage free properties – (I don’t understand the whole offset/interest/tax side of things, or the advantages of mortgages)

    I’ve met with a financial advisor but it was just like a sales pitch for pensions. I need investments that will cover my income as soon as possible – before my short-term high paying job ends.

    Ive been looking into a ftse100 tracker – but the dividends don’t seem as high as rent, plus it’s something I don’t know anything about.

    Thanks again for the reply! You’ve made me think I need to go and see someone for advice again.

  • 64 Jonny April 24, 2014, 1:19 pm

    @Lee

    Thanks for the thanks, though it’s not my site! I’m just an avid reader/follower.

    You say your goal is short-term howerver, so investing may not be for you (5-10 years + seems to be the de facto).

    Putting all your money in the same thing (property) could be risky if property prices (or rental income) ever crash.

    With regards to offsetting interest and tax – this is something an accountant should be able to advise you on.

    Previous meetings with various IFAs put me right off them (along with them potentially taking 1-1.5% of my pot EVERY year). I decided to go it alone, and that’s how I ended up finding this site. If you’re interested in investing, it’s a great place to begin. Only time will tell whether it was the right decision for me (ask me in 30 years!).

    If you’re interested in learning more, check out the passive investing stuff here (http://monevator.com/category/investing/passive-investing-investing/) for starters.

    Don’t forget with a FTSE tracker (or any other tracker), in addition to getting dividends, you’ll also (hopefully!) make capital gains in the value of your fund holdings, .

    With the money you imply you have, I’d be looking at maxing out ISA subscriptions (either cash or stocks and shares ISAs depending on your risk tolerance, and maybe in cash whilst you decide what to do with it). Holding stocks & shares outside of ISAs can lead to nasty capital gains tax liabilities over time. Or maybe consider a SIPP (there’s an article on this site comparing SIPPs with ISAs).

  • 65 Jonny April 24, 2014, 1:21 pm

    @ Lee

    Obviously none of that was advice, just my thoughts / 2 pences worth.

    You’ll certainly need to do your own research…

  • 66 kc May 13, 2014, 12:55 pm

    I am just pondering this very same question having recently retired, partly mortgaged my house to buy a house to rent to be paid off in 6 years, and now having sold my deceased parents house have the ability to pay off the mortgage with no redemption fees.

    A few calculations showed that tax and risk are the two parameters for consideration. Risk is personal and I am covered as far as living off my pension is concerned, so this decision is only about paying back the mortgage in 6 years either by selling the rental property and/or by cashing in the lump sum investment. So the risk is that the property’s saleable value less costs combined with the residual investment will be less than the outstanding mortgage. Worst case the mortgage should still be payable as it is unlikely the combined value of property and investment would fall below the mortgage. Of course, as an investor, I would like both the property and my investment to go up in value as well as paying the mortgage interest charges leaving me with all the rent as income. But that is asking too much.

    The interest on the mortgage is a deductable expense from the rent. The profit on any investment might be taxed in different ways either as savings, dividends or capital gains. I do not have the opportunity to transfer into an ISA (as this would take many years of allowance) or SIPP (as that is now frozen for me). However, the capital gains allowance of £11000 per year could be utilised to provide an equivalent tax free income to make the mortgage repayment by selling some units of stock/ETF each year. So any ideas on what growth investments offer a sensible risk balance to keep the capital intact for 6 years and grow after transaction fees by 2.75%(my current mortgage rate)?

    The strong likelihood of rate rise in next couple of years needs to be covered, probably by overpaying on the mortgage up to the CGT allowance whilst the investment grows well. This might reduce the interest payments on the smaller capital to below the CGT allowance when rates rise. This needs to be balanced against the lost capital in the investment fund. If rates rise, the growth on the investment is likely to slow unless some fixed interest/inflation linked investments are used.
    So what are the investment grade, preferably fixed interest, preferably inflation linked to base rate funds/bonds out there that can do the job?

    Otherwise riskier investments that grow to meet the committment to pay off the mortgage earlier will need to be used…..and so the argument goes on.

  • 67 Bob June 25, 2014, 4:22 pm

    People forget talking about Capital Gains Tax – there no real escaping.

  • 68 Jimmychoo72 July 11, 2014, 5:09 pm

    Really interesting article. Could it not be possible to combine investing a borrowed lump sum and overpaying the mortgage by using the extra capital (obtained on a low interest mortgage) and investing it in a range of high yielding funds/ETFs within a tax free NISA. Then taking a proportion (or all) of the income earned to overpay on the mortgage.

    This could possibly work as long as your normal earning were enough to comfortably cover the repayments on your increased repayment mortgage. There would still be a chance of some capital growth with the ISA but as long as you were willing to accept that you may also end up with a capital loss then you could still continue to take income from your holdings, tax free, once your mortgage is paid off early, or alternatively stop taking the income and reinvest for growth at any time.

    Obviously an alternative would be to stay fully invested to maximise capital growth but could this method be a happy median between borrowing to invest and making overpayments?

  • 69 Peter July 15, 2014, 1:52 pm

    Borrowing to invest even over the long term is riskier than it looks, and it’s less rewarding, too.

  • 70 Peter July 15, 2014, 2:03 pm

    Perhaps I should qualify this comment:

    With a cheap enough loan you’ve got a good chance of doing okay over 20 years if you borrow to invest in the stock market and keep costs low, but there are definitely no guarantees.

    Over the short-term, it’s madness.

  • 71 jimmychoo72 July 15, 2014, 3:56 pm

    Views on the following situation (not too dissimilar to my own!) would be appreciated:

    I currently have a mortgage of £160K on a property currently valued at approx £330K
    Repayment (was interest only until this month) – 22.5 years remaining. 2% lifetime tracker rate linked to BoE base rate.

    I’m 42 years old and hoping to retire at age 55.
    I’m lucky enough to have a final salary pension that should pay out approx £25K pa (in today’s money) at age 55. (approx £1k pa more for each extra year I work up to 60)

    I was until recently planning to take equity from my house to the tune of up to £80000 and use a proportion of it to use as a deposit on a buy to let property and the rest to pay off a short term personal loan (approx 12K) and the remainder to place into my Stocks & Shares ISA (current value just over 30k)

    I started having nagging doubts about buy to let as an investment for the following reasons:
    i) my asset allocation being severely overweight on property
    ii) Tax (both income tax but also and more so, CGT)
    iii) illiquidity

    Reading Monevator.com over the past few days has crystallised those views.

    I’m now contemplating using (or not) the equity to put into x2 Stocks & shares NISAs (mine & my wife’s) with a view that as long as over the next 13-15 years I get a higher return than my mortgage rate I should come out on top.
    During this time my mortgage will be reducing anyway from recently switching to repayment from IO , The residual amount left could be paid off by taking a pension lump sum. This would have the effect of lowering my income tax bill in retirement as my taxable monthly pension payment would be reduced but I could hopefully make up the shortfall with income from my NISA income tax free. Alternatively, downsizing could also be used for paying off the outstanding mortgage.

    My current investments are mostly equity income funds (UK, Global & Emerging markets) and I would probably continue with something similar to build up an income portfolio over time, initially re-investing all income earned.

    Pros & Cons:

    Higher risk with the extra leverage should markets collapse. I would however be willing to ride this out and of course I’d be looking to build up an income generator rather than just increasing capital.

    Interest rates increase alarmingly – If it was becoming too difficult to make those mortgage payments due to interest rate hikes way above what’s expected in the coming years there would also be the option to start taking some income from the fund earlier to help with payments or I the extreme selling off the fund built up to pay down some or all of the mortgage

    Returns don’t outstrip mortgage rates – over long term I would hope they would but then that’s the risk you take with stock market investments. As long as the mortgage payments were still manageable I’m willing to take that risk.

    Nightmare scenario – Property values nosedive as do stock values and interest rates rocket! – Time to throw in the towel!

    I’m not usually into to writing on blogs or forums but looking back on this I apologise if it seems like I’ve started a blog of my own. I just wanted to get as much of my thinking down as I could. There is more but I’ll save that.

    Any thoughts would be appreciated.

  • 72 Peter July 15, 2014, 5:24 pm

    At first glance, I’ll grant you it looks attractive. Who wouldn’t want to take other people’s money, compound it at 10% for 20 years, and end up with a fortune?

    Exactly — who wouldn’t? There’s your first clue life isn’t so simple.

    In reality:
    1.The money you will borrow is expensive
    2.Tax and other costs will eat up your returns
    3.Market returns are unpredictable, even over 20 years
    4.Your investment will probably be marked to market
    5.If you want to borrow to invest, it’s most likely a bad time to do so

  • 73 The Accumulator July 15, 2014, 6:31 pm

    @ jimmy – try computing a pragmatic upside (say 3% a year after expenses and lifestyling and subtract taxes, if any) and comparing that versus a downside, say you only break even or lose a couple of percent a year. Then do the same versus your nightmare scenario. How does it look then?

    Here’s more on the topic:

    http://theretirementcafe.blogspot.co.uk/2014/05/you-should-pay-off-mortgage-right.html?m=1

    http://www.kitces.com/blog/why-is-it-risky-to-buy-stocks-on-margin-but-prudent-to-buy-them-on-mortgage/

  • 74 jimmychoo72 July 15, 2014, 8:55 pm

    Thanks Peter. I really appreciate your input as it helps me sort through all the thoughts going through my head on this subject.

    I agree with you on the unpredictability of the markets but I think most investors accept that risk in the hope of a better return. The investments would be within an ISA so not really affected by tax too much.

    However, when interest rates rise obviously the return over mortgage rates would narrow and could even turn negative which would defeat the whole point of the exercise. Hence the much greater risk.

    The alternatives that I didn’t explore in my last entry were not to borrow any extra against the house and either;
    a. Overpay the mortgage as much as possible and clear that mortgage debt asap or
    b. Feed all surplus income into the high yield fund ISA that I’ve already started with a view to taking tax free income from it at the planned retirement age.

    There are several articles on the pros and cons of both of these courses of action on this and other websites. I must admit that I’m more inclined to take the route of investing especially as I believe that interest rates will stay at below average levels for at least the next 5-8 years and over the long term quality stocks should provide a decent return.

  • 75 Peter July 15, 2014, 9:32 pm

    Just remember that the stock market is volatile. You might see average returns of 10% or more for the next 5-8 years, only to suffer from a stock market crash the year before your repayment becomes due.

    Perhaps in the next year the market bounces back, just to rub it in..

    Too late — you repayment date has passed!

  • 76 Peter July 15, 2014, 9:35 pm

    Anyone who has lived through the past decade and seen two bear markets where stock markets fell 50% should know exactly why borrowing over five to ten years is simply gambling.

    If you invest your own money over the long-term, you can afford to ride out the ups and downs.

    But if you’re investing other people’s money over the short-term, you’re at the mercy of the whims of the market — and you could easily end up owing money to your lender after selling (or being forced to sell) your investments.

  • 77 Simon July 15, 2014, 10:46 pm

    I’m in agreement with you. I paid off my house and many say it was an unwise decision. It’s now been so long ago, the house would just about be paid off anyway. But the feeling knowing THERE IS NO HOUSE PAYMENT just never goes away. And it feels reeel gooood;-)

  • 78 David July 15, 2014, 10:57 pm

    Don’t be so hard on jimmychoo Peter. After all investing feels good. And paying off debt is less exciting. But I used to love seeing how every extra mortgage payment I made immediately affected my net worth right away. With investing, it’s not always like that, is it?

    When interest rates hit their historical averages again, loads of people are going to regret the wimpy payments they were making when rates were cheap. Compounding works in a couple of different directions, as you’re fully aware…

  • 79 Tony July 16, 2014, 12:42 pm

    Here’s an anecdote some might appreciate.

    In 1999 (or perhaps a little earlier) I was using Natwest to buy shares, and the girl doing the transaction for me said “You’ve a pretty good track record. We would be happy to lend you funds to buy more”. This caused several warning signals for me. So I offloaded what had been my most profitable buys. Sold BT at around £10. (Years later bought loads back at under £2).

    When the masses are borrowing to buy shares, get out quick. That situation does not obtain at present, however. Mind, I’ll sell BT again when it nears £10.

  • 80 n July 16, 2014, 1:11 pm

    jimmychoo,

    Do you regard investment as a zero-sum game? Funding an investment with a mortgage will tip the average return in the zero-sum gain towards a loss.

    So your choice is to spend all night at the roulette wheel betting red or black (i.e. passive index fund) with bits of your mortgage money. The balance will be tipped towards losing because of the interest payment. Some will have a string of misfortune and heavy losses. The winners walk away with the loser’s house equity.

    Or, you can pay off the mortgage and turn up late to the casino. Bet on one number with loose change. Regardless of the outcome – on average zero so better than the mortgaged crowd – everyone keeps their house.

    I’m paying off the mortgage.

  • 81 PC July 16, 2014, 2:26 pm

    @Tony ah Natwest bless them .. they tried to flog me a fixed rate mortgage just as rates dropped and dropped – got quite stroppy with me .. like you say if they’re selling it hard, run fast in the opposite direction.

    @n depends a bit on your tax circumstances – for example I’m in the fortunate position of being able to put money into a SIPP before tax and take it out enough to clear the mortgage tax free. That’s an extra 40% safety margin, OK it’s not a certainty but it tips the balance a long way.

  • 82 Sarah July 16, 2014, 3:44 pm

    I will be paying off my mortgage as fast as possible. I am more debt averse and also see the guaranteed return more valuable than possibly gaining a few percentage points per year. That said I will still be investing in stocks, which I have started before I have a mortgage already. It is a good problem to have, needing to decide how to make all your extra money become even more extra money.

  • 83 Rick July 16, 2014, 3:49 pm

    Paying off the mortgage early seems madness while I only pay 1.39% interest. Putting the money into my Stocks & Shares ISA and giving it the chance to earn 4% + seems more sensible. Yet, I know that the low interest rate scenario is a short-term thing and that mortgage payments will rise massively soon. So any money overpaid on the mortgage now will make repayments easier later.

    But stock market investing is so much fun! And that’s the hardest part about putting money into the mortgage. It’s dull city.

    So many other factors to figure too – housing market crash?, effect of inflation on prices (will the mortgage seem so much in 10 years time?), living today rather than tomorrow (you know, maybe it would be nice to have a holiday while you’re young enough to enjoy it properly), etc.

    Still, not have a mortgage would be great…

  • 84 jimmychoo72 July 16, 2014, 5:25 pm

    Thanks everyone for your views. It has certainly livened up this thread.

    One thing that I am clear on now in my own mind is that I will not be borrowing any more money against the house to invest in equities so thank you all for shedding more light on that.

    As in my last comment, my remaining options are to:
    a) pay down the mortgage asap
    b) invest alongside making my mortgage payments

    To be honest I will more than likely do a mixture of both. I do like the thought of having no mortgage but also having investments that will deliver a tax free income at retirement, to top up my pension, is also an important part of my plans.

    I must stress that the investments would be exactly for that and not to pay off any outstanding mortgage debt. That would be done by either using part of the 25% I can take tax-free from my pension or downsizing.

    Given the timeline I’m looking at, if I were to concentrate putting my surplus cash into overpaying the mortgage each month, I could probably clear it within 8-10 years. However, it would then be difficult to build up a sizeable income fund within the UK Tax Free ISA allowance in time for taking the income tax free on retirement given the limits to how much could be invested.

    The investments won’t be sold but hopefully kept to provide some income for the rest of my years. If they are failing to do so for a period then I’ll be lucky enough to still have a reasonable monthly pension to live off.

    Thanks again for all your views.

  • 85 Andy July 16, 2014, 7:08 pm

    Behavioural economics teaches us the pain of regret associated with a loss is about double the pleasure associated with a gain. Being in the same boat as you (pay down debt vs invest) it’s helped me to ask the question, “Which decision, if wrong in hindsight, will cause me the least regret?”:

    Wrong decision #1 (debt pay-down): house paid off but stock market doubled during that time.

    Wrong decision #2 (invest): market tanks by 50%

    For me anyway, #1 would produce less pain- I’d rather miss the boat than get run over by it.

  • 86 Peter July 17, 2014, 12:35 pm

    Nobody expects to lose their job, have a major medical problem, become disabled, or invest in a fraud; yet, over the course of a 30 year mortgage the odds that you will experience one or more of these admittedly rare and unfortunate events are far greater than you would like to believe. When your home is paid off it is easier to weather these storms with a minimum of personal adversity. Plan for the unexpected because eventually it will happen.

  • 87 Peter July 17, 2014, 6:59 pm

    Good point Andy. Another thing to bear in mind that most reader of this site may not realise is that, if the market tanks by 50% in one year, it would take over 7 years of, so called, “average stock market returns of 10%” to return to the same position you were in just prior to the loss.

  • 88 Andy July 17, 2014, 7:14 pm

    “The first rule of investing is don’t lose money; the second rule is don’t forget Rule No. 1.”

  • 89 jimmychoo72 July 17, 2014, 7:47 pm

    @Andy Fair point Andy, although, as long as the portfolio was still producing an income that pain would be lessened. Don’t forget that there is never any intention to sell the investments, just to build up and then take an income from it, tax free within the ISA wrapper.

    @Peter – Yes, you’re right, life throws up all sorts of hurdles but there are other ways to deal with these financially – certain insurances, ill-health pensions, selling up and moving to a cheaper area, renting your house out at a premium to somewhere you choose to live at a lower rent, cash in your investments (if they’ve suitably grown) etc. There’s always got to be a Plan B!

    If my Plan A goes more or less to plan I know that the mortgage will still get paid off in 13 years time. If I were to overpay each month I could probably do it in 8-9 years but I’d be struggling to then build up a decent income producing portfolio within a tax-wrapper such as a NISA, or whatever it will be called in 10-13 years time, within the 4-5 years before planned retirement.

    One thing is for sure – Paying down your mortgage is certainly the safer option and the most certain to provide permanent increased net wealth.
    Most investors however accept the higher risk of putting their money into the markets.
    I’m always one who like to find a happy median and I believe inroads could probably be made by employing a mix of both methods.

    Everyone’s circumstances are different and certainly for myself, my primary aim isn’t to neccesarily increase net wealth but provide me with an income that allows me to retire earlier than I might otherwise expect to.

  • 90 Balshey July 17, 2014, 8:20 pm

    The Accumulator,

    Just out of interest, why do you subscribe to splitting your money between 50% stocks and 50% cash rather than the traditional split of stocks and bonds? Do you believe that cash offers better returns in the current climate than bonds?

  • 91 The Accumulator July 18, 2014, 8:48 am

    @ Jimmy – ultimately most people do effectively borrow to invest by splitting savings between mortgage down payments and investing into a retirement fund simultaneously. I think your happy medium plan is a reasonable risk.

    @ Balshey – it’s because cash is safer than bonds. If I need to pay down the mortgage double-quick, or need the cash for some other reason, then I can be sure I won’t take a loss upon liquidation.

  • 92 Marin July 18, 2014, 11:00 am

    The Accumulator,

    Would you then suggest that cash as a like for like substutute for bonds. I ask this because all the guides suggest something like your age in BONDS, not cash. In your view, for the purpose of diversification and safety, are bonds and cash interchangable?

  • 93 The Accumulator July 18, 2014, 6:02 pm

    @ Marin – that rule of thumb is designed as a quick and dirty guide to establish an asset allocation for a retirement portfolio. My objective here was to pay off my mortgage inside 8 years so age in bonds doesn’t apply.

    Bonds and cash are both low volatility, low return, fixed income assets but they’re not the same. Over the long-run bonds beat cash in terms of return. They’re also a good diversifier because there’s a good chance bonds will wax when equities wane in a recession.

    Cash is safer than bonds, offers more optionality and I felt it suited my purposes better for this objective.

    Here’s some more on bonds: http://monevator.com/bond-asset-classes/

  • 94 David September 21, 2014, 11:18 pm

    Unfortunately we only get to see if the math wins in hindsight. For my personal situation, paying cash to build my house turned out to be the best decision in 2005/06. Interest rates were about 6% at the time. To use an easy round number, it cost me about $200k to build my house. (I bought the property a few years earlier, which had already doubled in value.) If I put that $200k into the stock market, it would have been worth about 40% less by early 2009 (down to $120k), plus I would have been making about $1200/mo payments on the mortgage at 6%. It would have taken until mid-2010 just to get back to breakeven, not including all the interest I would have been paying. My business also took a massive hit in early 2009 (economy + other business issues), which would have sent me into one hell of a panic if I had a mortgage at the time. Having no mortgage when the shit hit the fan? Priceless.

    But, shift my timeline ahead by four years and it would have been a lot better to take out a loan and dump all my money into the stock market. Or I could have bought Bitcoin in 2010 and been a multimillionaire (billionaire?) now. Good ol’ hindsight…

    Sadly, my crystal ball was broken at the time (and remains so). All I know is I was able to sleep well at night knowing I didn’t have a mortgage payment to make, and I could reduce my expenses to about $1200/mo at the time (including everything from food to property taxes).

    But yes, we are talking about “better” and “best” choices here. Either you get a free and clear house or you get a bigger investment account over the long run. Both outstanding options IMO

  • 95 Mike February 9, 2015, 7:02 pm

    What you should ask yourself is, does Warren Buffett keep a mortgage on his primary residence?

    No.. and you shouldn’t either because it isn’t worth the trouble (mental energy consumed would be greater than financial benefit earned).

    If you balance your assets well, your residence should be a small enough part of your wealth that it isn’t worth fussing with.

  • 96 smiling vulture June 18, 2015, 12:49 pm

    Andrew Hallam

    great post/no one can predict the future/but you can deal with the future now

    *I became debt/MF nov/2014,age 53

  • 97 paul March 18, 2016, 10:18 pm

    The viewpoint expressed in this article is extremly naive and short-termist. I’m a huge believer in paying off debts, including your mortgage, before investing. Today’s low interest rates provide an opportunity to rapidly pay
    down your principal, before rates return to historical norms. Over your mortgage’s lifetime, chances are that the interest rate you pay is going to
    exceed an average of 8%. So extra payments that you make today are likely going to be equivalent to an 8% after-tax guaranteed return over the
    long term. If you’re investing outside an ISA, you would need to make 10% annually on your investments just to match the returns of the person who aggressively pays his mortgage, so just do that and ignore this bad advice.

  • 98 The Investor March 18, 2016, 11:47 pm

    @Paul — Hi, thanks for commenting. All for a bit of constructive dissent, but while you say the article is “extremely naive and short-termist”, your own comment is far too sure of itself IMHO.

    For instance, the standard variable rate UK mortgage rates haven’t been 8% since the late 1990s. So that’s 15-years ago, and when base rates were far higher. That’s 15 years of a 25-year mortgage right there. Yet you talk about “historical norms”…

    Meanwhile, we currently exist in a world of near-zero interest rates, and have done for seven years. The only way mortgage rates are going to 8% in the next 10 years or so (and probably beyond) will be if the Central Banks lose track of inflation, at which point *having* a big mortgage would be desirable (because hyper-inflation erodes debt fast).

    Finally, to make your inaccurate, overly-alarmist case more credible, you talk about investing outside of an ISA.

    Why? Why would someone investing instead of paying off their mortgage do that? No, they’d sock their £15K away into an ISA, and so tax on returns wouldn’t be relevant until the mortgage is over at least £275,000 at today’s rates. Beyond that you could use your capital gains tax allowance sensibly and so forth.

    As I’ve said plenty of times before, a majority of middle class professionals have a mortgage and save into a pension at the same time. Most, I imagine. So by the logic of the mortgage alarmists, they are all following bad advice too.

    Don’t get me wrong, I think there is NOTHING wrong with paying off a mortgage as fast as you can. It is one of the safest investment you can make in terms of guaranteed return, though it does have disadvantages — in particular woeful diversification (all your investment eggs are in one basket — residential property, and just one residential property at that).

    And I fully agree there are greater risks with continuing to invest when you could be paying off the mortgage instead, especially outside of employer-matching pensions and the like.

    But in return, there are potentially greater rewards. It’s a decision. That’s what investing is about.

    There’s no need to over-egg the pudding with fantasy interest rates and over-the-top critiques.

  • 99 Ian March 19, 2016, 1:25 am

    The Investor,

    Judging by your comments, it would seem that, with respect, you too could be considered “extremely naive and short-termist”, if you are basing your argument on your experience of the last 15 years! Or maybe it is fairer to say you are just “young”.

    You appear to be one of the lucky generation who, since purchasing your first home, have never actually experienced mortgage rates of above 5%, and have simply got used to idea of paying 2-2.5% as if it is “the norm”.

    If you really do doubt the validity of the previous commentator with regard to mortgage rate “historical norms” of around 8% and, as I suspect, you are under 45, just ask your mum and dad!

  • 100 The Investor March 19, 2016, 9:41 am

    @Ian — Au contraire my friend, I am very familiar with interest rates (that as you know mortgage rates are based on) over the past 100 years, and vaguely familiar with the 300-year old record. (Not hard as they didn’t used to move much!)

    Very high interest rates (above 8% or so) only really occurred in the 1970s and 1980s.

    Of course rates of 5%+ are very normal. See the graph in this article (you’ll need to scroll down a bit):

    http://monevator.com/floating-rate-bonds-as-a-hedge-against-rising-interest-rates/

    If I was stress testing the idea of paying back a mortgage in the current climate and foreseeable future in the way you and the commentator did, I would think 5% Bank Rate would be a reasonable measure to use.

    Happily one doesn’t have to lock oneself into a plan for the rest of your life. If/when interest rates do start to rise, the risk/reward will of course become less favourable and the attractions of foregoing mortgage payments will diminish.

    Let’s look at what’s been said. We have on the one hand an interesting article outlining how a savvy investor *might* decide to treat their mortgage. And in subsequent comments we have people like me saying repaying your mortgage ASAP is a perfectly good and low-risk idea, which most people should probably pursue for that reason.

    However, we dare to suggest, some people might choose to think about the higher risk/reward option.

    For this we get people jumping down our throats, saying our balanced and reasonable articles are “bad advice”, quoting 8% interest rates (about 4x the current level) and ignoring ISAs and pension contributions and whatnot, and generally being dogmatic.

    Each to their own, but this site probably isn’t for such people as we’re a bit more nuanced and rounded around here. 🙂

  • 101 The Investor March 19, 2016, 9:54 am

    @Ian — P.S. Apologies for intemperate use of “grown-up” in the last sentence. Haven’t had a coffee yet! 🙂 Have changed to “nuanced”.

  • 102 Michael March 19, 2016, 11:08 am

    The Investor,

    Don’t make the mistake of confusing The Bank of England Base Rate with mortgage rates per se. Most lenders charge approximately 2% above base rate on average. So, by your own admission, “rates of 5%+ are very normal”. Add on an extra 2% for the lenders spread and you seem to be pretty close to agreement with Paul.

  • 103 The Investor March 19, 2016, 11:14 am

    @Michael — Yes, I obviously understand that. Sure, we can get to 6-7% for mortgage rates. But “Normal” doesn’t mean “persistent”. It would be “normal” to have some sunny days this summer in London. If only they would be persistent.

    Saying something can happen in the future and has in the past is very different from saying it’s “bad advice” to do something now with interest rates near-zero (you can get a 5-year fixed rate, for example, cost just 2.29%, and a ten-year rate at barely 3%).

  • 104 Michael March 19, 2016, 11:33 am

    The Investor,

    I think you have somewhere along the line lost track of Paul’s original point. He made a remark that “over your mortgage’s lifetime, chances are that the interest rate you pay is going to exceed an AVERAGE of 8%”. You (almost) agree with him by making the point that a base rate of 5% and morgage rates of 6-7% are normal. Fair enough.

    Going on to point put RIGHT NOW (with a Bank of England Base Rate at near-zero) you can get a 5-year fixed rate, for example, costing just 2.29%, and a ten-year rate at barely 3%), and making speculative investments on that basis is a different issue altogether.

  • 105 The Investor March 19, 2016, 11:37 am

    This is just a frustrating Internet-style debate now: I try to add some wider context to the debate, and it gets picked over in micro-detail that doesn’t apply to the original comment maker. My quick non-exhaustive comments are put under the microscope; Paul’s aren’t. Etc.

    A ten-year fixed rate mortgage of 3% is 40% of the life of a mortgage. It’s very significant. It also gives you ten years to change course if for some reason mortgage rates leap to 8%, which absolutely nobody thinks remotely credible. (The 10-year gilt yield is currently near 1.5%, and the market still fears deflation).

    We’ve all had our say for now.

  • 106 The Accumulator March 19, 2016, 1:01 pm

    I haven’t had my say! And I’m sure I will regret pitching in but…

    This piece was not advice. It was an exposition of my own particular situation and thought process.

    I clearly outlined the risks and am not arrogant enough to think I know the future. Risks if taken must be lived with.

    Most importantly, we’re not talking a 25-year gameplan here. As mentioned, I’d be de-risking over the next 7 – 8 years (starting 2 years ago). In particular, the historically low rate of interest, the fact that I’m on a tracker mortgage and my own abnormally high savings rates were all big factors in the decision.

    To repeat, this is not generalist advice along the lines of “Hey losers, why don’t you man-up and bet the farm on the stock market instead of paying off that mortgage? Ya wimps!”

    Good to debate the wisdom or otherwise but let’s keep it social.