Like all financial services, investing attracts its unfair share of bad actors and inept shysters. So it’s comforting to think that if the worst happens and your investments disappear in a puff of fraud, then the UK Financial Services Compensation Scheme (FSCS) will swing into action and bail you out.

But that ain’t necessarily so.

The FSCS protection scheme may come to your aid. But eligible claims have more strings attached than a puppet show. 

How can you know if your investments are actually covered by the FSCS? And what further steps can you take to maximise your protection level?

Fancy hearing about a route to 100% FSCS compensation coverage with no cap?

Read on!

The FSCS compensation limit

The first knot to unpick is that FSCS compensation is limited to £85,000 for investments. 

The formula is £85,000 per person, per firm.

Hence £85,000 is the maximum amount of compensation you can personally claim per firm you invest with. (Assuming all the other eligibility criteria are met. We’ll get to that funfest shortly).

• The per person element means that you’re covered for up to £170,000 in a joint account. 

• Per firm means that if, in some future dystopia, two or more of your investing platforms collapsed, then you could make a separate claim for up to £85,000 to cover assets lost in each implosion. 

For example, if you had £30,000 lodged with Ee-z-eeMoney Broker$ Ltd then you could put in a claim for the full amount owed. 

Meanwhile, you’ve also got £200,000 stashed with the Hard4Profits Company. Their directors were last seen boarding a flight to Panama so you can claim back £85,000 for that mess, too.

You’re not covered for the remaining £115,000. The FSCS compensation limit maxes out at £85,000 per firm, no matter the value of your accounts with that firm. 

Which firms are covered by FSCS compensation?

You’re only protected if the firm that pops its clogs is authorised by the UK’s Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA).

Note, the word you’re looking for is authorised by the FCA or PRA. 

The next step is to ensure that the authorised firm is actually regulated (by the FCA or PRA) to undertake the particular service you’re using them for. 

For example, is your broker regulated for ‘Arranging investments’ (translation: executing trades) in the particular security you wish to invest in? Such as ETFs or shares?

The FCA’s Financial Services Register theoretically enables you to check these details for every firm on their books.

But in reality it’s a minefield. A fact the FSCS acknowledges by shifting the responsibility for keeping tabs to you.

The FSCS says:

Ask your firm to confirm that the activity they are carrying out for you is a regulated activity and FSCS protected.

I thoroughly recommend you do that. Then double-check your broker’s claims are verified on the firm’s  Financial Services Register page. 

There was a time when I felt confident in checking a broker’s status purely through the Financial Services Register. 

However, a firm’s status on the register is nowadays defined by specific, technical terms. I cannot be certain my interpretation of those terms is correct. 

Plus the FSCS’s “Ask your firm to confirm…” edict is plastered everywhere on the site – which suggests we cannot solely rely on the register. 

Multiple brand names, one firm 

If you decide to diversify your money between brokers, then check they are not part of the same financial group.

For example, iWeb, Lloyds Bank Share Dealing, and Halifax / Bank Of Scotland Share Dealing are all in the same group. 

This means they all count as being part of the same firm, from an FSCS perspective. So you’d only be eligible for a maximum £85,000 payout, even if you diligently split your assets across them all. 

You can quite easily check whether your broker is part of a wider group on the Financial Services Register page. 

Just search for its name, then check the Trading names section of its particular entry for other aliases. 

FSCS protection for fund providers

FSCS protection does not cover you for investment risk. If your meme stocks go to zero then there’s no backstop. 

Rather, the £85,000 compensation limit is there to cover your investments from fraud, negligence, mismanagement, and mis-selling.

And those vices can affect the companies that manage your funds, too. (What a wonderful world!)

However the FSCS scheme only covers a narrow sliver of fund manager firm situations.

The headlines are: 

• FSCS protection applies to UK domiciled OEICs and Unit Trusts.
• It does not apply to funds domiciled overseas. For example, in Ireland. 
• Nor will you be compensated if you hold ETFs or Investment Trusts with a fund provider that runs into trouble. 
• The same goes for individual securities like shares or bonds. Never mind crypto. 

Use this tool to check your investment type’s FSCS protection status.

If you do invest in UK-domiciled funds then your maximum payout remains £85,000 per person, per firm.1

This is separate to the FSCS protection you’d be eligible for if a broker broke. 

However, there is a way to invest with 100% protection…

100% FSCS protection for insured personal pensions and annuities

Some personal pensions qualify for 100% FSCS protection. (That is, the maximum compensation level is not capped at £85,000.)

The FSCS describe eligible pension schemes like this:

The FSCS protects 100% of a pension directly managed under a life insurance contract.

Essentially that refers to some personal pensions and stakeholder pensions that are offered by large insurance firms. 

The firms must be regulated by the PRA. And the particular scheme must be classed as a contract of long-term insurance to qualify for FSCS protection.

100% FSCS protection seems to be woefully advertised, given that many people would value it highly. 

Rather than plastering it all over their brochures, I’ve found pension providers typically relegate any references to a couple of paragraphs that are sometimes found in their Key Features documents. 

Here’s the kind of thing to look out for, courtesy of a Standard Life Stakeholder Pension document (bolding is mine):

Your plan is classed as a long term contract of insurance. You will be eligible for compensation under the FSCS if Standard Life Assurance Limited becomes unable to meet its claims and the cover is 100% of the value of your claim.

Watch out for clauses that warn you lose FSCS compensation if you invest in certain funds available through the pension. These funds are usually managed by another investment firm but, bizarrely, they may also include own-brand funds provided by the firm that is actually running your pension.

Talk to your pension plan provider if you’d like to know more and maintaining 100% FSCS protection is important to you. 

Bear in mind that – along with annuities – these types of pension qualify for compensation under the FSCS insurance claim category. 

In other words, pension assets like this don’t interfere with your £85,000 investment category claim should you hold a brokerage account, or other funds, with the same firm. 

FSCS protection for Master Trust pension schemes

If a Master Trust workplace pension scheme runs into problems then its trustees can invoke FSCS protection on behalf of its stakeholders. You wouldn’t claim yourself. 

However, here again, beware of warnings in the documentation about choosing certain funds that aren’t eligible for FSCS compensation. 

Defined benefit pensions

Defined benefit pensions should be covered by The Pension Protection Fund (PPF) rules. Double check that yours is.  

The top-line is:

• 100% compensation if you’ve reached the scheme’s pension age.
• 90% compensation if you’re below the scheme’s pension age.

Public sector pensions are funded by the taxpayer, so you’re fine as long as we have a functioning government (place your bets) and the Bank of England money printer doesn’t run out of ink. 

What about cash in an investment account?

Your £85,000 FSCS investment compensation limit doesn’t reduce the £85,000 you can claim for lost cash deposits.

Most brokers lodge client money with one or more big-name banks.

If a bank fails while holding your cash on behalf of your broker, then you can claim £85,000 back, while still claiming £85,000 elsewhere for missing investments.

However, if your broker money was stashed with a single institution – say Lloyds – and you also had a personal account with those self-same black horsie people, then you could only claim up to £85,000 for the two losses combined.

That’s because the limits apply per person, per firm, per claim category. (Cash is one category and investments another).

Some brokers park your money with multiple banks. They say that means your cash is equally divided between them all. 

So, if your broker uses four banks for client cash, then you wouldn’t have to worry about exceeding the compensation limit until there was more than £340,000 sitting in your account.

(If you’re – cough – an absolute baller with more than £340,000 in cash at your brokers, then I hope you’ve already ponied up for Monevator membership…)

How likely are you to need FSCS protection? 

Of course, the worse shouldn’t come to worst.

There are regulations in place that require fund managers and brokers to segregate your assets from their own.

If the mother company explodes, your money should be safely ring-fenced in a separate pot. You’ll get it back once the smoke has cleared. The company’s creditors have no legal right to your piece of the pie.

That’s what is meant to happen. But any system can fail. You will find a warning to that effect in the terms and conditions of any reputable UK broker. 

As Cofunds puts it:

As with any FCA regulated investment firm in the UK, while it is highly unlikely that Cofunds were to become insolvent, or cease trading and have insufficient assets to meet claims, we can’t provide a 100% guarantee that your money is fully protected.

So FSCS compensation provides a last resort backstop – just in case the next Bernie Madoff happens to be running your brokerage, while the cast of Dad’s Army is in charge of administration and oversight.

If your investment platform went pop, shouldn’t the bulk of your assets actually be held elsewhere, though? Shouldn’t your money be invested in ETFs and funds with other companies that are still in perfectly good nick? 

Yes, that’s true. Indeed, most claims that require FSCS intervention seem to involve mis-selling, where consumers took advice from a so-called investment professional.

However, the FSCS did step in to assist customers of Beaufort Securities and SVS Securities – two UK brokers that collapsed in 2018 and 2019 respectively. 

In both cases, the FSCS made good customers who would otherwise have taken a haircut because client assets were earmarked to pay the fees of the insolvency administrator. 

It turns out that administrators are not creditors. So they can dip into the pool of supposedly segregated customer assets, at the discretion of the FCA, if there’s no other way to meet the bill. 

Passively paranoid

During the wind-up of Beaufort Securities, the FCA used the FSCS scheme to ensure that most but not all customers avoided a hit.

In this case, people didn’t lose everything. But clients with a very large account balance took a haircut that exceeded the FSCS compensation limit. Whereas most customers took a percentage loss on a relatively small total account balance, meaning their share of the shortfall was inside the FSCS cap.  

So you may decide that you don’t need to fret when your account balance reaches £85,000. That you’ll only need the FSCS to cover you for a percentage of whatever amount you’re owed. 

On the other hand, my biggest fear is the (admittedly small) chance of being caught up in a massive financial fraud. 

It’s not hard to picture a scenario in which a firm tells you, “Don’t worry your cash is safely tucked away in Vanguard funds,” when it’s actually been spent on a fleet of supercars and crypto bets.

• For a full picture of why your brokerage account may not be as ironclad as you’d like, please read this piece on the weaknesses of industry-default nominee accounts. 

What should you do?

We’ve had many discussions in the Monevator comment threads about how far to go for peace-of-mind. 

Most people accept that their chance of needing FSCS compensation is acceptably low. Hence few of us open a new brokerage account for every £85,000 worth of investment assets we own. 

But anyone with a large holding would be well-advised to diversify. 

I personally operate across two different, reputable brokers. The Investor uses at least four that I know of.

Even if it all ends happily ever after, broker insolvencies can take many months to clean up. During that time your funds will be inaccessible. 

If liquidity is important to you, then you’d be wise to spread your assets across multiple platforms, regardless of the FSCS. 

Managing broker risk 

No guarantees but here’s some tips if peace of mind is extremely important to you. Choose at least one broker that is:

• Big not small 
• Listed rather than private (greater scrutiny)
• Profitable (check their annual report)
• High credit rating rather than low or no rating
• Doesn’t offer margin, loan out stocks, or run their own trading desk

Brokers can buy ‘Excess of FSCS cover’. This is an insurance scheme that apparently “protects investors for deposits above the level that the FSCS will reimburse.”

I haven’t seen any online broker advertise it as a USP, but it’d certainly offer some comfort if you find a platform that does.

Getting the answers you want about FSCS protection

As discussed, the FSCS expects you to contact your broker for reassurance that they are properly protected by the compensation scheme. 

However, investment platform support staff are often inadequately trained in this area. 

You may get a vague, confusing, or inaccurate reply. Ask two different people at the firm and their responses can be worryingly inconsistent. 

Moreover, while some brokers clearly explain their level of FSCS protection on their website, others do not. Even when their coverage is perfectly fine!

So you might have to persevere. 

A line like this may do the trick:

“Is my investment account covered by FSCS protection up to £85,000 if your firm becomes insolvent?”

Then make sure they specifically answer that question without fobbing you off with talk about cash protection, client money, or segregated assets. 

The answer you need is that your investment holdings are covered by the FSCS. 

Take it steady,

The Accumulator

1. Think BlackRock, Vanguard, or L&G, for example. [↩]

What caught my eye this week.

The ‘proper’ savings rate for a pursuer of financial freedom is one of those perennial hand grenades lobbed into the otherwise cozy and supportive world of personal finance blogging.

Partly that’s because of fundamental differences in philosophy when it comes to how many fingers to raise – and how vigorously – when faced with the endless temptations of consumer culture.

But mostly it’s because we all have different values and financial situations. We’re at different stages in our journeys, too.

Hence we see the spectacle of comfortably retired Boomers berating 20-somethings for ordering a bit of avocado on toast, while other 20-somethings shame their own for getting a latte from Starbucks (shameful, true, but not for financial reasons) – and everything in-between.

When I bought my flat, I also bought a fancy coffee machine. I’d wanted one for at least a decade and for me it was part of the home ownership dream.

But to some readers it was akin to Bob Dylan going electric at the Newport Folk Festival.

Never mind that I could easily afford it – and I’d waited until I could, too – or that my savings rate had been 20-50% for 20 years. That I’ve never bought a car, let alone several cars, in my life. Or that a good coffee is one of my top ten hedonistic pleasures.

They didn’t like it – and yet other readers slapped me on the back.

Enjoy yourself, they smiled. Ignore the haters!

Comparison shopping

Funnily enough I didn’t feel massively more kinship with the latter than the former.

That’s because we all had – and have – a lot more in common with each other than could be divided by a homemade espresso.

While others read the footie results or catch up on Love Island, here we find ourselves on a pretty niche money and investing blog. We’re all looking to put or keep our finances on a decent footing. And making our own decisions daily about what to splurge on and what to eschew.

The only contention is that one person’s luxury treat is another person’s wasteful squandering. That his cost-saving gambit is her unthinkable sacrifice.

A luxury you just can’t forfeit might not even register for me.

You drive a BMW Coupe 343 B-Liner Sedan Thingywotsit? Really?!

At least I think that’s what you said. Knock yourself out.

I don’t do cars. Maybe you don’t do espresso machines. It’s silly arguing over the specifics.

The big picture – money in, money out, investing the rest – is what matters.

Better latte than never

It’s a similar story with savings rates.

If you’ve no money socked away at 50 and you tell me you’re going to start saving 5% of your salary into a SIPP, then I’m going to tell you it’s not enough.

Until, that is, you tell me you’re earning £500,000 a year…

At the same time a 22-year old saving 5% of their fairly ordinary professional salary – topped up by the company and the government – might well be on their way to becoming a millionaire by the usual retirement age without ever feeling they sacrificed anything.

Which in turn leads to those circular arguments about whether compound interest matters or not.

If you only start saving properly when you’re a decade away from retiring, I agree it’s not going to do much for you.

If you began in your early 20s and now you’re in your 50s – seeing a good year in the stock market bolt more than your annual salary onto your portfolio – well, it’s hard to know where to begin.

It all adds up

Nick Maggiulli over at Of Dollars and Data therefore did everyone a great favour this week by pinning some numbers onto this age-old drama.

By showing how the impact of saving a bit extra varies depending on how much you’re already saving – and for how long you intend to keep at it – Nick has revealed the mathematics behind the emotions in these debates.

For example, let’s say you are currently on-track to retire in 30 years. Nick’s table below shows how many years of work you could avoid if you increase your savings rate by three different amounts:

So if you’re already saving 20% of your salary, for instance, then save 5% more for the rest of your working years and you could actually retire three years and a bit earlier.

What’s striking about this table is actually how little difference saving even more money makes once you’re already putting away a healthy 20% or more of your income. That’s the long time horizon at work.

Have all the avocados and lattes you like, my young and disciplined friends!

In contrast, if you’re only currently saving 5% to be on-target to retire in 30 years, then tripling your saving rate could nearly halve your remaining years in the office.

There’s plenty more insights unearthed by Nick’s tables and graphs, so go read it.

And have a great weekend!

p.s. Thank you to everyone who has already signed up to become a Monevator member. It’s truly gratifying and the strong start has encouraged us to think we can eventually become a sustainable operation. What’s more, many of you shared some generous words, too. If you haven’t already read the more than 130 comments from readers on last Saturday’s post, please do! And thanks again.

[continue reading…]

You don’t need to be paid-up member of the Monevator mafia to recognize the pain of rising interest rates.

All you need is a mortgage.

Rates soared in 2022. And anyone coming off a fixed-rate mortgage they’d bagged in the near-zero era found they were on the queasiest roller-coaster ride since a post-beers jaunt at Munich’s Oktoberfest.

That includes me. I got my mortgage in 2018. The rate was 2%, interest-only, fixed for five years. Due to my unusual income and asset profile I had to literally write to the CEO of a bank to secure it.

Thankfully, the CEO immediately saw the sense. But please do keep this in mind with what follows.

If you’re a vanilla mortgage customer, then you’ve far more options for dealing with rate volatility than me.

I wrote about stress testing your mortgage in June 2022. We also ran through a mortgage risks checklist. After doing your sums, you might well have concluded an early repayment charge was worth paying to lock in a new deal before rates rose further.

But I was too nervous to prod my bank. In fact, I wasn’t 100% sure what would happen when my deal expired. The CEO had left. The bank seemed more risk averse. Would it do something mad like ask me to repay in full? (On the face of it against the 25-year term, but you never know.)

A few inquiries established that other banks still didn’t want my custom – not any more than five years ago. Shopping around like most people wasn’t an option for me.

So I waited for my automatic three-month ‘remortgaging window’ to open. I hoped to snag a new rate with a few clicks via my bank’s online platform. All without a human staffer raising an eyebrow.

But then came Liz Truss.

Budget bazooka

The Tories have given me many reasons to regret my rare vote for them in 2010.

The Referendum. The hard Brexit interpretation of the close result. Boris Johnson.

“Hold my pint,” said Liz Truss, before unleashing her Mini Budget.

Already climbing, bond yields and swap rates soared just as my remortgage window opened. Every time Kwasi Kwarteng spoke, I needed to find another £100 a month for the next five years.

Can you spot the Mini Budget below?

Truss and Kwarteng weren’t responsible for all that climb. And yields remained elevated even after they got their marching orders.

But that extreme spike, with no signs of stopping? Lenders slashing their mortgage ranges and hiking rates on what was left? Pension funds on the point of blowing-up?

The worry felt by ordinary people having to make a huge long-term decision with the serenity of an engineer using a slide rule on the dodgems?

That was made in Whitehall.

Up, up, and away

Even before my remortgage window opened, I was watching swap rates and daily visiting my bank’s (admirably transparent) mortgage website page.

For a good while its relatively low rates didn’t budge.

I wondered why.

Were customers truly being offered these rates? Did it have some tranche of cheap funding to work through? Was it desperate for market share?

All very interesting. But what I should have been doing was grabbing its five-year fixed-rate – then under 4% – with both hands.

Sure enough, one day I refreshed the rates tab to find all its mortgages had jumped up by more than a full percentage point.

Indeed at its worst, a five-year fixed rate for my loan-to-value rose to well over 5%. That compared to the 3.5% I was modeling in summer, and of course the (now fantasy land) 2% I was coming off.

The rate hike would pump-up payments on my chunky interest-only mortgage overnight from much less than £1,000 a month to more than £2,300.

Now, it’s worth reminding readers – especially if you haven’t read my mortgage origin story above – that at all times I had far more than sufficient assets in my ISAs and elsewhere to pay off the mortgage completely. I could use my assets to pay the monthly repayments too.

So this wasn’t an existential threat.

It was, however, a sucker punch.

Like most stockpickers I’d gone from giddy markets and a frothy portfolio in summer 2021 to a seriously battered warchest. Now I faced a squeeze on my cash flow too.

To compound things, I’d eased off freelance work in those heady 2021 days. So I had less cash coming in to call upon. Maybe I’d end up drawing down my portfolio years ahead of schedule.

Thankfully, while I fretted about all this Truss was ousted and swap rates finally eased. That implied mortgage rates would soon come down, too.

I decided to wait a while longer. I even gamed out paying my bank’s Standard Variable Rate (then well north of 7%) for a few months if it looked like rates would fall rapidly – though going on to the SVR would be heinously expensive, at more than £3,000 a month.

Mortgages and emotions

Despite seeing light at the end of the tunnel, I had to concede all this was stressing me out.

Which surprised me. I’ve many years experience of juggling my net worth and more recently running a portfolio an order of magnitude (and then some) bigger than my best-ever annual earnings.

One time I liquidated half my tax-sheltered portfolio in a morning – and then headed out for a jog.

I’m not saying this as a flex. It’s just to highlight that I’ve done my shift in the trenches with big financial decisions – and I’m usually pretty rational about finances and investing.

But this mortgage rate volatility had given me the willies.

I even called The Accumulator. His sage advice was to pay off some of the mortgage while I waited to see where rates went. And to pay attention to how it made me feel.

Maybe I could pay down some more if I felt an overwhelming sense of relief?

Or maybe not, if I didn’t.

Fortunately, I still had a big chunk of cash lying around from my sale of unsheltered shares in Spring 2021 – especially from dumping a massively over-sized Amazon position.

I had done this selling partly fearing a capital gains tax hike, and regretted it when CGT rates were left unchanged.

That regret was eased when tech shares plummeted later in the year.

Now I was actually grateful to my former self.

I paid off 10% of my mortgage balance and sat back to enjoy the endorphin rush.

But there was none.

The projected monthly mortgage payment amount dropped by a couple of hundred quid or so, but to me it still looked like I would be paying out the equivalent of a foreign holiday a month out of sheer bad luck, given how I’d unwittingly anchored to my previous lower rate.

Also, I missed having all that cash to hand. It had stood ready to help with those higher bills, for one thing.

And there were other dramas on my way to remortgaging.

For instance, the bank’s online platform borked, and for a few days I thought my account had perhaps been flagged for investigation. I’d discovered I could ‘bank’ a mortgage offer and then wait to see if rates fell further, but these technical issues complicated even that.

I ended up talking with staff after all. At least they reassured me that I was definitely going to be able to remortgage.

Finally – after just a month on that ball-breaking Standard Variable Rate – I refreshed the mortgage page to saw a new five-year fix at just under 4.5%. I’d pay a little over £1,600 a month.

I checked the URL and reloaded. It was still there. So I did the necessary, and finally felt some relief.

Of course a few weeks later my bank was offering well below 4% for the same fix! Which is entirely on-brand for this saga.

But at least the 10% I’d paid off wasn’t a wasted experiment.

Only by making this payment had I put myself into the bank’s best loan-to-value band. Which was what had enabled me to bag its best five-year fixed rate.

Small victories.

Late to the party

I’ve gone into all this biographical detail because some of you have been reading about my mortgage adventures for many years now. A few of you asked about my remortgaging, too.

In fact I’ve previously had to explain in Monevator comments why I wasn’t remortgaging in Summer 2022.

While we do always need to beware hindsight bias – almost no-one predicted what rates did last year – I believe if I hadn’t been nervous about rattling my bank, I would have remortgaged early in June or July.

After all I was writing those stress-test articles (linked to above), and I’d warned about the regime change to higher rates several months before that.

Remortgaging in summer would have secured 3.5% fixed for five years – and maybe more sleep.

And it’s that sleep point which is motivating my slightly self-flagellating tone today.

A mortgage is still a debt

To be clear, I have never been against paying off a mortgage. My articles on investing instead have invariably noted that paying down the mortgage is usually a sensible decision for most people.

That’s true even when the mathematics say otherwise – inspiring more risk-hungry souls like myself to see mortgage debt as cheap funding for investment.

And I knew a big reason to pay off early was the emotional dividend. Not being stressed about being on the hook for a mountain of debt – nor even worrying about the monthly repayments.

However it’s one thing to know something and another to live it.

I’d already learned that carrying a big mortgage potentially affected my investing. (I partly blame my huge Tesla investing misstep on getting used to being a borrower.)

But that dread I felt during the remortgage process, of being at the mercy of chance – and political ideologues – was far more unpleasant than I expected.

As a lifelong debt hater, I’d highlighted to a skeptical friend when I took out my mortgage in 2018 that for the first time I’d opened up a path to going bankrupt (however unlikely). The potential was now there for my mortgage to outweigh my assets in a 1930s-style crash, putting me underwater.

So I was alive to my aversion even to mortgage debt, which is by far the most palatable kind of borrowing.

Yet when things got hairy, I’d discovered I felt threatened by the mortgage in a way that I’ve never been worried by, say, a bear market.

Admittedly, paying down £50,000 didn’t do much to alleviate things. I’m guessing there’s something binary going on between having any debt and none.

But that was a lesson too.

Again, I’ve long known retaining a big cash cushion was reassuring, even if it’s theoretically sub-optimal.

But I missed it more than I anticipated once it was gone.

So I’ve changed my mind about some things

Despite this rather emotional journey, I’ll keep running my mortgage for the foreseeable.

However the episode did result in some changes to my portfolio – I now maintain an explicit buffer of lower-risk assets, partitioned from my usual investing antics – and also to my long-term thinking.

I can’t now imagine going into true retirement with the mortgage, for example. Before I’d wondered whether I’d ever pay it off, versus letting it dwindle into inflation-adjusted insignificance if I could.

So let this be a moment for you pay-off-the-mortgage militants to enjoy a bit of schadenfreude.

Like I said, I never thought paying it off was the wrong decision for anyone.

But I do now feel it’s a bit more right than I did before.

Why I stayed invested and kept the mortgage

Given the finer margins of investment returns versus the higher cost of debt – not to mention my remortgaging drama in the midst of market chaos – why didn’t I just get shot of the thing?

Again, paying it off would be perfectly sane.

However for various reasons I didn’t.

It’ll probably still be more profitable to invest. Even on standard expected returns, my portfolio should still outperform over the next 20 years if tax-sheltered. However it’s a far closer call – and paying off a mortgage is a sure thing, versus uncertain investment returns. So it’s my own active track record I’m looking to, personally. This is holding well into double-digits per annum even after a terrible 2022. Fingers crossed. (Try our spreadsheet to explore the maths for yourself.)

Retaining tax shelters (ISAs). This has always been a prime motivation for my having a mortgage. If my portfolio couldn’t be tax sheltered in ISAs, I’d probably ditch the debt. I’d also consider doing so if annual ISA allowances were unlimited, on the grounds I could rebuild the shelter later. But the ISA allowance is a use-it-or-lose-it affair. Who knows where my finances will be in a decade or two? If I’m lucky though and I continue along the same track, I’ll be pleased to have built up a seven-figure tax-shielding ISA fortress. (See Finumus’ article on borrowing just to fill your ISA each year.)

It’s a hedge against hyper-inflation. We need to do a proper article on this, because you can tie yourself in knots. High inflation quickly erodes the ‘real’ value of debt in today’s terms. Hurrah! But what if whatever you spent the mortgage on languishes? If house prices fall or are stagnant, was it still a hedge? (I think so…) But I’m invested, too – so what about market returns? Or what if incomes rise fast, making it easier to pay off? Where do taxes fit in? (Inflation ‘gains’ on eroding debt aren’t taxed…) Broadly, I see my big mortgage as a hedge against high inflation. It aligns me too with the government, which also has a debt problem. The cost is extra risk – though inflation does diversify my need to achieve high investment returns. (Everyone with debt ‘earns’ when higher inflation erodes its real value, regardless of skill.)

I might not ever be able to get another mortgage in size. This won’t apply to most. But unless I decide to ramp up my income massively, I’ll never be able to replace this mortgage. (Recall: I had to go to a CEO for it.) Even if I was earning the six-figures required, I’d more likely put most of my earnings into my SIPP – at least while the lifetime allowance is in abeyance.

I’m not running a fund professionally. Very personal. A few years ago I threw in the towel on the idea of running money professionally. A story for another day. Anyway, I sort of see the mortgage as my nod to running Other People’s Money. My bank’s money! It’s my small way of using external assets to grow my wealth.

More than a feeling

I don’t fault anyone whose response to 2022 was to pay down their mortgage, pronto.

Even more power to you if you saw this coming and did the deed earlier.

For now I soldier on – though this may change if and when the facts and my finances do.

Or if Liz Truss somehow gets back into office. (I think I’d sell my flat and emigrate.)

Having dealt with the emotional and personal side, I’ll look at the numbers more generally in a fortnight or so. Subscribe to our free email updates to ensure you see it!