When interest rates are high or rising, you might wonder: “Should I pay off my mortgage or invest? Which strategy will put me financially ahead in the long run?”
Very low interest rates following the global financial crisis made larger mortgages much more affordable.
At the same time, strong returns from investing trounced the relatively low savings you made from paying down your mortgage instead.
With hindsight then, investing in the markets during the very low interest rate era was much more profitable compared to paying off your mortgage early.
However this comfy state of affairs was upended when rates rose fast in 2022.
Anyone who hadn’t properly stress-tested whether they could handle higher interest rates had a rude awakening when, say, their 2% five-year fixed rate deal expired and they had to remortgage at 6% or more.
It was a reminder that paying off a mortgage will always be worth considering. Debt can be deadly. Owning your home outright can be financially liberating, whereas running a mortgage comes with risks.
Very few people who pay off their mortgage regret it.
But this is Monevator. We like to kick things around – and sometimes to do things differently.
Where do we stand today? I’ve updated this article and our spreadsheet to reflect higher interest rates since it was last updated in January 2022. But remember mortgages are a long-term commitment – you’ll probably see multiple cycles of rate rises and cuts over the full term. Assess the risks accordingly! Only you can decide what’s right for your situation.
Pay off the mortgage or invest?
Borrowing to invest is typically a bad idea.
- Returns from investing are uncertain and volatile.
- Debt – and the cost of debt – is a certain liability.
However mortgage debt is relatively cheap and manageable. I believe it’s the only way most people should consider borrowing to invest.
A mortgage is money rented from a bank. Typically we use that money to buy a property. But if we delay repaying the mortgage to build an investment portfolio, we’re effectively using the mortgage to invest.
In this scenario our home stays mortgaged for longer, like an investment property.
It’s almost as if you’re a landlord – someone who borrows money from a bank on your behalf – except you’re your own tenant.
If you trust yourself to meet your mortgage payments whilst also saving into an investment portfolio for the next 25 years, then with average investing luck you’ll probably end up better off investing versus repaying the mortgage.
However there’s a lot to think about when deciding whether to pay off the mortgage or invest. The decision is as much about risk – and emotions – as any reward.
Come with us via the scenic route! We’ll tour the landscape, and wind up at a calculator that enables you to further explore the options.
First things first: Non-mortgage debt must go
Have you got credit card or store card debt or any personal loans? Get rid of that debt first.
Student loans may be an exception, as MoneySavingExpert explains. Think carefully before repaying any student loans.
The interest rates on credit cards and loans are much higher than on a mortgage. Credit cards typically charge 25% or more.
That rate is almost triple the average returns you could expect from the stock market.
The risk/reward equation of trying to grow your money faster than you’re losing out due to expensive debt is terrible.
Running a credit card debt at 25% while investing in shares is like rowing across the channel on a raft made from chicken wire.
At 7% or even 8% – a very cheap personal loan – the maths might work. (Though I don’t think it’d be worth the risk).
At 25% it definitely doesn’t.
If your already-optimistic 10% stock market returns are sapped by taxes and costs, then even loan rates of 7% aren’t worth thinking about.
And many people would expect much lower returns from a diversified investment portfolio – perhaps as little as 4% to 6% from today’s levels, though investment giant Vanguard for one is a bit more optimistic.
In short – unless you’re Warren Buffett – only mortgage debt is cheap enough, given the risks, costs and taxes, and likely returns from investing.
What about margin? Some gung-ho sophisticated investors use margin debt from a broker to fund property. The risks are magnified because unlike with a mortgage, margin debt is marked-to-market. This means that if stocks fall, you must stump up more assets or else repay the debt. The strategy can work, but it’s well beyond the scope of this article. I suggest 99.9% of readers push away thoughts of margin debt. With a 20-foot barge pole.
Pay off your mortgage: a good, safe option
If you can pay off your mortgage early, you’ll be in a great place financially.
There is no law of smart investing that says you should do anything other than pay off your mortgage first.
Many people would kill to be mortgage-free.
Crucial point alert! Repaying a mortgage is a form of saving. If you pay £10,000 off your mortgage with a cash windfall, it has the same impact on your net worth as putting it into a savings account. When you pay down the debt, your (negative) mortgage balance is made £10,000 less negative. When you save the money, your (positive) cash balance is £10,000 higher. Your net worth – assets minus liabilities – is the same in both cases.
Repaying your mortgage is usually a better option than saving in cash.
The average cash savings account pays 3% as I write – and you can do better if you shop around.
Most new mortgages charge a lot more. So unless you’re still on some dreamy super-low fixed mortgage rate from the old days, you’ll probably earn a higher return paying off your mortgage and avoiding interest compared to earning interest on cash.
Taxing matters
Indeed depending on your personal tax situation and where you hold your savings, the benefits of paying down your mortgage can be even bigger.
Once your personal savings allowance is exceeded, interest income on cash outside of an ISA is taxed.
In contrast, paying down your mortgage delivers a tax-free return via those future interest payments that you’ll never need to pay.
Note that you should still have an emergency fund before investing or making over-payments on your mortgage. Just in case you need cash in a hurry.
If you for some reason you want to hold even more cash at the same time as a mortgage – say if your income fluctuates a lot – then consider an offset mortgage.
Pay off your mortgage to get out of debt early
Paying off a mortgage early will slash the years you’ll live in debt.
Imagine you borrow £250,000 at 4% over 25 years.
- According to the Monevator mortgage calculator, you’d pay £1,320 a month, give or take a Mars Bar.
- Our calculator also handles over-payments. Let’s say you can bring your monthly payment up to £1,600 by overpaying £280 a month.
- You’ll save £42,151 and cut nearly seven years off the life of your mortgage.
The red line in the graph below shows how overpaying accelerates your mortgage repayment schedule:
I’m ignoring a few things here, especially inflation and the time value of money.
If you go shopping with £280 today it’ll buy much more than in 25 years time.
But that would be true too if you kept that £280 in cash or invested it in a fund. So we can ignore inflation when comparing these options.
More reasons to murder your mortgage
Paying off a mortgage early is a great aspiration, and for good reason.
Being debt-free is mentally liberating. Pay off your mortgage early and you experience that benefit sooner and enjoy it for longer.
Other pros of paying off your mortgage include:
- It’s a guaranteed return. You’ll earn whatever interest you save, unlike the variable and unknown returns from the stock market.
- It reduces risk. The smaller your mortgage, the less chance a financial upset like unemployment, illness, or divorce sending your finances spiralling out of control.
- It’s simple. There’s no fussing with funds or shares or anything else. Just throw any spare money at your mortgage!
- You can remortgage to a cheaper rate when you’ve built up more equity in your home. That will save you even more money.
- You may be happier investing in volatile shares when you have no mortgage. You should have more spare cash to do so, too.
- Selling your home is tax-free. If you sell up and go traveling, say, you’re not taxed on any gains you make on realising your own home investment. If you’d instead invested spare cash outside of an ISA or a SIPP, you might. True, the ISA and pension contribution limits are very generous – £80,000 in total in a year – so that usually won’t matter. But it may be best to put big windfalls like bonuses or inheritances into paying off your mortgage, rather than investing outside tax wrappers.
You can be too clever in life. Paying off the mortgage is hard to beat. I’ve never met anyone – aside from online commentators – who regretted it.
Now, personally I run an interest-only mortgage in pursuit of higher returns. While this got hairy in recent years when rates rose, I don’t regret it.
But I would never chastise anyone who chose to clear their debts ASAP instead.
For the average wage slave, being mortgage-free is one step to nirvana.
Invest instead: risks and rewards
Okay, let’s look at the case for investing.
There’s only one reason to invest instead of paying down your mortgage.
You hope investing will leave you richer!
The long-term average return from developed world stock markets depends on how you measure it. But it’s in the ballpark of 7-10% a year.
Real or nominal returns? The 7-10% returns I quoted are in nominal terms – with no adjustment for inflation. Often we prefer to talk about real (that is, inflation-adjusted) returns with investing. But it makes more sense to use nominal figures when comparing whether to pay off your mortgage or invest, because your mortgage calculations will also use nominal figures. Indeed you might even consider your mortgage a hedge against inflation, since inflation erodes the real value of your debt over time.
Returns of 7-10% returns from investing (if achieved) compare well even to mortgage rates of 4-6%.
The catch is you can’t get a mortgage to buy shares.
However by running a 4% mortgage, say, and investing spare cash into the market instead of paying off your mortgage, you might earn 7-10% over the long-term from your portfolio, and pocket the difference.
Is it worth it?
At the very least your portfolio needs to deliver higher returns1 than your mortgage rate for investing to be profitable.
But considering the risks of investing, you’ll want to do much better than just scraping ahead for the uncertainty to be worth it.
Aiming for a high return means investing in riskier assets – specifically shares.
And shares are volatile. Your portfolio’s value will fluctuate. You could suffer a deep bear market where you’re down 50%.
Over a typical 25-year mortgage term, you’ll likely see a couple of very big declines.
Worst of all, there’s no guarantee that even a globally diversified equity portfolio will do better than paying off your mortgage. Only historical precedent.
This is all very different to the certain return you get from paying down a mortgage.
House prices are volatile, but your mortgage balance isn’t. It’s irrelevant if house prices fluctuate when it comes to the returns you see from paying off the mortgage or investing. You’ve already locked-in the purchase price of your home. Paying off the associated mortgage delivers a known return. Investing earns an uncertain one. House prices fluctuate regardless.
How to invest instead of repaying your mortgage
Regularly investing into index funds is the best approach for most.
Investing globally diversifies your money across many stock markets. That way you’re not exposed to any one country, sector, or region.
Index funds will get you the market return at the cheapest cost.
We think a global tracker fund is the only equity fund most people need.
If you wanted to try for higher returns, you could tilt your passive portfolio towards value shares and small caps, especially early on when you’ve more time to make good any disappointments.
There’s no guarantees you’ll not do worse for trying to do better, though.
If you’re a naughty active investor, you’ll have your own ideas about how to invest to beat paying off your mortgage.
Just remember that the ownership of your home could be at stake if you can’t meet your mortgage payments. This should influence the risks you take!
Interesting choice
Suppose you have an interest-only mortgage.
If you can’t repay it at the end of the term because your bets on Bitcoin or blue-sky biotechs blew up, you’ll probably have to sell your home to repay the bank.
Invest wisely!
More commonly you’ll have a repayment mortgage.
Here it’s only your potential over-payments on the mortgage that you’re instead directing into investing.
You’ll still pay off your mortgage over 25 or 30 years with regular monthly mortgage repayments.
So investing whilst running a repayment mortgage is less risky than opting for an interest-only mortgage.
True, if your investing does well you’ll make less money with a repayment mortgage than if you’d gone interest-only.
But it may still have been worth it to reduce risk. You’re already taking on risk by investing in shares instead of clearing your mortgage, remember.
Equities are your growth engine
What about other assets – like bonds? They’re usually part of a passive portfolio, right?
The trouble is that as you add safer assets to counter the volatility of your equities, you also reduce expected returns.
And this really matters here, because you’re pitting investing against the certain return you can get from repaying your mortgage.
Is it sensible to put 40% of your portfolio into a bond ETF returning 4%, when you could use that money to pay off mortgage debt costing 5%?
On the face of it, no – except there’s more to diversification than that.
Up to a point, adding safer government bonds to an equity portfolio will reduce risk (volatility) more than it reduces returns.
And a smoother ride can make it easier to stick to your investing plans.
Still, if you’re going to invest instead of taking the safer return earned by repaying your mortgage, you’ll probably want to invest pretty aggressively.
Equities should probably comprise at least 70% of your portfolio if you’re to have a good shot of making all the risk and uncertainty worthwhile.
On which note…
You might regret investing, if you’re unlucky
Know that there’s no guarantee you’ll do better by investing.
Sure, historical stock market returns suggest that over a mortgage term of 25 to 30 years you’d be unlucky to lose out.
That’s assuming you invest regularly, mostly in equities, and stick with it through the tough times.
But the past is no guarantee of the future.
Also, just like retirees you face sequence of returns risk, especially with an interest-only mortgage.
Because what if the stock market crashes a year before your debt is due?
Course correct as you go
Luckily you have some flexibility over a long mortgage term.
For example, if your investing portfolio shoots the lights out for a decade, you might change gears and shift to paying off your mortgage instead. (As opposed to pushing your luck into a stock market bubble.)
You could even sell some of your bulging portfolio to repay your mortgage early. The best of both worlds!
Avoid early repayment charges. Take note of your mortgage’s fine print. Most lenders only allow a portion of the balance or initial advance to be repaid each year without penalty – for example 20%. You can still sell down your portfolio by more than this if it seems appropriate. Just keep the proceeds in cash, and pay off your mortgage as the terms allow.
Alternatively, you could simply use new cash from your salary to overpay your mortgage. Your existing portfolio could then be left to (hopefully) keep growing.
Watch the direction of interest rates! What made sense with mortgage rates at 4% will look very different if you must remortgage at 7%.
It’s essential to use tax shelters
You’ll want to invest in a tax shelter to keep all your returns. Either an ISA or a SIPP2.
If you pay tax on your investing gains then your subsequently lower returns will struggle to beat paying off the mortgage. Once you take risk into account, it’s almost certainly not worth it.
Note though that there’s a snag with relying on a SIPP to shelter your investments, especially if you have an interest-only mortgage. Access to pension cash is restricted by age.
What if you find you want (or need) to repay the mortgage sooner than you’d expected to, and all your money is in a SIPP?
In that case you’d have to wait until you’re allowed to withdraw money from the SIPP – so into your late-50s. You might then use your pension’s tax-free lump sum to pay down your mortgage.
But until then you’d be stuck.
Investing while running a mortgage for normies
Of course, most people have a mortgage whilst they earn a salary and pay into a pension – and for much of their working life.
Like this they too are funding their pension via that mortgage debt, as we’ve discussed above.
But few will ever think of it that way. Including many of those who criticise articles like this one!
As for ISAs, their tax-free status is such a boon we’ve suggested that opting not to repay a big debt – like a mortgage – or even taking out new debt might be worth it just to use as much of your annual ISA allowance as you can. This way you can best build up your tax-shielding capacity for the future.
ISAs are accessible at any time, too. This flexibility might be crucial if your plans change.
Long story short: think carefully about how and where you run your assets. If you decide to invest instead of paying off your mortgage, you’ll probably want to use both ISAs and a pension.
More reasons to run a mortgage and invest
- Time diversification. Investing in equities is for the long-term. But if you wait until you’ve paid off your mortgage before investing, you’ll have a shorter time horizon.
- Experience. You need to get used to volatility in risky assets. Starting young helps.
- Asset diversification. There’s much more to the economy than house prices. Do you want all your eggs in the property basket while you pay off your mortgage?
For my part, I run an interest-only mortgage while investing mostly in equities. I’ll probably keep doing this until either my mortgage rate rises substantially or I can’t find any markets worth investing in.
Higher rates since 2022 have made it a tougher decision for sure. But I judge it’s still the best long-term strategy for me. As for the near-term, interest rate cuts are coming.
Investing will not be the right choice for everyone – or even most people – and this is not personal advice!
So do your own research. Properly weigh up the many benefits of paying off your mortgage instead.
Mortgage repayment calculator/spreadsheet
To help you decide whether to pay off the mortgage or invest, we’ve created a calculator embedded into a Google spreadsheet that can help you calculate and visualise the potential returns.
(Thanks to Monevator reader ArnoldRimmer for the initial work here.)
Open the spreadsheet in a browser. Then make a copy of the sheet. You can now edit your copy to play with the numbers for yourself.
If you share the sheet with friends or family we’d love it if you’d send them to the original sheet please. It includes a link to this article, so they can read all the important background information.
The six yellow cells are the ones to edit to try out different outcomes.
The spreadsheet runs the numbers on four scenarios:
- Repayment mortgage. No extra savings – you spend your spare cash.
- Repayment mortgage with mortgage over-payment.
- Repayment mortgage, but investing instead of making over-payments.
- Interest-only mortgage. Investing instead of any mortgage payments.
You input the mortgage size and term, interest rates, amount of cash directed to either over-payments or investing, and your expected return.
The table below plays out those numbers over 30 years.
The first four columns shows your growing net worth from repaying the mortgage and/or investing. The final two columns shows your portfolio growth, without netting off the mortgage balance.
The cells flip to green when your net worth becomes positive and you repay your mortgage – or you could do so from (tax-free) investments.
Remember: real-life returns are not smooth. Calculations like this can only give an indication of how an annual return would compound over time. In reality annual returns would be lumpy. Some years they will be negative. Perhaps very negative. Your investment portfolio will go down, maybe by a lot! Do not expect an easy ride.
Our spreadsheet lets you explore what’s possible – but it cannot map the future, which is unknowable.
Scenario planning 101
For example, the spreadsheet tells us that a £250,000 mortgage charging 2% over 25 years with £250 a month in either over-payments or investing at a 7% return delivers:
You can see with this example that investing whilst running the mortgage would leave you much better off (Scenarios 3 and 4).
But simply over-paying your mortgage is financially good, too (Scenario 2).
And even in the first scenario you had £250 a month extra to spend on fun. The extra gains in the other three scenarios didn’t come for free.
Perhaps you object to this interest rate or investment return? After all, mortgage rates are now much higher than 2%, and are probably set to stay higher.
That’s fine and I agree. It’s the whole point of making this spreadsheet editable.
With this update I’ve increased the default mortgage rates to 4.5% and the mortgage size to £300,000.
But you can create your own copy and try out whatever figures you think are realistic.
Remember real-life investing is volatile and uncertain, whatever numbers you use. If it wasn’t then this strategy would be a no-brainer. It’s not, because the potential downside is real, especially over shorter periods.
Our spreadsheet is a guide to what might play out over 25-30 years – a hypothetical future seen through a rear-view mirror.
You mileage will definitely vary.
So… pay off the mortgage or invest?
The decade or so after the financial crisis was very kind to investors. Most markets did well, especially the heavyweight US.
At the same time – and not coincidentally – interest rates stayed low.
In hindsight it was a great time to invest rather than pay down a mortgage.
I’d even argue this wasn’t completely unforeseeable.
After the March 2009 rout, the odds of superior returns – greater than 10% – from shares over the medium-term looked pretty good.
I wrote that year that a decade of 20% a year returns seemed possible, given the crash we’d just seen.
If you invested the money you saved in lower mortgage payments in those gloomy times, you deserve applause – or maybe your own hedge fund!
But were the record numbers then paying off their mortgages chumps?
I don’t think so.
As I said at the start, paying off your mortgage is never a bad idea. There are financial benefits, and it reduces risk. There are non-financial wins, too.
One lump or two?
Remember our spreadsheet only shows smooth growth over the years.
In reality it would be a wild ride of unpredictable annual highs and lows.
And markets today look much more expensive. Interest rates are higher. It does not seem such a propitious time to fund an investment portfolio via a mortgage, compared to 2012 say.
For disciplined investors with broad shoulders and girded loins, running a mortgage while investing will probably still win in the long run.
But do your research, think about risk tolerance, and make your own mind up.
Note: This article was first published in 2011, heavily updated in January 2022, and updated again in September 2024. As usual I’ve retained all the reader comments below – they provide fascinating insights as rates fall and rise over time. But do check when a comment was posted for full context.
Great article. I’m facing this dilemma at the moment myself and had a crack at figuring out what to do on my site:
http://simpleinvestingadvice.blogspot.com/2011/02/pay-off-mortgage-early-or-invest-more.html
Couldn’t come to any decent conclusions myself. 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…
Well said – although we need to recognise that this property ownership thing is a particularly anglo-saxon bias. For Brits and Yanks (as opposed to many Europeans), buying a house and getting a mortgage is a *big thing* and it a first real major investment in their ‘place in society’.
Paying off the mortgage is a financial and psychologic challenge – because it usually means changing your mind-set about spending money: most people are shocked by the thought of adopting a more frugal lifestyle, as it is bound up with a different philosophy of life.
But the basic message is sound, I think (for the reasons you have stated) – get rid of debt before you start investing.
paying off mortgage early dull city?
not when you can now see your mortgage account on-line and see interest debt payments fall each month or day as well as capital balance.
im on track to clear in 4 years
the disposible income i will have will make me comfortably off–now—-not in 25 years time.
Not the most widely accepted idea, but very sensible in my opinion *and* you back it up with facts!
Enjoyed this post thoroughly!
By investing (when you have a low mortgage rate), you are increasing your liquidity. It is much easier to meet mortgage payments if you suddenly lose your job when you have a year’s worth of mortgage payments available.
Another time not to rush paying off the mortgage is when you’re in the last few years of a fixed mortgage. Due to amortization, you’ve already paid the interest and now your payments are just primarily going to principal, so there’s no rush now.
Great article! Very well balanced. I have recently switched from investing to paying down the mortgage so this is a very comforting read.
@George The danger in considering your portfolio as a (backup) “emergency fund” is that its value is likely to be strongly correlated with your job security; i.e. a recession is the time when you are most likely to both need to cash it in, and to find it has lost a lot of value.
I think there is a something to be said for attempting a kind of counter-cyclical investment strategy: pay off mortgage when equity market PE is high, buy equities when PE is low. (Substituting PE for PE10 or whatever is to your taste)
@Lemondy – If one has a year’s worth of mortgage payments stored up in the investment account and the market loses 50%, then one still has 6 months worht of mortgage payments available.
Additionally, I use stop losses, so in an economic downturn, the stop losses are triggered before much capital has been lost. My account is currently worth 3 years of ALL my expenses. This is the security that liquidity offers and I would not have it if I had put the money towards the mortgage.
Personally I fill up my Stocks and Shares ISA each year rather than pay down my BTL mortgages so that I;
a) keep a liquid reserve fund to pay emergency mortgage payments if I lose tenants
b) I *think* I’ll be able to make more than 3% on the stock market (which is my combined mortgage rate)
c) I don’t want to make both my BTL properties any more profitable so if I put the money into an ISA I essentially avoid the tax I would pay on making a profit.
Didn’t we have ISA mortgages in the early 2000s which are pretty much this idea? Once upon a time you were expected to have a method of paying down the capital of a mortgage as well as servicing the interest (nowadays there seem to be crazies who just pay the interest). One of the alternatives to a repayment mortgage was an interest-only mortgage + a stocks and shares ISA.
I like Lemondy’s idea of buying during low PEs and paying down during high PEs!
There’s a small time bomb out there called “pension mortgages” i.e. using your pension to pay off your mortgage.
I wouldn’t be surprised if they’re still being sold.
Super comments everyone! 🙂
I would just observe that we shouldn’t dismiss any strategy just because it’s not worked or it’s been linked to dubious products in the past. If we did we’d never invest or save in anything – even cash!
It’s true, for instance, that many endowment mortgages failed, and that on some level they combined investment and mortgage lending. But providers wrapped everything up in an opaque product and opaque operation, and too many products extracted the bulk of the value for the provider, and/or were poorly balanced across customers (so winners were effectively paid for by losers, rather than by taking their chances in the wider market).
There’s a big difference between doing that, and taking control of your own finances, driving down costs, assessing your risk against public benchmarks like the equity indices — and constantly re-assessing those risks (and also re-assessing the potential rewards, as Lemondy suggests).
I agree that pension mortgages, ISA linked mortgages and so on have been poor investments for many people, either due to timing, insufficient saving, or them being shoddily constructed.
But I’d also wager anyone who read the post above and our comments that have followed has done more research than 90% of people who took them out, at least in terms of understanding risk/reward, rather than just listening to an adviser tout dreams for his percentage of the fat.
I think we need to at least consider all the tools at our disposal in this quixotic quest of ours for financial independence!
Pay it off!! Thats what I say. I am no genius with investments but my 30 year will be paid off in 14. Once it is gone I can invest that money into savings areas that will allow me to retire with a portfolio that will actually keep me from being a pauper. Alos, it is freedom financially in a very special way that I am looking forward to.
Wow, I love this blog!
I would love to see a blog post about buying a house outright vs buying a house with a mortgage. or what to do with 400k.
Thanks!
Interesting article and follow on comments. I would be interested to explore the exit strategy using investments instead of simply paying off the mortgage. Do you use your investment lump sum and pay off when it reaches the mortgage value? Hopefully before the 25 year repayment mortgage period.
Will the investments be on a high or low at that time? What happens if just before you get to your last few hundred quid to complete the market crashes? Early on with £10K saved a 30% fall, whilst not pleasant is less worrisome than a 30% fall when you have £200K and less time to recoup the loss. Arguably this might be the time to be investing! It might be a no brainer if markets have just quadrupled just after your £200K is saved making it 800K but where are we today ……. not so sure, will you be in 25 years time? So not knowing if the market is on a high or low (without hindsight) what is the plan?
Do you use the “income” to start overpaying from, say, year 10 or from the beginning with overpayments becoming bigger and bigger as time goes on.
Eventually it has to be repaid and what about the” wasted” ISA allowance if you take it all out as a lump. What would be the best way to exit this?
@Gerry — Sorry, missed your comment. Personally I would not rely on the investment returns to repay the money you borrow. You’re doubling down on the risks like that, as currently there are no safe investments that are guaranteed to return more than the mortgage rate for 25 years. (It might be different if gilts were yielding 8%, say, and you could get a mortgage for 5%. But that’s very unlikely).
Also, you don’t want to rely on the markets playing ball in the few years when your mortgage becomes due.
Much better to make heavy cash repayments and slowly reduce your gearing and your risk as your time horizon shortens, I feel, if you decide to go down what is already a risky path.
Having a £300,000 lump sum with £200,000 in investments to pay it off after 25 years (when maybe the later was £400,000 a few years before) will leave you feeling sick as parrot as well as far poorer to boot, and potentially at risk of losing your home.
I think the key variables are
1. how much you currently have invested in high risk investments (equities)
2. how much you currently have in low risk investments minus the mortgage value
3. how much you expect to earn in future before retirement
Most people are going to have 3. much bigger than 1. until around 20 years before retirement. So these people will just want to invest in equities and not pay off mortgage. But in the next 5 years, they are probably going to want to focus on paying off mortgage. After that they will want to invest in a combination of 1 and 2.
Wow, I love this blog!
I would love to see a blog post about buying a house outright vs buying a house with a mortgage.
Also the post was written a couple of years ago, what do people think give current market performance and mortgage interest rates?
I have 400k, looking to buy a place to live for 550k and cant decide what to do. (11k ISA allowance already used)
#get a 5 year <3% mortgage and invest in S&S's
#get a 5 year <3% offset mortgage and invest some in S&S's and some in the offset account
#get a 10 year <5% mortgage and invest in S&S's
#play it "safe", put all the money in the house and pay off the mortgage like "normal" people.
Comments?
Thanks!
Investor, if I were you, I would hammer down the mortgage instead of investing. Many people would disagree, with interest rates so low. But with mortgage interest rates as low as they are, you can hammer down on the principle owed far faster than you could if rates were high.
Most people just get used to the idea of having a mortgage (almost) forever. But seeing your net worth increase with every extra payment would feel amazing.
Yeah, I’m a wimp, but that’s what I would do. The stock market is never guaranteed, but the return from paying down your mortgage is. If you are paying 3.5% interest, then paying it down will be like making a 5% guaranteed pre-tax return. And with rates so low, you could really hammer that mortgage down before rates rise. They won’t stay this low forever.
When I had a mortgage, I didn’t invest. Yeah…I’m old fashioned. But it works!
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. The interest on the mortgage is a deductable expense from the rent. The interest on any investment might be taxed in different ways. 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 the mortgage repayment. So any ideas on what growth investments are a sensible risk balance to keep the capital intact for 6 years and grow by 3% after transaction fees?
Personal loans are now cheaper than my 10 yr fixed mortgage deal taken out during the credit crunch. My mortgage 5.39% 10 years running out in 2019 reverting to standard variable, First Direct are advertising 4% Personal Loan seems a no brainer to take one out and shorter the mortgage. I suspect more people are in the same position.
If you choose to invest instead of paying off your mortgage then consider this question – would you be willing to refinance the equity out of your mortgage (thus increasing your debt) to add to your investment accounts? If not, then you are logically inconsistent.
Every businessman or woman borrows to invest. As I said in my previous post, that restarted this thread, profitability is about risk and tax , but I could add that it it also about the effort put in to make the capital work.
In my case I decided to mortgage my house to buy another house that I now rent. This was not a simple investment decision as it was instigated by a family situation. But, even so, it was a profitable investment with rent easily paying the mortgage and capital gain accruing as well. Another family situation meant I was now able to pay off the mortgage or put the money into equity or bonds or even buy another property. This was the more complex decision as IHT, CGT, IT and risk in timing the stock market were all factors. In the end I decided to pay off the mortgage, but given a different perceived stock market situation , I might have moved the other way. The mortgage was due in only six years, but, if it had been longer, I might have moved the other way. If the BoE had not signalled a rate rise I might have moved the other way. Anyhow, I am now sleeping easier, but if I had been greedy or younger I might have moved the other way….
kc,
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.
Investor,
I am currently thinking about making overpayments to our mortgage but would like to double check something beforehand. I have one mortgage payment per month but in reality this is comprised of two loans. After initially borrowing 127k, we remortgaged a further 10k a few months later for furnishings. The total current mortgage is 122K at 4% SVR and current repayment £688. However the monthly payment is made up of £635 to account 1 and £53 to account 2. If I begin to overpay, to which account should I direct the overpayment? I’m guessing it doesn’t make much difference if they are both at 4%?
Thanks in advance
Id go for lower balance so you can snowball debt repayment ,once payed off
but technicaly I think its higher balance
@Paul — I can’t really give you any personal advice about something specific like that, as I’m not your financial adviser etc.
If it were me and I had two mortgages on the same rate, as a fan of simplicity I’d clear the smaller mortgage to get it out of the way. (And I’d try not to borrow to furnish in future, even at 4%! 🙂 )
Thanks investor and Stuart, enough said. At least I didn’t buy a new car, I can live with the furnishings mistake at 4% 🙂
You need to compare the expected investment returns against the interest rate on the debts. The average annual return from that is 11% a year. Never mind some years it will be less (like the crash a few years ago) and sometimes it will be much more (like this year). The AVERAGE annual gain over the long arc is all we care about, and that’s averaged about 11% a year since inception.
Now, remove your inflation figure from that. The standard amount most people use is about 3% inflation per year. So now, adjusted for inflation, you can expect to make 7-8% “real money” on a total US stock market investment. Since 7-8% is greater than the 3% mortgage, it makes more sense to put your money towards the investment than towards the mortgage.
There is a school of thought that says you should invest by mirroring the investments of the ultra-rich, eg Warren Buffett. There is some soundness to this approach – the ultra-rich have access to information we don’t, and by their very actions they can change the financial landscape.
Let’s say I told you that Buffett has a 17 billion dollar mortgage. Because of various business decisions, he is actually increasing that mortgage value every year.
What if I also told that Buffett had a magical power that could lower all mortgages at will. I wouldn’t have to tell you that Buffett doesn’t like losing money, and would rather use his magic power than paying back the full mortgage. Wouldn’t getting a mortgage and enjoying Buffett’s magic power when he used it be cool?
As it happens, if you replace “Buffet” with “US Government”, replace “Billion” with “Trillion”, replace “mortgage” with “national debt” and replace “magic power” with “the ability to control inflation”, you have something pretty close to reality. Nominal debt at low interest (not to mention tax deductible interest) is a good thing if you use it for investing (patience and safety cushion may be required).
I am squarly in the investment camp, but i do recognize the choice is not for everyone and for some paying down the mortgage is a better option. To me, this is a simple math problem and there is a very high probability you will come out ahead in the long run by investing. But this assumes you have the self discipline to actually invest the extra money every month and not spend it. I also personally believe that inflation will eventually go higher. If so, your monthly mortgage payment will look like a greater and greater bargain, meanwhile your stocks/mutual funds are likely to keep pace with inflation and give you a stronger return.
Bottom line, math says to invest but psychology is a factor and if you value the thought of owning a home free and clear you may want to do otherwise. From a math perspective just ask yourself why apple etc have been issuing debt lately even though they have no need for it? Cheap leverage can really juice returns. Your mortgage is cheap leverage.
I don’t think it’s quite as straightforward as saying “math always wins” when the math isn’t always known. If you’re bearish on the market in the near-term and believe your $85k may be reduced by 40%, the math may be on your side to sell those investments now, lock in your return on those gains and then lock in an additional 2.75% gain by paying off the mortgage.
You’re making assumptions either decision you make, which means there is definitely an emotional side to it. Being more conservative and pessimistic about the market and your future job prospects will influence your “math” one way while being aggressive and bullish will send you another direction.
As has been mentioned in plenty of the threads, either way you look at it is a win-win. The important thing is that you’ve put yourself in a situation to make the decision, as long as you keep that up, you’re probably gonna be all right regardless of what happens with the stock or housing market.
It’s not purely a financial decision.. It’s more about risk.
Lets say the markets tank this year.. we all loose 40% of our investments and you both get laid off.. (it could happen). Wouldn’t you rather be free from having to find the mortgage payment each month?.. Of course you would.
So the conservative approach is to pay off the mortgage.
But your right.. looking back this last year.. if you’d know what the markets would be doing there is no way you would have paid it off.
Now you have a pretty low rate so I’m fairly ambivilent which way you should go.
But like the poster above, the sense that YOU own the roof over your head… Priceless…:)
Keeping the mortgage and investing is the mathematically sound decision.
You will very likely end up with more money in your pocket if you pay off that mortgage as slow as possible. If you’re okay with the extra added risk (and I’d say the market returning less than 2.75% long term is a pretty low risk, IMO – many high quality companies pay dividends higher than that, and that’s then not counting the stock price going up at all), I wouldn’t pay the thing off.
It depends on the person.
I have the money and choose not to.
Heck, I choose not to pay off my student loans, which are now down to only £900, while holding six figures in cash.
Some people like the warm fuzzies they get from being debt free, some like the warm fuzzies they get from optimizing their investments/debt mathematically. 🙂
A word of caution about that “math.”
The “math” only works if the markets act the way you expect them to. And even then, it’s not as clear cut as some would have you believe (I won’t get into that can of worms, but a lot of the analyses I’ve seen that advocate keeping a mortgage are not very good).
I paid off my mortgage (started in Feb. 1996) in 1999. The “math” said that was a bad decision. But the money wasn’t all that big a deal to me as I was already a millionaire, so I chose to just pay the darned thing off.
As it turns out, from 1999 to Feb 2011, the stock market had essentially no growth. In the end, I did better by taking the money out of the stock market and paying off my loan early.
The “math” was wrong.
By keeping the mortgage and investing, you are assuming a level of risk, and you may not win if the expected returns don’t materialize.
Pay it off early, and you know exactly what your rate of return is with no risk.
Plus, of course, it feels GREAT to be completely debt free. You just can’t put a dollar value on the kind of freedom that brings.
The maths can’t be known. But playing the odds, most of the time you’ll do far better and have more money in your pocket and more liquidity if you invest it. If you happen to hit the one wrong time period, yeah, paying it off could make more mathematical sense. But that is the minority of the time.
I’d pay it off, but that’s just me. My mortgage is a risk-free 3.5% investment with no tax liability, essentially. You can’t get that anywhere else right now. A good hedge against equities, in my opinion. It decreases your monthly expenses, too, which is invaluable peace of mind in my book.
I’d invest in the market. If history is our guide, chances are over the next 10+ years you will get more than 6%
Of course, either strategy is a decent place to put your money. DO what is comfortable for you.
Given the market is overvalued right now and we are in a 5 year bull run the safe bet is to pay off your mortgage. Money is cheap to borrow right now and too many people are using borrowed money to play the market. History has shown when people over leverage themselves in the market the market yields often much lower during those periods.
But the good thing playing the market is that if you receive dividends which are taxed at a lower rate than your rental income if you were to pay it off.
Ultimately its a tough call. You could go both ways and it wouldn’t be the wrong choice.
What I would do in your shoes? which I kinda am as well.
I would pay 50% of the mortgage off, use 20% to buy another cheap property and then invest the last 30% in the market. Once there if a good market correction then put more money into the market from borrowing against your first rental. I feel the housing market will rebound in the next few years so now is a good time to buy I am thinking.
best of luck!
Ignoring the effect of market timing (as in assuming neither stocks, bonds, or real estate have a significant bull run), you are *almost* equal regardless of what you decide to do.
If you pay off the mortgage now, you will have a ton of cash flow each month… which you will then invest.
If you keep the mortgage, you will have less cash flow each month, and you will slowly/consistently build equity until the mortgage term is over.
Mathematically, there is a benefit to keeping the mortgage if you think you can beat the return on your investments in the market, however, you’re not really comparing apples to apples as a guaranteed 3.5% savings is NOT THE SAME as a 3.5% return at risk in the market.
In theory, you can outperform by levering up at the bottom of the stock market (i.e. 2001, 2009) and investing the extra cash, but since we are not wizards, there is no guarantee you will be right… only time will tell.
The opposite is also true, you will underperform if you lever up at the top of the stock market (i.e. 1999 and 2007).
Have an offset mortgage I can borrow up to £170k on.
Borrowing on this mortgage is now £40k, which is totally offset by savings, so no interest charge on the mortgage.
I continue to pay the mortgage down by £2k a month, so will be mortgage free in 20 months.
I don’t invest apart from in ISA’s, savings accounts and the offset itself of course (effectively earning 3.69% net).
Interested to know what folks would do in my situation.
Thanks.
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
Investing may earn you more based on oft-quoted long term averages but, consider this, 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, and that is not even factoring in inflation.
Consider also the possibility of experiencing a period of unemployment during this period whilst still having to meet your mortgage repayments. Suddenly, leveraging your mortgage to invest doesn’t seem so appealing after all.
I believe someone once said “rule number 1: don’t lose money, Rule number 2: don’t forget rule number 1”. You have to admit he has a very good point.
You made a great, even-handed case for paying off the mortgage early vs using the extra payment amounts for equities. I have one quibble with this quote, ” But historical market returns suggest that over a long period like 25 years, you’d be very unlucky to lose out, provided you invest regularly in equities and stick with it through the tough times.” We need to constantly keep in mind that studies have consistently shown that whatever the historical market returns, historical individual investors returns are far less. Studies show that very few investors have the willpower or stomach to invest regularly and stick with it through thick and thin. One of the biggest mistakes of individual investors is over-confidence and thinking everybody else lacks willpower and stomach.
Any one have comments about a similar but reverse situation…..
A rental property, fully paid off with no mortgage. Rental income provides sufficient income to live off, not flash cars and Maldives every year, but a decent existence.
Said property took most spare cash to renovate.
To remortgage this property is tough, best rate I’ve found is 3.4% for 2 yrs before reverting to the SVR (6.6%). However fees for this commercial type mortgage would be about £5500! (1.5% fee, broker fee, valuation + legals)
So in my opinion, try and get a small(tax deductible) mortgage on the property is costly for only 2 yrs of “cheap” rates.
The other option is to use the offset mortgage on the personal house to replenish the coffers. In essence borrowing to invest, which does fly in the face of common sense!
Interesting to revisit this article since after it was written to see what has actually transpired.
CUKX has returned about 6% annualised. Slightly better than mortgage rates available at the time of writing, but probably falling short of most investors’ expected returns, and probably not really worth the 1-3% risk premium involved.
@Vano — That’s a valid comparison to use in that it’s a UK index, I suppose, and we’d be talking about UK mortgage rates. But otherwise pretty spurious IMHO.
Monevator has been hammering home the message that private investors should be investing globally for many, many years. You shouldn’t have all your money in your home market – or any other market for that matter.
Looking at the SWDA — a popular global tracker ETF — there the CAGR has been over 13% or so since the article was written.
Much more appealing!
Of course that’s unusually high.
Also the return would come down to the extent that an investor chose to diversify the portfolio into bonds and other lower-returning assets. (Not something that makes a lot of sense in size if you’re also running a mortgage, but maybe 10-20% to dampen volatility).
Even then the return should have been around 10%+ or more.
Of course this was a great period to be an investor, and we only know all this in hindsight. Everyone saying it’s a far riskier strategy is 100% right.
I agree and say so myself.
Cheers!
Please note this article has been totally updated as of January 2022.
Some of the comments above are timeless, but others reflect a bygone age when we rode penny-farthings and invested in palm plantations.
New comments reflecting today’s realities or thoughts on the calculator very welcome! 🙂
I think alot also depends on the level of mortage vs equity in the home and to income and to the value of investments. I currently have 3 x my mortgage invested across isas and pensions. My mortgage is less than 2x joint salary between myself and my partner. I view it as a 30% margin loan. I’ve got 2/3 of the 3 mortgage in an isa.
I’ve just remortgaged fixed for 5 years at 0.99% at 56% ltv. I’m interest only and will be piling as much as possible into both isas and pensions for the next 5 years. I’ll review a couple of years out and see how I’m doing at that point by which time I should be able to take 4% a year from my isa to pay the mortgage down. Leaving the capital intact. That’s the plan anyway!
Ha, some of the comments were confusing me, until I noticed the dates on them…
@TI – “Some of the comments above are timeless, but others reflect a bygone age when we rode penny-farthings and invested in palm plantations.”
Well, I’m still riding my penny-farthing and am still smu… eternally grateful we liquidated ISAs and put the money into the mortgage offset account, where it covers 90%+ of the capital. Mortgage payments come from the offset and I guess in about 10 years we’ll have find another £4/5000 to pay the rest off. Sure, we’ve missed a boat load of returns. But we wouldn’t change our decision.
The mortgage-free feeling can’t be beat!
And if there’s going to be a correction or bear market even, maybe the decision will feel even better. But who cares. Whether a decision was the right one or not is not decided by its outcome (which is unknowable obviously) but by the process. The process was we thought we’d be relaxed and content afterwards. And for the 7 or 8 years since, we have.
YMMV.
I pursued the heart of head policy of notionally paying off the mortgage over investing spare funds. As soon as the mortgage was cleared it did free up additional funds for investment purposes.
I’ve been prioritising pension investment due to it’s tax friendly nature but I mostly was also able to fund my ISA each year. I hold a fully offset interest mortgage and have often thought about drawing down funds for investment.
However, I’m aspiring to early retirement and might need to draw down the offset funds for bridging the gap until my pensions are accessible. My hope is that my ISA continues to grow (recover from the dip of last week) and I can either repay the mortgage with ISA funds or from pension tax free funds.
I’m in the buy vs rent-and-invest first time buyer calculation right now, and honestly rent and invest still doesn’t stack up.
If the value of your new home goes up just 1-2% a year then it will trounce stock market returns over 5-10 years compared to renting , even if you otherwise invest a 20% deposit, and even if your repayment mortgage is quite a bit higher than your rent and you’d invest the difference while renting.
Overpayment calculations are a different beast. Personally I don’t think it’s clear cut. One reason you might want to pay down your mortgage is rate risk. If you fix for 5 years say, then you have 5 years in which to invest vs a variable rate mortgage, but that’s still pretty short for investing in equities, and you’re paying a premium to fix. If you go variable rate and rates spike, and stocks crash at the time, then you’re doubly stuffed.
The equation was never mathematical for me – it was psychological around the benefit of being able to say “feck it” to my job if necessary at the soonest point possible even if I wasn’t going to exercise that option.
That plus offset mortgages were a brilliant innovation – I could freely overpay yet have the rainy day fund still available and/or a cash pot if I did want to switch into investing or BTL etc. Of course when you see how rapidly you can get to “feck it” day (when you can then start moving onto what I think of FIRE second act of building the other capital) then it’s a powerful incentive to stay at it.
Of course for those that are spenders at heart then mortgages are probably essential financial discipline and the property market will generally have equally or moreso rewarded leverage to the maximum (if those people can ever bear to downsize or wear the CGT on their BTLs).
I remember reading this article a decade ago and the principles helped me out no end on my journey.
I’m liking the google spreadsheet too. Nice and simple to use.
I tested it out just to see what my numbers look like and only 2 years difference between interest only and current mortgage rate. It made me feel better about not aggressively pursing interest only.
Thanks for the revamp.
I went with the pay it off rather than invest. Mortgage-free for most of the last decade now – and still a feeling that never gets old.
Plus the lack of a mortgage meant I was able to massively ramp contributions to my pension and take advantage of the tax benefits there. It’s also meant I was able to take more risks at work (inc going part-time and remote working).
Finally, it just felt simpler life administration wise – I’ve no interest in becoming a part-time financial advisor to myself.
Thanks for updating this – it’s very timely for me as I’m just going back and forth on this myself.
For what it’s worth, I totally agree that this is one of those very individual personal finance decisions, rather than one where it make sense to make a blanket ‘most people should do X’ statement (and you’ve very carefully avoided doing that!). Some of things which I’m mulling over personally are:
– Would the invested money be going into a tax-efficient pension/ISA or a GIA? The former feels like an easier call than the latter, if only because I don’t want the paperwork of having a GIA.
– How big might the mortgage payments become in future if rates have spiked when our fixed term comes to an end in a few years, and how much would the overpayments move the needle on that? I quite envy the Americans with their 30 year fixed rate mortgages, as it seems to eliminate this concern.
– how tempted am I to be a naughty market timer and hold some ‘dry powder’ as premium bonds paying 1% tax-free rather than overpaying a mortgage at 1.5%, just in case there’s a market crash / good opportunity to invest around the corner? Suspect I’ll lose Boglehead points for that, but the difference in interest rates is marginal.
I paid off my mortgage early, back in the 1990’s and always regretted it (or not getting a bugger one and moving to a more expensive house). But when you realise that, with a 6% interest rate, a house with a £500k sticker price would actually cost you £1,000,000 over 25 years, I can see why I did it.
Thanks for the comments all — will reply later but I have a quick query.
I’m assuming (not least from comments above!) that people have been able to create a copy of the spreadsheet and then edit their copy?
I am getting share requests to the spreadsheet from readers, you see. I’m presuming those people haven’t read the instructions to save and edit, rather than that I’ve messed up the access rights?
Cheers in advance!
TI
Nice re-work.
Re: “Real-life returns are not smooth like in a spreadsheet” excellent health warning. Some forward reference(s) to the impact of volatility on returns might be helpful.
In my experience, mortgage over-payments may not be smooth either, e.g. the use of a windfall such as an annual bonus or similar.
Personally, I would say that the way the spreadsheet presents the outstanding mortgage balance for scenarios 3 and 4 is not overly clear; for scenario 4 the mortgage balance is £250k until you decide to clear it, and for scenario 3 it is the same as scenario 1.
@TI (#59):
P.S. I had no problem making an excel copy and then fiddling with it ….
Yes, making a copy works just fine. Perhaps an additional, prominent message at the top might help – ‘Head to FILE > MAKE A COPY to plug your own numbers in’ or some such?
Thanks for the resource – really helpful!
@Jon @Al Cam — Thanks so much. Yes, I’ll try changing the messaging on the sheet!
@Al Cam — I’ve changed the box above the four scenario tables to reflect your comments. Is that clearer (or more confusing?)
Smart Money Tools has a seemingly very good Rent Vs Buy calculator :
https://smartmoneytools.co.uk/rent-vs-buy/
Hi Investor,
Yes, I am able to create a copy of the spreadsheet and edit my copy.
Cheers,
SMT
Lots people commented saying invest with a mortgage is risky because one could lose their job and have their portfolio value halved in a recession.
However, in my opinion, invest with a mortgage is far less riskier than overpaying the mortgage in this scenario. If the person had made overpayments and didn’t have any other liquid asset, they will have trouble to meet the monthly repayment and risk facing repossession. But if the same person had invested in a global equity tracker fund instead, they would then be able to sell some of it each month to meet the repayment. Even if the person has had emergency fund in cash savings, the same would still apply as soon as the cash runs out.
As you can see, invest is less riskier if you are worried about losing your job. Sure, selling at a loss is less than ideal, but that’s still better than risk losing your home, isn’t it? Also, please keep in mind that the investor will only be forced to sell just enough to cover the repayment. They certainly don’t need to cash in the entire portfolio and realise the 50% loss. The remaining portfolio will still enjoy the market rebound if that is to happen.
@Fatbritabroad Interestingly I recently sold my business and have adopted the exact same strategy as you have. Instead of paying my mortgage off fully, I hit it with a large chunky payment. I now have 33% LTV on a 5 year fixed interest-only mortgage at a comparable rate. It looks as though we’ve perhaps fixed at the most perfect time 🙂
My strategy (like yours) is to keep investing for the next five years and see where it takes me. Hedging our bets of sorts. I think it’s the happy medium between both strategies and there’s always an option of paying off if required.
Id be keen to see how things progress for you long term 🙂 Do keep in touch!
@TI (#64):
Sort of works – i.e. it is clear if you understand what the sheet is doing.
FWIW, I would have been tempted to do the following to the original layout:
a) add two more columns showing investment projections for scenarios 1 & 2 – all zeros
b) add another block to the far right hand side called something like “net position” (more below re net) and have a column for each of scenarios 1 to 4 – which would be the current block with four scenarios
That way you can hopefully clearly see for each scenario each year:
1) your mortgage balance – and compare it with statements, etc you receive
2) your investment holdings, likewise
3) the overall [current or future] net position – which may need further work/thought if your investments are held in e.g. SIPP’s to account for tax due when drawn, minimum age they become accessible, etc
Having said that, these changes might just serve to make it more complex/confusing too.
The only observation in the article I have an qualms with is around the relative benefit of ISA allowances when looking over 20+ years. ISA’s are only just over 20 years old, and the allowance was very limited until 7 years ago. We’ve seen continued action by government to decrease the amount of tax that can be avoided through pensions, and I think it’s very likely ISAs will be “reformed” as well. This makes me very hesitant to make long term financial decisions to prioritise maximising my ISA allowance; it simply doesn’t seem plausible that in 20 years time my partner and I could have a couple of million, in today’s money), in S&S in a tax shelter (and we haven’t and aren’t maximising our allowance) while the government is already looking at how to generate more tax off capital gains.
I really like the fact you proactively defended the pay down the mortgage choice; rather than just a throwaway line. For many, if not most, it’s an excellent option and very easy.
Great sum up article. Thanks. Exactly what I needed to read!
@JohnG (#70) It’s fairly likely the government will change the ISA rules in the next 20 years, but I highly doubt any change would affect the money already in the ISA wrapper. What’s more likely to happen is changing the contribution rules or introducing a cap on the balance in ISA (like the LTA for pension). Based on that assumption, it makes more sense to make use of the ISA wrapper while it’s available.
I take it the section regarding “Is it sensible to put 40% of your portfolio into a bond ETF returning 1%, when you could use that money pay off mortgage debt costing 2%?” was a recent addition, because it is definitely worth discussing in this context. Even more so as rates start to climb and longer maturity bond ETFs get hit in value.
My own dilemma is whether to use the 25% tax free lump sum from my SIPP to pay off what remains of my mortgage around age 55, even if I don’t start drawing any pension income at that time.
With this scenario in mind I am building up gradually to an approx 25% allocation to short dated bonds around that age, so I won’t have to sell equities at a bad time. Current allocation to short dated (sub 5 year) high grade bonds is around 15% as I’m a few years off.
The other options are, instead take the 25% lump sum and invest into ISAs for tax free income, and/or downsize house by the value of the outstanding mortgage just to be rid of it.
On the other hand staying leveraged to UK residential property has worked out well so far, especially given the continued race for space that remote working has enabled. And once you downsize it is very difficult to move back up the ladder again, so not a decision to rush.
ISA’s are a bit too generous and I can see a LTA or similar being introduced. I agree this is unlikely to be retrospective so some version of Fixed / individual protection should apply to those already above this “limit”.
I’ve managed to put in the max for about 12 years, for me and my wife – the IO mortgage certainly helps with funding this – I’m running down all GIA to fund and will likely recycle SIPP money to fund for ages 55-60.
Post 60 I intend to spend rather than save further….after so long being frugal-ish it may take a bit of effort.
~10 more years to contribute and I’m hoping to hit a £1m (between us)
B
@SemiPassive (#73) It doesn’t make sense to gradually shift your pension portfolio to bonds 5 years prior to age 55, unless you have to pay off the mortgage at age 55 without delays.
If your mortgage can run into age 65, and you do nothing before you can access your pension funds at age 55, then by the time you are 55, there’s two possibilities:
– the market is normal, you can sell and pay off the mortgage; or
– the market is down, you wait for at most 10 more years for recovery and then sell and pay off the mortgage.
As you can see, there’s very little risk as long as you can remortgage for 10 more years. In a down market, you ideally would remortgage to interest only, so you can take advantage of the recovery by putting more into your pension/ISA.
@Alex, I guess I don’t HAVE to pay it off at 55. It was a goal though. The mortgage term presently runs until my mid 60s since I wanted flexibility and reasonable monthly payments in case my income ever dropped, rates went up etc. Any overpayments can then be made on my terms as and when, rather than the lenders enforced monthly payments.
The trouble with your second option “the market is down, you wait for at most 10 more years for recovery and then sell and pay off the mortgage” is it relies on at least being in gainful employment for that decade.
The chances of ending up on the corporate scrapheap climbs dramatically over the age of 55. If it happens I guess I could just downsize at that point, e.g. when forced to.
@Alex – I also think that’s a likely route they will take; but I don’t think it is certain. I can also see the bad press a government would get if they restricted it so you couldn’t contribute after say £200k when there were already 10s of thousands of people getting tax relief on far more than that. With pensions it simply wasn’t feasible for them to take back tax relief on previous contributions, with ISA allowances it would be relatively easy for them to limit the future relief.
@SemiPassive (#76) you don’t really have to stay in gainful employment after age 55 if you don’t need to remortgage and meet the new lender’s eligibility criteria. You could instead sell just enough each month to cover the mortgage repayment (and living cost), but keep the rest vast majority of your pension fund fully invested.
The lower the expected market return, the stronger the case for repaying the mortgage. I’ve been overpaying mine for the past 10 years, and have now accumulated enough funds in ISAs etc. to finish it off completely. Fingers are itching to press the button (I do hate the sucker), but I won’t do it. Instead I’ll just carry on overpaying for the next 3-4 years until it dies a natural death.
I agree with JohnG – I can see a scenario where there is a maximum amount allowed to be in ISAs tax free e.g. £500k (which would be a big spanner in a lot of peoples plans on this site), and everything else above that is taxable, i.e. no more tax free growth after the limit is reached. It wouldn’t be fun for those seeking FIRE, but I can see the fairness angle in it given large swathes of the population have little/no savings.
ISA, SIPP and other tax shelters in the UK are unbelievably generous compared to other countries. The ISA contribution limit has trebled since 2010 – ripe for a claw back of some kind.
Really pleased to see my spreadsheet make it into the updated article. Hope people find it helpful.
I’ve just bitten the bullet and switched to a part and part mortgage (75% IO) . Friends mostly think i’m insane, although I have repeatedly pointed out that this is no more risky as an investment than their DC pensions (i’m fortunate enough to have a public sector DB pension so overall exposure to market is more limited).
It’s really hard to disassociate yourself from the psychological impact of mortgage debt and your home. As others have said, there really isn’t a right or wrong answer and it will be entirely down to each individual. The purpose of the spreadsheet was to help fill in the gaps so individuals can better weigh up the potential reward with the risk / psychological impact. For me the psychological benefit of potentially being mortgage free 10 years earlier is well worth the risks and impact in the interim.
I’ve been thinking about the future of ISAs too. I spent over a year evaluating whether to go down the BTL route or not. I ultimately decided that BTL was far more susceptible to future tax change arrangements, including changes that would impact historic investments. I cannot see the same ever being done with ISAs. Governments may well limit future ISA investment but I can’t see them coming after historic arrangements and investments – famous last words!
@ArnoldRimmer (#82):
Glad to see that part and part is still alive & kicking. I have used this approach in the past; albeit structured somewhat differently (repayment – fixed rate with repayment – fully flexible) primarily as a hedge against rising interest rates. Are you in anyway locked into your arrangement?
Your observations re DB vs DC are also important.
Lastly, are you aware of endowment backed interest only mortgages? For years they were good (often with significant surpluses from the endowment) and then they were not – with shortfalls aplenty!
Best of luck.
@Al Cam
I would have gone 100% IO but my mortgage provider wanted evidence I was already investing enough each month to be able to pay off the mortgage. They wouldn’t accept that I needed to switch to IO to free up the cash to allow that to happen. Pretty frustrating.
I’ve got a 5y fixed at 1.21%. They have said I can switch to 100% IO (or any other repayment:IO ratio) after a year without a fee. At the end of 5y, if interest rates are back up to 3-4%, I would probably rethink it.
Didn’t consider an endowment. Only experience I have is my parents being left with a decent sized shortfall in the 2000s. Let’s hope history doesn’t repeat itself.
Well thought out article.
I recently made a s/s to help me estimate how much I could reduce my monthly repayment by from extending my mortgage term (remortgaging), and critically how much (x%) of this saving I would need to invest each month to be no better/worse off overall, based on comparing interest paid minus investment returns made, for a fixed (fairly prudent) assumed investment return, over a time horizon equal to the original outstanding mortgage term (before extending).
The 100-x% I view as disposable income, i.e. it’s for improving quality of life/ spending, so is not part of the main calculation but can be viewed as a form of profit.
In the end I extended my mortgage term from 25 (18 yrs left) to 35 years (35 left), reducing my monthly repayment by around £600, of which I now invest £500 in a diversified global tracker (my mortgage investment fund), which leaves me £100 better off each month.
As you point out in your article, I can subject to any repayment constraints, use this investment fund to pay down the mortgage at any time in the future. The calculation assumes I use the fund to pay it off completely at the date of the original term expiry, I.e. in 18 years time.
I also added in the ability to monitor the fund growth vs the assumptions, such that I can at any time check how much (£) i’m ahead or behind while on this journey.
The other benefit of this strategy is that it has similarities to the structure of an offset mortgage (without actually being one) in so much as if I need that money in the fund I can readily access it (e.g. imagine you get told you have 12 months left to live), whereas if it had been used to pay down the mortgage it is no longer accessible.
I wonder if anyone is in my situation and I wonder what they did?
My youngest son starts reception in September which means I’m free of nursery fees (hurrah!).
It leaves me with two options for the extra cash (about £500-£600 a month):
1. Into a Lifetime ISA with bonus, global tracker etc for the next 10 years?
2. Overpay the mortgage, on top of what I’m already paying. I can get a 1.66% fixed rate with Lloyds for a 10 year period which would hopefully leave me mortgage free in 10 years.
My gambling instinct says option 1 but my safety first side says option 2. If I’d been in this situation 12 or 24 months ago I’d be all over option 1 but I can’t help worrying about high valuations, rising inflation and interest rates going up. It’s been 15 years since we had a mortgage rate above 2%!
I’m 40, with 20 years to retirement and pension is otherwise taken care of.
All advice is appreciated.
If you’re a 40% or more tax payer use the cash to put in your SIPP and you’re getting a 40-50% return from day one.
Of course you can’t access the SIPP till 67, possibly 70. But still 1.66% versus 40% is pretty good.
I own a flat outright in London that I live in, and have an interest only mortgage on a BTL house in Bristol. My rate is cheap – 2% – and fixed for 4 more years. Interest rates are rising, albeit slowly. I currently have tenants who look likely to renew for another year (in July).
I’m wondering if I’m better off paying off the capital while the rate is low, so the monthly payments don’t jump when I remortgage in 4 years time.
Currently owe 61% LTV
The Investor,
This is the age-old question. Mathematically speaking, paying extra on your mortgage provides an after tax gain of 3%. That’s equivalent to a pre-tax return of about 4%. You should be able to beat that return by investing in a low cost portfolio of index funds. Some years, you’ll make far more than 4%. Other years, you’ll make far less. But over 15 years or longer, you should easily exceed a 4% return on your investments. That said, there’s always a second element to consider: a psychological one. Personally, I’ve never liked debt. That doesn’t mean you need to think like me. Debt can be effectively leveraged to earn a higher return elsewhere. But I love the idea of mortgage free homes. I like pushing extra money on a mortgage. If I were in your situation, I would make a few extra mortgage payments every year, and invest as well.
That’s great, that’s exactly the approach I’ve taken. Set up the simple vanguard all world ETF auto paying out of the rental income into stocks and shares ISA each up. Before the years up I’ll also clear some more capital. Thanks for your simple and clear explanation of your mindset
The Investor,
You sound like a market timer, if you think it is a good idea to leverage your interest only mortgage to invest in equities.
I’m a pretty wimpy investor, I wouldn’t personally borrow money to invest in equities. But that doesn’t mean that’s right nor wrong, that’s really up to somebody’s level of tolerance for risks. So it wouldn’t suit me, but I’m not saying that it shouldn’t suit you or your followers.
Best of luck with it.
When considering leveraging my mortgage to invest, I think about whether I can handle it if the market dives.
Let’s say your stock portfolio is down 30% or 40% and you still have the full liability of the mortgage, I could see that causing a lot of stress. But you don’t really know until you live through that, how you’re going to react because the hard part is there’s always a story that happens at the time that the markets go down, be it the coronavirus, be it 9/11 or the ongoing Ukraine War.
The Investor,
By definition there are two characteristics to borrowing. Number one: borrowing works both ways. So you are compromising the idea of margin of safety if you borrow. Number two: borrowing reduces your staying power. If you are a value investor, you are a long term investor, so you want to have staying power.
The Investor,
Is the money that you are leveraging from your mortgage 100% invested in equities, or does it include any bonds at all?
Hi Neil, if for me, at the moment 100% equities. Considering the rule bonds might play in the ISA as per articles on portfolio makeup.
So far I’ve cleared 5% of the mortgage capital, but thought given any cash turned into equity was essentially illiquid, and was 100% tied to success of the Bristol Market, I’d take the gamble that I could get a better ROI versus just using cash for equity.
I don’t plan to sell up any time soon – good property in a good location with a lot of equity growth potential.
I mortgaged the Bristol property to release cash to buy my london flat outright, so worst case I sell the Bristol property to cover the mortgage. I’m hoping that property prices don’t drop by 40% by 2060.
The Investor,
There are many ways to get to the end goal. All of us have some irrationality in us and understanding our emotions is important. For me, being indebted to anyone else just make me queasy even if the numbers make sense. Mortgage is the best debt you can get (due to leverage and tax benefit). I get the maths, but emotionally I didn’t feel good. As such, I accelerated my mortgage and paid it off fully in my twenties, instead of slowly paying it in my thirties or forties (even though the numbers likely made sense). Similarly, when I started after college, I couldn’t afford a new car. Instead of taking a car loan and buying a new car, I drove my old banger until I could pay for a new car outright and never took a car loan. I don’t plan on being indebted in my life (knock on wood).
I have always invested 100% in stocks since my early 20s and simply haven’t changed it so far (45 now). At the same time, I am very conservative when it comes to debt. Perhaps that combination, is irrational to you but it has always made sense to me. Because I never have debt, have owned my house outright since my twenties etc, if there is a draw dawn/recession and stocks enter a bear market, I will not be forced to sell at the lows. I remember the 2000-2002 and 2008-2009 bear markets. During both, I owned my house outright, so panic levels were reduced. If had considerable debt, had a large mortgage (say during 2008 financial crisis), and then we hit a recession AND lost my job, that combination would scare me to death. I know 100% stocks is a very risky portfolio, but as I get older, I will reduce risk by adding bonds, not increase it.
Age matters a lot. I assume by what you write that I am much older than you (I am 45). Due to my age and net worth, I would therefore have a lot more to lose if I adopted your strategy. There is a lot more downside than upside dealing with leverage (for me). The likely change I will be making as I get older is add bonds rather than leverage myself even further. If you are much younger (as I think you you are) then that’s fine. Even if I were starting over and your age, I wouldn’t do this. Some things can’t be brought down to maths. Margin stuff just scares me. If that is irrational, so be it. Good luck to you.
The investor,
Don’t get me wrong, I can see why you aren’t eager to pay off debt. That’s because you see interest rates at all-time lows. With low rates, you assume you will earn a high-enough investment return on stocks. Therefore, borrowing to invest more in stocks makes sense to you.
However, when interest rates are very low, that is exactly the time NOT to invest in stocks. Let me explain:
You understandably assume that with stocks earning 10% on average historically, you should expect that same 10% investment return. That conclusion is wrong because stock returns are actually determined by the very interest rates that you find so favourable for your plan.
Stock returns increase as interest rates increase. The opposite also applies. If interest rates are low, stock returns will also be low.
With bonds paying so little, investors like yourself have been drawn to investing more in stocks, which makes more sense. This increased demand for stocks has pushed stock prices upwards. High stock valuations lead to future lower investment returns.
Therefore, you shouldn’t assume that low interest rates mean the chance to borrow money cheaply, and earn an even higher return on stocks. This may not work because future stock returns will be below average.
If we assume you are very young with a long time horizon and can stomach a 100% stock allocation, at best you might be lucky enough to see a net 1% annual profit from you strategy, based on a 2.5% mortgage rate. However, if you asset allocation is sensibly way less than 100% stocks, your best bet is to pay off the debt as soon as possible.
Please note that I haven’t even mentioned the huge addition risk you are taking on, but from you comments above, I think you already understand that concept.
Hi Kate and Hakan,
As I said, my main residential property is paid off, and the mortgaged property is essentially a BTL. So there’s cash coming in from that. I owe 33% of my gross worth, and stocks currently make up 0.32% of my net worth, with the majority in property equity and the rest in cash (a much smaller cash pile).
I’m 37 so I’m neither young nor old, in that weird middle ground.
I find it fascinating and scary how little my peers care about what happens if they lose their jobs, through illness, redundancy or retirement…
I started keeping figures on the pay off vs invest in Jan 2012. Back then the mortgage rate was 3.74%. I like to try and fix for 5 years and ideally with an offset interest only mortgage.
Over that time rates have changed Oct 16 the rate changed to 4.79% I think this was the SVR and we might have been trying to move house. Rates were slightly lower if you didn’t have an offset but the offset is quite flexible. Rate history below:-
Jan 2012 3.74%
Oct 2016 4.79%
Aug 2017 2.54%
Jan 2023 4.74%
I tracked the amount invested against the cost of interest on a monthly basis. Ie if I bought £1500 worth of shares on the 12th of the month I would annotate £1500 of monthly interest from the beginning of that month. Full monthly interest would accrue even if the investment was made on the 31st of the month. I also tracked the value of the capital used v the value of investments at the end of each month and tracked the interest accrued against the dividend income received. So I could compare Capital and income costs over time. I would be investing in mainly dividend paying shares.
As expected the dividend income was behind initially. It takes a while for dividends to be paid. At the end of Jan 12 the income was -100%. There was no income to compare with the interest charged for that month. On capital values it was expected to be much closer depending on how the share price fluctuated. This showed a -1.43% difference. The Tesco shares I bought were worth slightly less.
It was expected that it might take 6 months to a year for the income side to catch up with capital values expected to show an increase on a constant basis after a approx. a year.
I received the first dividend in March 12. This improved the income to -50.64% but the capital value was now -2.79%. A third share had been purchased by this time.
At the half year, investments were -8.5% of the capital and dividends were -17.57% of the interest mortgage values. Not great, not terrible as the line from TV’s Chernobyl series goes. Maybe sell in May is a thing!
The first time both were above the capital and interest values was in Aug 2012. Investments were 29.42% and dividends 3.43%.
At year end investments were 35.24% and dividends were 29.72%. The shares were yielding higher than the interest being charged.
The second year investing remained a winner throughout. Sometimes a share was sold. This reduced the capital and effective interest epically if it was sold at a profit. The first share sold made over 62% in six months plus some dividends. In hindsight it would have been better to hold onto this share but I didn’t realise how much this would continue over the years. Royal Mail was bought and sold quickly at a profit. This was not expected to do well longer term by me.
As more shares were bought the dividends started to roll in. By 2014 there were payments every month more than offsetting the interest charged. By the end of 2014 investments were 15.89% higher than the capital and dividends were 48.14% higher than interest charges.
It wasn’t until Feb 19 that the equation turned slightly negative for the investment case. Share values were -0.06% but dividends remained strong at 61.53%. Whilst this was the first time in a while that the shares were worth less than the capital. It was only a small amount and was dwarfed by the income. By now the value was a decent size compared to when it all started.
Things were back on track by year end. Investments 12.23% and dividends 73.78%. In this period the interest rates had gone up to 4.79% and down to 2.54%. This was now a lower rate then when I started.
2020 was the outbreak of covid. This saw the country closing. Share values fell and some stopped paying dividends. Id bought extra Lloyds as they announced quarterly dividends only for the PRA to tell banks to cancel dividends. By Oct 2020 shares were -22.86% whilst dividends were still positive at 74.11%. Unfortunately, now due to the portfolio size even with the dividends the investment case was lower than if the mortgages was paid off instead. This would have been catastrophic if the mortgage was now due.
Still shares were now much cheaper and this couldn’t go on indefinitely. Further investments were made and whist there was some improvement from the nadir the year ended with investments showing -10.21% and dividends showing 71.86%. The case for Invest v pay off was almost back to equal. The income for 2020 was 18.49% less than the prior year, 2019 even with the extra investments made during the period.
At year end 2021 things had turned around. Some of the cancelled dividends had restarted even if the rate was lower but the portfolio size had increased. So more shares paying out meant an increase of 8.55% on the prior year but still below 2019‘s £ amount. Investments and dividends were now both positive at 4.81% and 72.57%.
2022 remained positive for the investment case but there was a mini budget that sent out a little wobble. Unfortunately I couldn’t get another low rate mortgage but missed some of the worst effects. Mortgage Rates would be rising to 4.71% from 2023. Nearly double “Not great, not terrible” as the saying still goes. Yearend saw investments at 2.01% and dividends 80.48%.
Not all shares did well. I had some terrible ones. Carillion and Debenhams. I still hold Vodafone which has lost capital and rebased (another name for reduced) its dividend. Some of the shares bought in 2020 have done really well. Shell is up 77% and its share price could have been bought much lower than I paid. Others have been just ok like Lloyds but there is a bit more optimism and payments are increasing.
2023 should see more of a drag on performance as the higher interest rates affect the balance of things against investments a bit more. Hopefully the size of the portfolio and its yield will continue to see it ahead even at a lower overall pace. Dividends for the first quarter outpaced the interest and the investments are still ahead. The next black swan might be more difficult to ride out though.
There is another option.
I have an interest only offset mortgage and have an effective return on my cash of 4.74% tax and risk free (since the mortgage interest paid is reduced).
Decided recently that this was worth selling some ISAs and stashing the cash in the offset savings account.
I don’t keep much cash in my pension so that’s also a diversification benefit.
The key is that this approach is flexible – you can get at the cash whenever you need unlike over-paying the mortgage.
Pay more in every month than the interest until the savings equal the debt.
My pension tax free lump sum (assuming the budget doesn’t change that) is the backstop to pay off the debt.
Offset mortgages tend to be a bit more expensive and availability is limited but this approach is useful, especially if you’re self-employed and have varying income.
I looked at it in terms of the immediacy of impacts. Having lived through two (mercifully brief) spikes in mortgage interest rates, I was always very nervous about what the future rate would be. A spike in mortgage fees was something that happened immediately and caused immediate problems. I might have to raid investments and savings to pay up and retain my house (I did not want to think about selling up at that stage). Not continuing to save and invest would have impacts in the future, but not right now.
In my simple way of looking at things, I strove to do both. Invest and overpay the mortgage. But I was clear about the desire to be mortgage-free sooner rather than later. Fortunately, I managed to do both most of the time. But I remembered when the mortgage rates spiked – it was real squeaky bum time, and there was a realistic chance we would have to give up the house. Not nice. So from then on overpayments were a routine part of my saving and investment.
Fascinating discussion to which there isn’t one right answer.
I always took the view that it was better to prioritise putting money into my SIPP over repaying my mortgage – to the extent that I have an interest only current account mortgage that I extended until I’m 70. I’m 66 now and continuing to work.
In the last few weeks it has gone into credit for the first time and I am completely underwhelmed. I’m kind of disappointed. I don’t feel anything.
I think the reason is I’ve always been more interested in my overall balance sheet – that is I’m happy owing money on my mortage account if I have assets elsewhere that could cover it. I suspect my previous life as a money market trader has something to do with it too.
This is a timing thing IMHO.
Interest rate cycles move over multi-year periods. When inflation and growth are weakening, rates fall and leverage costs (through mortgages and/or cost of carry on other forms of financial leverage, like LETFs) reduce.
Lower rates and/or lowering inflation is very often associated with substantially improving expected longer term returns for equities – think 1981/2, 2002/3, 2008/9 – but only provided that the starting multiples are low to moderate and typically only when the general levels of pessimism are sufficiently high (in order to exhaust the last sellers): i e. preferably near universal doom and gloom, as in the late 1970s/early 1980s recession (think the Death of Equities headline in August 1979 in Business Week) or late 2008 and early 2009 (the belief that the world was headed for the Great Depression 2.0).
In those circumstances – a deflationary or disinflationary recession with easing monetary policy and an attractive reset in stock prices – it’s almost remiss not to use leverage if you can in order to invest.
Whilst the world might be seeming to go to hell in such a scenario, the reality underlying that is very likely that the odds of beating the cost of leverage have just significantly improved.
Contrastingly, the worse time to use leverage is when sentiment is high and improving following a long bull market with high multiples and expectations, and especially when inflation has been lower for longer than normal – think of late 1999 or 2021 (although both inflation and rates were more towards moderate rather than outright low in the former case).
Basically if you use leverage then, whether through extending a mortgage or otherwise, you’ll likely be cruising for a bruising.
So, the question of whether or not to use a mortgage to fund investment (and the extent of any such use) is one whose answer is heavily contingent upon both the macro circumstantial situation and, of course, and as always, upon one’s own personal situation and attitude(s) to risk. It’s a dynamic question with a dynamic answer.
@PC (#102):
As a former money market trader I am duty bound to ask why are you still working at 66?
P.S. in spite of how the above may read I am not having a go; I am just genuinely interested
@Al Cam (#104)
Because I’m very fortunate to have fallen into work that is interesting.
I was a money market trader at a time and place that paid well but wasn’t life changing. It ended at a big Japanese bank in 2000. I loved it and traded bond futures on my own account for around 6 months before giving in and accepting I needed to do something else to pay the bills.
Since then I’ve been a developer turned contract business data analyst. Equally fascinating and well paid as it’s in the City.
I know I will stop working at some point. I’m very fortunate that I don’t need to work and working partly from home and on contracts of typically 6 to 12 months feels very different to being an employee. I honestly don’t know what I’ll decide to do when this contract ends.
I have a simple repayment mortgage with £500k outstanding and 33 years left and have been mulling this over recently.
When I can I think I’ll pay any overpayment I’d make into my workplace pension.
With the income tax and NI saving and employee contribution on the way in and 25% tax-free and 20% not 40/45% income tax on the way out, for every £450 of take-home salary given up today my pension grows by £900. Even factoring in 20% tax on the way out, that £450 given up today = £725.
@PC:
Thanks for the info.
Glad that working is not necessary.
I pulled the plug nearly eight years ago.
I have not been tempted back to work even though I did have had a couple of unsolicited offers, in the earlier years.
Very much each to their own.
Go well!
P.S. on re-reading my first sentence [at #104] I may inadvertently have implied I was a currency trader – never was.
@gerry – great to read your original comment and the follow up a decade later.
For any decision where we can’t figure out the best course, we tend to just go 50:50. e.g. House renovation costs 60k, do we extend the mortgage or use savings/investments? Assuming you’re adding approx 60k to the house value (for sake of argument) then taking the mortgage levers up your investment a bit, whereas paying the cash delevers it a bit. In the end we were on the fence with regards to risk, so split the difference (30k mortgage, 30k savings).
I think the optionality of having the cash/investments has a lot of value. It gives you dry powder for the unexpected events (not just the doom and gloom of losing your job/illness etc – maybe a business or personal/family opportunity too) and I assign a small premium to that – if I can borrow at 4% and put cash in savings at 3.9% (net) – I think that 0.1% loss is worth it to some extent to have the option to change my mind about how that cash is allocated. If instead I’d overpaid and really needed the cash I’d have to ask the bank for another loan, pay fees, etc etc, and am at the mercy of prevailing rates, job status etc etc. The counter to this is that it makes it easier to make stupid decisions where the application process for a second mortgage would have (hopefully) held you back.
This is all said with the hindsight of having rates <1.5% for most of the last decade while investments in ISAs and SIPPS returned much more. Now that our average rate is back up to 3.7% and the highest tranche at 4.1% I suspect I'll start overpaying more enthusiastically.
I was always a “straight repayment mortgage pay it off as fast as possible” man, and so when I won £57K on the football pools in 1994, when I was still working, I used that money to clear the c.£40K oustanding mortgage balance and buy myself a brand new car.
When I say “clear the outstanding balance”, what actually happened when I went into the local Nationwide branch to joyfully “do the deed” was that in the light of a potential privatisation, which ultimately didn’t happen, I was advised to leave the princely sum of £1 as a debt in the mortgage account, so that I would qualify for any privatisation perks that might be offered.
In truth I forgot about the £1 until several years later, when something must have jogged my memory one Saturday morning and I thought it would be fun to stroll into the Nationwide and give them a pound coin to zero the balance on the account. I duly presented the coin to a cashier who said she’d have to check with the manager. He came out and with a broad grin said that I could keep my coin and that they would just write the debt off.
Flushed with success, I went into the next-door bookmakers knowing next to nothing about racing, and put the £1 on a horse in the first race who’s name I liked. Lo and behold it won at odds of 7-1!
@Factor: We can’t control our luck, but we can control what we do with any financial good luck that comes our way.
@Factor — Great story, thanks for sharing! 🙂
I suspect I’d feel like @PC though, as I’ve always taken this balance sheet approach to my property value and the associated mortgage.
Indeed the 10% I paid off as an experiment around the Truss time — at the suggestion of @TA, who knew I was worried about whether I could remortgage at a half decent rate — gave me no warm feelings. Which was still a valuable lesson (because I learned/confirmed something about myself and so didn’t pay the rest off, as I might have if I’d felt a surge of joy 😉 )
miner update for 2024
£47k remaining @1.64% repayment fixed (year 4 of 5 ) ends summer of 2025 length remaining 15 years ( due to wife age) currently have £47k set aside in cash is a generating more income, will assess next year based on cash/low risk interest rates.
Over the years used a sporadic combination of paying off lumps and investing so both the right answer and wrong at the same time but right in that at no time felt mentally bad.
Kids now might need help with a deposit for housing so keeping liquidity at present especially If can be neutral interest rate wise.
If payoff would gain +£80 per year by not having to have mortgage life insurance.
Will be soon fire so risk levels erring more on the side of stash preservation.
Thank you for this article. Interesting and thought-provoking as always. Currently I have £305k (representing approx 50% LTV) left on a repayment mortgage. I was very fortunate that I fixed for 5 years at 1.69% in March 2022.
I have 23 years 6 months left on the mortgage and, aged 41, I decided this year I wanted to clear it in 15 years and started overpaying. I’ve since stopped and I’m currently, with my wife, maxing two 7% regular savings accounts, starting from zero so no interest tax. These only last a year so I’ll need to find some other place to save after that hopefully with a decent interest rate. Before March 2027 I’ll use all these savings to pay off a lump sum, which will be inside the annual overpayment limit.
I’ve also started this year investing in S&S ISAs, putting in what I can. I wish I’d started investing sooner but nothing I can do about that and I have the bug now. To me the best thing to do is overpay but also invest as waiting until my mid 50s will rob me of the compounding benefits of time in market. The split is 60-40 between saving-to-overpay and investing. It’d interesting to know your thoughts on that approach and also if there’s some extra functionality that could be added to the spreadsheet so you can see the impact of overpaying and investing concurrently. Thanks!
Well, as per my original comment upthread (#51), still happy at the decision we made to liquidate ISAs a decade or so ago to put in the offset account and be effectively mortgage free.
Though we’ve now been withdrawing some to do some maintenance work on the house so I suppose we’ll have to work a bit on replacing that money over the next few years. SWAN baby, SWAN.
I think people are overthinking with all these complicated calculations as to the optimal decision. Just do what feels best to you.
Life is not a spreadsheet.
@miner49er — Er, you had me at 1.69%. What a wonderful place to be sitting through the storms of the past couple of years! Can well understand your motivation to clear house and simplify ahead of FIRE.
@Brod — See my comment below. 🙂
@RobD — I don’t think there’s much comment to be made, it’s a perfectly reasonable strategy and as I say in my article it’s effectively what the vast majority of people do. (Pay down a repayment mortgage while saving into a pension).
Yes you’re overpaying slightly so that will make a difference but what difference you will only know in retrospect, looking back on the returns you got and the interest rate you paid over the full-term of the mortgage…
Ultimately that’s what will drive how somebody feels about the ‘spreadsheet outcome’, to use @Brod’s term. With average luck and average rates (and inflation, I suppose) investing will beat overpaying provided you’re doing so in tax sheltered accounts. Playing with the calculator shows this.
But markets can both overdeliver and underperform versus historical precedent for long decades, and inflation and rates can be bumpy too. (The most important issue with the latter is you’re not so over-extended that you cannot hold on when they do).
Hence while we could add another scenario to reflect what you’re doing to the calculator, I think we’d be drifting into over-precision here.
I see the calculator as a way of getting a feel of what’s possible and reasonable.
One should then compare it to your risk tolerance as best you can, and make a decision.
And then perhaps see how that decision makes you feel!
A lived life is indeed to quote @brod not a spreadsheet, and this choice will always be in part an emotional one.
Cheers for the thoughts and updates all! 🙂
@TheInvestor
Yes a bit of both is what most people do and the important thing is not to be over-extended when things don’t go as expected.
It’s interesting how the framing of the question tends to get a different response
– should I have a mortgage while paying into my pension?
v
– should I borrow to invest in the stock market?
Like RobD I’m currently exploiting the fairly decent Regular Savings accounts offerings around at the moment. Reaping 7% on £300pm with First Direct and 10.3% on £250pm with Virgin Money. Not so much that I exceed my Personal Savings Allowance, but nicely exceeding the 4.2% rate on my 2023 re-mortgage (why didn’t I take out a 5 year fix in 2021 when I bought?) Can recycle previous year’s “overpayments” too.
Strategy-wise it has always been obvious to me to do a bit of both when it comes to investing & overpaying, not least because my FIRE plans are predicated on being mortgage free, and if I want to have kids along the way the sooner the better!
From my modelling there’s a diminishing return in higher overpayments, you save less interest/mortgage duration for every additional £1 you overpay, my feeling was the tipping point was around £6000-7000/yr (at least for my size of mortgage).
My plans involve a ladder whereby I both invest and overpay a bit more every year, but once I reach the above threshold will put any additional cash into additional investments and/or allowing a little lifestyle creep rather than ever increasing my overpayment.