Sanity check on mortgage versus investing

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  • jamesd wrote: »
    Pensions are perhaps the most efficient way to pay off a mortgage and are core to my own approach. But the mortgage has a lot of leverage advantage on all of the mortgage balance, not just the amount being paid off. Here are the current HSBC two year fixed mortgage rates for various LTVs and for an initial 200k mortgage amount:

    90% 1.99% nil saving, current rate
    85% 1.49% 0.5% saved on £170k, 1.49% saved on £10k, total £999 = 9.9%
    80% 1.49%
    75% 1.24% 0.2% saved on £150k, 1.24% saved on £20k, total £548 = 2.74%
    70% 1.24%
    65% 0.99%
    60% 1.09%

    So first observation is that he is wrong if using HSBC to choose 80% as the threshold because with them there is no difference between 80% and 85% LTV. The relevant thresholds are 85% then 75% then 65%.

    Following the interest rate column is the potential saving from cutting a £200,000 mortgage to get to that level from the previous one that makes a difference.

    Easy one first. You get an effective 9.9% interest rate on the £10k used to take the LTV down from 90% to 85%. That's a good deal in part because it is tax exempt.

    Next, to go down to 85% there is just a 1.49% gain on this £10k.

    Next gain comes on the extra 20k to get down from 85% to 75%. But this delivers just 2.74% tax exempt effective interest rate on the £20k more it takes to do it. Here, the current compressed range of interest rates is a big deal. Usually the margin would be greater and so would the reward be for this drop. 2.74% tax exempt might look interesting to someone with a complete unwillingness to invest.

    This is really interesting thanks! I guess he was just talking generically rather than having looks at what happens at each threshold.

    In particular I know his worry is that at next remortgage, and certainly the one after that, interest rates will be higher. Crystal ball and all that I know.
  • jamesd wrote: »
    So what else might be done?

    I can get 12% taxable from P2P easily on he sort of amounts you're considering, perhaps 10% after bad debt. For him at 40% income tax this would be comparable to perhaps 6% on mortgage cost reduction. Or perhaps 10% if it's for you and you're not a tax payer. So some learning about P2P seems useful.

    Could I just ask where you get those kinds of numbers from? We do have a small amount (£2,000) in Zopa, and we get closer to 4% plus we lose 1% of that to close the accounts (as per my understanding which may be wrong!)
    jamesd wrote: »
    While mortgage interest rates today are low, that may well not apply long term so it is useful to have a fair chunk of money outside a pension to allow getting down to say 75%, the traditional threshold for the most cost-effective mortgage rates. At a stretch, 60% where no further gains are typically expected.

    Maybe this is where he was going with his overpay to 60% then invest the rest idea, but maybe overshot the %... having seen your numbers for HSBC and the "margin" analysis I can see we have to do more work on that.
  • jamesd wrote: »
    Now, an integrated plan.

    1. Forget 80% if using HSBC, it makes no difference compared to 85%. 85% does look like a good plan so go for that with a two year target. Remember that property values can go down as well as up.

    Yes noted - we'll look at this more closely.
    jamesd wrote: »
    2. Determine what the retirement plan looks like for the two of you combined and put both of your anticipated income streams into it along with your household income desire. See what that does to your desired pension pot target size at a particular age. Then work back from there to work out what the 25% of the pension pot is worth and how much can be used to pay off the mortgage with the greatest efficiency. Use the whole 25% if needed and perhaps five years of 20% taxed money.

    I think the pension is a red herring actually now based on what you and DunstonH have said (for the purposes of the mortgage anyway!)
    jamesd wrote: »
    3. Consider investing outside a pension more money to allow you to get to 75% LTV in case mortgage rates increase substantially and the interest rate benefit of a drop to 75% becomes more substantial.

    Yes this seems to fit into the multi-pronged approach that everybody is suggesting.
    jamesd wrote: »
    4. Overpaying does not currently seem efficient compared to investing vs the HSB mortgage options one you have reached 85% LTV.

    Noted and agreed.
    jamesd wrote: »
    5. Overpaying is not an efficient way to get the LTV down to 85%. Investing then selling the investments looks more efficient if using P2P where exit on time is readily doable then a lump sum payment can be used to get the reduction needed.

    Like I asked before (and I'll go do my own research) but what kind of places are you getting such high returns on P2P lending?
  • Can I just say thank you to everybody for the replies.... a lot of knowledge and time used here! I really appreciate it.... pop round for tea any time!
  • Thrugelmir
    Thrugelmir Posts: 89,546
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    You can of course never say never but we are hoping this is our only home, prior to downsizing in the future (i.e. at retirement)

    Over the years I've moved due to work location. Never planned. Just the way life panned out.
  • jamesd
    jamesd Posts: 26,103
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    edited 12 October 2016 at 2:43PM
    Could I just ask where you get those kinds of numbers from? We do have a small amount (£2,000) in Zopa, and we get closer to 4% plus we lose 1% of that to close the accounts (as per my understanding which may be wrong!)
    Ablrate and MoneyThing. Ablrate has a fair bit of secondary market availability and a loan paying 1% a month open at the moment. Minimal secondary market availability at MoneyThing but a property development loan is due to go live in half an hour or so. Both have more coming in the future of course. Neither has a charge for selling loans or parts of loans and exiting. Ablrate lets buyers and sellers offer their own interest rates on the secondary market so there's a fair bit of variation. MoneyThing does them all at par.

    You're rightish about how Zopa works, there's actually a calculation based on interest rate changes as well.
    Maybe this is where he was going with his overpay to 60% then invest the rest idea, but maybe overshot the %... having seen your numbers for HSBC and the "margin" analysis I can see we have to do more work on that.
    Better to invest then reduce the capital only if the bad thing happens. Given the returns available from investing it'd take a very substantial rate increase before it hurts vs taking the pain immediately by not investing. 75% LTV is going to get the biggest gain and I do think it is worth keeping money outside the pension to allow that. Just not actually overpaying until the bad thing happens.
    I think the pension is a red herring actually now based on what you and DunstonH have said (for the purposes of the mortgage anyway!)
    Well, not really. We all need integrated financial planning and the 25% and some of the rest is a good plan for the mortgage. But depending on the mortgage value it may well not be viable to use it for most of the mortgage repaying. Still a good piece of the overall picture though.

    In my case the pension means that in a couple of years I could repay my whole mortgage at no net cost to me at all, just with tax relief, saved NI and employer contributions. And that combined with my non-pension investments means that I could retire now if I hadn't changed my objectives. It's very nice to know I don't need to worry about not working and that comes as a result of integrated planning and of course a high savings rate in my case.

    One other advantage of investing rather than mortgage overpaying: you can meet your day to day living expenses for an extended time if you have the money invested. You can't if it's all in the property and you can rely on the mortgage lender refusing to let you get at the equity if say you're both unemployed. Not going to do you a lot of good to have more equity if you're forced to sell because you can't pay the routine bills of living including the mortgage payments themselves. Having the money outside is safer in many ways, though not with regard to risks like means tested benefits and bankruptcy.
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