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  • FIRST POST
    • principa
    • By principa 10th Oct 16, 10:40 AM
    • 58Posts
    • 16Thanks
    principa
    no goals - wtd?
    • #1
    • 10th Oct 16, 10:40 AM
    no goals - wtd? 10th Oct 16 at 10:40 AM
    I want to invest in an ISA. I have mortgage which is almost fully offset with cash.

    how would you calculate which is riskier?

    A high risk investment with a small amount of money not from the offset i.e. emerging market fund?

    Or

    A medium risk investment funded with money from the offset i.e. a FTSE tracker?

    Or

    A low risk investment with all of the mortgage offset used i.e. a bond/equity income fund ?


    In terms of the eventual outcome, are they all the same?
Page 1
    • dunstonh
    • By dunstonh 10th Oct 16, 11:44 AM
    • 85,144 Posts
    • 50,155 Thanks
    dunstonh
    • #2
    • 10th Oct 16, 11:44 AM
    • #2
    • 10th Oct 16, 11:44 AM
    A high risk investment with a small amount of money not from the offset i.e. emerging market fund?

    Or

    A medium risk investment funded with money from the offset i.e. a FTSE tracker?

    Or

    A low risk investment with all of the mortgage offset used i.e. a bond/equity income fund ?
    All different risks

    1 - borrowing to invest is higher risk due to gearing.
    2 - Investing in emerging markets is higher risk due to currency, volatility expectation and the nature of the investment
    3 - Investing in a FTSE tracker (noting you dont say which but lets assume UK equity) is not medium risk. It is high risk. Not as high as emerging markets but it as at the higher end of the scale.
    4 - Single sector investing is higher risk (and generally regarded as bad investing). it pushes the risk up itself just by being single sector.
    5 - Multi asset funds are available across most risk profiles. So, a bond/equity fund can be cautious or adventurous.

    In terms of the eventual outcome, are they all the same?
    No. They all have different risks. Emerging markets can lose 80% in 12 months. UK equity 50%. A low risk multi-asset fund more like 15%.

    The degree you use the offset money changes the risks but it would be difficult to level them out the way you have. Also context is also needed. If you have a further £200k in cash savings then that would reduce the risk. If you had £2k in savings, then the risk is increased. If you are little or no excess income then the risk would be increased compared to having significantly more excess income (ability to replace losses). There is also behaviour risk as well. Can you stomach seeing the value fall by 50%?
    Last edited by dunstonh; 10-10-2016 at 12:02 PM.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • Linton
    • By Linton 10th Oct 16, 11:49 AM
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    Linton
    • #3
    • 10th Oct 16, 11:49 AM
    • #3
    • 10th Oct 16, 11:49 AM
    What risks are you concerned about?
    -The only sure/sensible way to avoid the risk that you wont be able to pay off your mortgage is to use the offset to pay it off now.
    -The only way to avoid the risk that you wont make the maximum gain from your offset is to invest it.

    The outcomes of your options are very different. Option 1 is just avoiding the question, you could do it no matter what you do with your offset. By investing the offset you could end up with a significant amount of extra wealth assuming your investment return is higher than your mortage interest rate. There is no point in investing the offset if it isnt. What is best depends very much on your timescale. The benefits of investing the offset only come from medium to high risk investing. To avoid the risks of major short term fluctuations leaving you with less money than you would have if you hadnt invested you need to be thinking long term - say 10+ years.

    As with all investment questions as to which one of a number of options is optimal, the answer is probably a mixture of everything. Keep some and invest the rest.
    • kidmugsy
    • By kidmugsy 10th Oct 16, 11:52 AM
    • 8,503 Posts
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    kidmugsy
    • #4
    • 10th Oct 16, 11:52 AM
    • #4
    • 10th Oct 16, 11:52 AM
    What is the interest rate on your mortgage?
    • principa
    • By principa 10th Oct 16, 12:30 PM
    • 58 Posts
    • 16 Thanks
    principa
    • #5
    • 10th Oct 16, 12:30 PM
    • #5
    • 10th Oct 16, 12:30 PM
    What is the interest rate on your mortgage?
    Originally posted by kidmugsy
    The interest rate is lifetime tracker currently 2.14%
    • principa
    • By principa 10th Oct 16, 12:34 PM
    • 58 Posts
    • 16 Thanks
    principa
    • #6
    • 10th Oct 16, 12:34 PM
    • #6
    • 10th Oct 16, 12:34 PM

    No. They all have different risks. Emerging markets can lose 80% in 12 months. UK equity 50%. A low risk multi-asset fund more like 15%.

    The degree you use the offset money changes the risks but it would be difficult to level them out the way you have. Also context is also needed.
    Originally posted by dunstonh
    But is the level of risk (not the risk type) the same?
    losing 80% of 10,000 is no better or worse than losing 8% of 100,000...

    ..if that 100,000 is using the offset though, I suppose that increases the risk...
    • principa
    • By principa 10th Oct 16, 12:52 PM
    • 58 Posts
    • 16 Thanks
    principa
    • #7
    • 10th Oct 16, 12:52 PM
    • #7
    • 10th Oct 16, 12:52 PM
    What risks are you concerned about?
    -The only sure/sensible way to avoid the risk that you wont be able to pay off your mortgage is to use the offset to pay it off now.
    -The only way to avoid the risk that you wont make the maximum gain from your offset is to invest it.

    The outcomes of your options are very different. Option 1 is just avoiding the question, you could do it no matter what you do with your offset. By investing the offset you could end up with a significant amount of extra wealth assuming your investment return is higher than your mortage interest rate. There is no point in investing the offset if it isnt. What is best depends very much on your timescale. The benefits of investing the offset only come from medium to high risk investing. To avoid the risks of major short term fluctuations leaving you with less money than you would have if you hadnt invested you need to be thinking long term - say 10+ years.

    As with all investment questions as to which one of a number of options is optimal, the answer is probably a mixture of everything. Keep some and invest the rest.
    Originally posted by Linton
    very useful thanks. What do you think of:

    50% LTV mortgage comprising
    ....50% cash offset.
    ....50% ISA investments. comprising:
    ........50% active (managed global equity)
    ........50% passive (passive global equity)

    Money over and above offset (not spent on living!):
    ....50% equity / 50% bond (split 50/50 Active/Passive)

    How about that for fence sitting :-)
    Last edited by principa; 10-10-2016 at 12:53 PM. Reason: formatting
    • Linton
    • By Linton 10th Oct 16, 12:57 PM
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    Linton
    • #8
    • 10th Oct 16, 12:57 PM
    • #8
    • 10th Oct 16, 12:57 PM
    The type of risk is affected by the type of investment. Assuming that your portfolio is well diversified equity's risk is short term fluctuations, perhaps over a small number of years. In the very long term you will gain, well its not guaranteed but if equity falls in the long term your mortgage is probably the least of your, and the world's, problems. If you just invest in cash you are safe short term but in the long term you will probably lose out to inflation.

    The concern with long term equity investments isnt the risk itself so much as your attitude to it. If a short term fluctuation spooks you into selling everything you make a loss.
    • Linton
    • By Linton 10th Oct 16, 12:59 PM
    • 6,957 Posts
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    Linton
    • #9
    • 10th Oct 16, 12:59 PM
    • #9
    • 10th Oct 16, 12:59 PM
    How many years remaining on the mortgage?
    • bowlhead99
    • By bowlhead99 10th Oct 16, 1:16 PM
    • 5,144 Posts
    • 9,076 Thanks
    bowlhead99
    very useful thanks. What do you think of:

    50% LTV mortgage comprising
    ....50% cash offset.
    ....50% ISA investments. comprising:
    ........50% active (managed global equity)
    ........50% passive (passive global equity)

    How about that for fence sitting :-)
    Originally posted by principa
    Sounds pretty terrible to me. Basically taking a secured loan against your house to allow:

    - an investment in cash (deposited in an account that won't return any more than the mortgage interest amount, but presumably very safe and secure - if you are within FSCS limits for the cash deposit or have right of set off with the mortgage debt in the case of provider failure)

    - an investment in global equities (passive, active, who cares, it is the content of the ISA - i.e. global equities - that sets the risk, which is high)

    So well done, you have a portfolio that's half very low risk and half very high risk. That doesn't sound much like what someone of sound mind would put together, whether or not they were financing it with borrowed money like you.

    Thinking to yourself, "hmm, do I want really low risk or really high risk... ooh, I have no idea, how about I just get half of each so that I don't have to deal with the question, I'll just sit here on the fence", sounds like a total cop-out.

    You are not a child being asked his favorite colour and needing an instant answer off the top of your head. Give it some thought, like a grown-up.
    Last edited by bowlhead99; 10-10-2016 at 1:18 PM.
    • jimjames
    • By jimjames 10th Oct 16, 1:23 PM
    • 10,849 Posts
    • 8,919 Thanks
    jimjames
    My mortgage is at a similar rate and I've avoided overpaying and invested the money instead. I started about 10 years ago and now have enough to pay off the original mortgage 4x over. I'm still not paying it off as I think it's better (for me personally) to have investments growing rather than paying mortgage off at 2% or so. Beating that sort of mortgage rate with investment returns should be fairly easy long term and I'm prepared to take that risk as I'm aware it could be volatile.
    Remember the saying: if it looks too good to be true it almost certainly is.
    • principa
    • By principa 10th Oct 16, 1:23 PM
    • 58 Posts
    • 16 Thanks
    principa
    How many years remaining on the mortgage?
    Originally posted by Linton
    14 years to go....
    • principa
    • By principa 10th Oct 16, 1:43 PM
    • 58 Posts
    • 16 Thanks
    principa
    So well done, you have a portfolio that's half very low risk and half very high risk. That doesn't sound much like what someone of sound mind would put together, whether or not they were financing it with borrowed money like you.

    Thinking to yourself, "hmm, do I want really low risk or really high risk... ooh, I have no idea, how about I just get half of each so that I don't have to deal with the question, I'll just sit here on the fence", sounds like a total cop-out.

    You are not a child being asked his favorite colour and needing an instant answer off the top of your head. Give it some thought, like a grown-up.
    Originally posted by bowlhead99
    I've given it a lot of thought and appreciate your advice (if not your manner).

    I do not see the offset as a low risk investment - it is simply reducing the mortgage to 25%.

    In effect, I would be taking a secured loan of 25% on the house to risk in the global equities for 15 years. This is equivalent to about 3-4 years salary. A 50% loss would mean 2 years more work, a 50% gain 2 years less...
    • principa
    • By principa 10th Oct 16, 1:45 PM
    • 58 Posts
    • 16 Thanks
    principa
    My mortgage is at a similar rate and I've avoided overpaying and invested the money instead. I started about 10 years ago and now have enough to pay off the original mortgage 4x over.
    Originally posted by jimjames
    what do you invest in? global equities or something more targeted?
    • bowlhead99
    • By bowlhead99 10th Oct 16, 2:24 PM
    • 5,144 Posts
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    bowlhead99
    I've given it a lot of thought and appreciate your advice (if not your manner).

    I do not see the offset as a low risk investment - it is simply reducing the mortgage to 25%.
    Originally posted by principa
    OK, so it's not like you have a really low-risk investment right next to a really high risk one.

    You just have no investment right next to a really high risk one.

    It sounds like you are relatively new to the investment game, so initial advice would usually to go into a mix of investments across the risk spectrum rather than fully in global equities. And frankly that's decent advice for people who are not new to investing too, depending on timescales.

    It seems in your case you would be planning to go fully into global equities with your non-cash bit, and then only with the relatively smaller amount of new money going into the ISA (over and above the money from the mortgage) would you go anything other than all-out global equities. That makes it a relatively high risk idea.

    In effect, I would be taking a secured loan of 25% on the house to risk in the global equities for 15 years. This is equivalent to about 3-4 years salary. A 50% loss would mean 2 years more work, a 50% gain 2 years less...
    I think the 15 years was missing from earlier posts so it gives some context. Although presumably your mortgage isn't fixed at its current rate for that long, if it's a tracker. But you would generally expect investment returns to exceed mortgage returns over a long long timescale, as they're unsecured while the mortgage is not, so the lender doesn't demand as high a return.

    However I'd be careful in presuming that if £x is four years salary, then if you lose 0.5x you can just work two more years. For example in my case, there are already commitments on my salary, like paying my taxes, bills etc and so I can't pay a whole years salary off the mortgage when I get a whole year's salary in the door.

    The sums are different for everyone though, these are just some of the things it's worth considering if you haven't.

    It has worked for some people on this site, but not for all. The people with the great results have generally done it when they were fortunate to be investing over a great period for equity markets.
    Last edited by bowlhead99; 10-10-2016 at 2:29 PM.
    • Linton
    • By Linton 10th Oct 16, 2:51 PM
    • 6,957 Posts
    • 6,550 Thanks
    Linton
    very useful thanks. What do you think of:

    50% LTV mortgage comprising
    ....50% cash offset.
    ....50% ISA investments. comprising:
    ........50% active (managed global equity)
    ........50% passive (passive global equity)

    Money over and above offset (not spent on living!):
    ....50% equity / 50% bond (split 50/50 Active/Passive)

    How about that for fence sitting :-)
    Originally posted by principa
    I see no point in treating the investments you make from what is currently spare money separately from that you release from the offset. It's all one pot to be managed.

    It would be more sensible to divide up your assets on a basis related to your objectives. For example it may be sensible to keep enough in the offset to meet repayments for 1-3 years. You could then perhaps start off with enough in safer investments to meet another say 3-5 years of repayments and the rest in equity. Each year you could rebalance between the offset, safer investments and the higher risk equity keeping %s the same. The objective being to buy rather than selling equity when prices are low,

    There is no point in splitting between passive and active. Again you need to look at the equity portion as a whole and devise an allocation diversified across countries, sectors and company sizes. Whether you choose active or passive funds to meet that allocation is a matter of religion and choice of the best one for the purpose.
    • principa
    • By principa 10th Oct 16, 4:28 PM
    • 58 Posts
    • 16 Thanks
    principa
    That makes it a relatively high risk idea.

    However I'd be careful in presuming that if £x is four years salary, then if you lose 0.5x you can just work two more years. For example in my case, there are already commitments on my salary, like paying my taxes, bills etc and so I can't pay a whole years salary off the mortgage when I get a whole year's salary in the door.
    Originally posted by bowlhead99
    thanks for that insight and the other advice - and you are right - it would be more like working an additional 5 years - not so great. Need to have a rethink...
    • principa
    • By principa 10th Oct 16, 4:54 PM
    • 58 Posts
    • 16 Thanks
    principa
    I see no point in treating the investments you make from what is currently spare money separately from that you release from the offset. It's all one pot to be managed.

    It would be more sensible to divide up your assets on a basis related to your objectives. For example it may be sensible to keep enough in the offset to meet repayments for 1-3 years. You could then perhaps start off with enough in safer investments to meet another say 3-5 years of repayments and the rest in equity. Each year you could rebalance between the offset, safer investments and the higher risk equity keeping %s the same. The objective being to buy rather than selling equity when prices are low,

    There is no point in splitting between passive and active.
    Originally posted by Linton
    Its an interest only offset mortgage so I have made no repayments - it is fully offset so is, in effect, paid off?

    No objectives either, other than to retire in 15-25 years.

    I like your proposal - what I probably need to think about is having a value for the offset as a target which mimics a repayment mortgage over the term.
    • kidmugsy
    • By kidmugsy 10th Oct 16, 10:31 PM
    • 8,503 Posts
    • 5,475 Thanks
    kidmugsy
    The interest rate is lifetime tracker currently 2.14%
    Originally posted by principa
    Currently a tax-free risk-free return on cash of 2.14% p.a. is pretty good.

    The question is whether you want to borrow money - because that's what it comes to - to invest in equities, and if so, how much. In turn, the first resolves into two questions. (i) Do you want to invest in equities with this money at all, and (ii) if so, is now a good time to do it?

    Only you can answer (i); my guess for (ii) is that now is not a particularly good time to do it.

    But you have 15-25 years before retirement. Why not put your toe in the water by investing your monthly surplus income to begin with?
    • EdGasket
    • By EdGasket 11th Oct 16, 11:07 AM
    • 3,030 Posts
    • 1,234 Thanks
    EdGasket
    Why not pay off the mortgage then think about investing? At least then you won't lose the house. There's no 'safe' accounts paying over 2% return (except with some faffing around for small amounts in current accounts) so you'd be gambling for a higher return somewhere else.
    Last edited by EdGasket; 11-10-2016 at 11:09 AM.
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