invest lump sum or pay off mortgage

lazysloth

I've come into some money (50K) and seen an IFA. He wants me to invest a lump sum in stocks and shares, inc. ISA allowance. As well as fund charges, I have his 3 per cent one off fee and 1 per cent annual charge to consider.

He is not keen on me paying off 10 per cent of my mortgage with some of my money, although this would still leave me with 30K to invest in markets.

Any thoughts on lump sum vs mortgage pay off (i'm a higher rate tax payer)?

lisyloo

Well the first question would be what rate is your mortgage??
If your mortgage is 1% then he's right.
If it's 7% then it's a different matter.

I think his fees are high BTW.
I pay 0.5% and I get a monthly report and recommendations (for switches) if appropriate.

Do you have decent pension fund arrangements?

Primrose

Perhaps you have to ask yourself what is your attitude to debt? For some people paying down their mortgage /clearing it completely is their Number 1 priority, especially if the interest rate they're being charged is higher than the interest rate they're receiving on their savings.
Obviously if the budget brings in higher Capital Gains Tax and a lower CG allowance, you may not want to have too many investments that are not ISA or otherwise tax protected, in which case, paying off 10% of your mortgage may not be a bad thing. At least £20k of your money will be going into an asset which is not liable to Capital Gains.

diable

It may be the wrong advice but I was always told to pay off deb first. What I would do is to use the 50k to get the mortgage down but then still pay the same amount every month to get the debt down even quicker, once the mortgage is paid off then use the money for investments.

dunstonh

It may be the wrong advice but I was always told to pay off deb first.

There is no right or wrong when it comes to mortgages. Short term debt should be cleared before investing as the interest rates are typically higher than the investment return rate that is likely. However, with mortgages, you are talking long term cheap debt which can often be easily beaten over the long term with investments. So, its often a individual call based on personal attitude to investment risk and tax position (i.e. higher rate taxpayer utilising their full £10200 ISA allowance).

Personally, I maximise our ISA allowances each year and I am overpaying the mortgage. You dont need to do one or the other. You can do both.

lazysloth

thanks for advice. mortgage rate is fixed at 4.5 per cent for next four years so high enough for me to have a dilemma (once fund charges added on to that, my investments need to be making 7 or 8 per cent for it even to be worth the risk).

I don't mind a monthly investment but putting 40K in a lump sum into the market on any given day at the moment seems terrifying...

Lisyloo - .5 per cent sounds a good deal for monthly advice!

dunstonh - your advice sounds the way forward!

dunstonh

thanks for advice. mortgage rate is fixed at 4.5 per cent for next four years so high enough for me to have a dilemma (once fund charges added on to that, my investments need to be making 7 or 8 per cent for it even to be worth the risk).

You pay charges on everything. Even savings accounts. Some you see, some are hidden and not disclosed. So, dont let the charges be the primary driver. Investment potential and risk are the initial focus.

7 to 8% isnt difficult as a long term average. Many will look to double digits longer term as an annual average. Eemember that performance figures you may look at are net of charges. Not before charges.

I don't mind a monthly investment but putting 40K in a lump sum into the market on any given day at the moment seems terrifying...

If you think its terrifying now then you will always have that view. Usually the worst time to invest is when everything seems normal and everyone is positive. The best times are often when everyone seems negative. However, trying to time the market is often futile as no-one really has a clue what is going to happen next.

The other thing to remember is that risk is not on or off. Everything has risk. Its just the amount of risk varies. If you are new to investing them going 100% into the market means you are jumping straight in a medium/high risk. On a 1-10 scale (1 = cash) that is like jumping in at risk 7. You dont need to go that high to begin with. You use lower risk investments and a spread to bring the risk down. For example, putting 15% into property (Bricks and mortar) funds, 35-50% in fixed interest funds and then the rest into a spread of equity funds. That will move you down the risk scale.

The other thing you could do is phase it in gradually. Instead of investing today you set up a monthly payment and average the investment over a period. There is a potential negative to that. If the investments go up then as you were not fully invested you will miss out on it. However, if they go down, you will buy units that month cheaper than at the start.

jamesd

lazysloth, what do you think the 2009-10 tax year was like for investments with all the fuss that was going on? It was one of the best years for stock markets that there have been, because at the start of 2009 a lot of people were very negative, so prices were cheap. Then they did a really nice recovery.

The time to buy is when there's a lot of bad news discouraging people because that's the time when you're most likely to get a good buying price. It's not as bad now for news as it was then but there's still a lot of bad news and worries around, and markets remain down on their highs by quite a bit. There aren't any certainties but that makes now a good time to be buying. You just don't get major world crisis events including things like doubt over the future of the Euro every year and they hurt markets when they happen, creating an opportunity for those who buy if the world doesn't really end.

The catch is that it's hard emotionally to buy at such times. Spreading the buying out over time is one way to deal with that sort of worry.

Long term investing is likely to be better than paying money off a mortgage, so that's what I would do and am doing. But along the way you'll see up and down years and you need to be prepared emotionally for the down years as well as the up ones.

Your IFA will ask you about your risk tolerance and the idea of that is to find out what sort of drop you can deal with emotionally without panic selling. Then the IFA can pick a range of investments that move at differing rates to try to match that tolerance. The ones that drop less also gain less, but probably still more than the mortgage interest cost. They help to moderate the ups and downs of the ones that move up and down more. So you might get a mixture with corporate bond funds that may drop by 10% in a bad year with UK stock market funds that may drop 40% in a bad year. A 50:50 split of those would get an average of 25% drop in a bad year for both. Usually those two move in opposite directions, so it would be half dropping by 40% and half rising by 10% for an average of 15% drop. They didn't move in opposite directions in the recent events because the difficulties were in the financial markets, including bond markets.

Personally I've been investing hard over the last few years. Last year my increase in net worth was enough so that I could now pay for the flat I'm buying just by selling investments. I'm not, I'm using 25% deposit and a mortgage. Deliberate choice to have a mortgage I don't really need. I'm looking to long term investing because I know that, on average, that's what will make me better off. I'm doing it to try to increase my early retirement fund.

But that's me and my risk tolerance. You need to be happy with yours, not mine.

lisyloo

It may be the wrong advice but I was always told to pay off deb first.

Normally I would say this is correct, but we are not now in normal circumstances.
This is why you need to understand the underlying reasons behind the statement and not just blindly follow what someone has told you like a lemming.
The reasons why normally that would be true is that normally you pay more on debt than you can reliably get on savings.
However some people now have great mortgage deals (I have 0.99%) so in some cases it makes sense to put your money elsewhere and even borrow more (drawdown) if you can on the same rate.
I have some of my money paying 3% fixed and safe against debt of 0.99%, so what is said above ir MOSTLY true but not ALWAYS.

I have to say that at 4.5% then it doesn't sound attractive to me to invest especially when you need to add charges to that.

I don't think we know what tax rate you pay (basic or higher) but I think you need to consider access to savings (for an emergency like redundancy, roof, car, boiler etc.), pensions, long term tax strategy.
If you are a higher rate tax payer and might "run out" of debt to pay off then you seriously need to think about using ISA allowawances that are really valuable even if you expect the sameish return.
You also need to consider pensions.

I would go to see another IFA for sure as I think the charges are too high.
Or provide a lot more info here about
1) tax rate
2) pension
3) imeediate savings etc.

We're not being nosey, but these things need to be considered.

lazysloth

Thanks guys, all your advice is very helpful. As a newbie I am very impressed.

Yes, I am a higher rate tax payer already with a shares ISA (invested 7K before the crash, not yet recovered), 20K cash ISA on crap rate while I decide what to do... Group pension through work, plus an old pension which my contracted out contributions go into - both of which did really well last year.

I absolutely believe in long-term investment in markets and would never panic sell. I think my dilemma now is the balance, and your advice has helped me a lot on that front. I think now what's holding me back is the question of using this IFA and what seem to be fairly high charges.

I've been burned by DIY investment, and I know that my money is a bit all over the place at the moment. but I can see a fund manager's performance at a glance, but I can't investigate my IFA's performance with his other portfolios. OR can I? I realise it's a question of trust, but it seems a bit bonkers getting someone to invest 40K when I know next to nothing about them or their abilities.

lisyloo

Here is my IFAs past performance publicly available.

http://www.msfs.co.uk/pastperformance.html

If this guy is wanting to charge a lot and won't show any evidence of past performance then I would steer clear or at least get a second opinion.

Have you thought of trying the advisors who do your works pension fund.
My own experience is that they won't give you duff advice to make a quick buck, because your employer is a larger account and they won't want unhappy employees complaining about them, so it's in their interest to keep you happy.
They might also give you a discount as they already get bulk business.

Don't forget the pension.
Tax is an important consideration and pensions give you great tax relief.