Overpay or Invest over the long term...?

crux

I won't bore you with the story, but the long and short of it is that i have with a 'Buy to let' mortgage of 146k at 6.17% interest.

I also have a 180k mortgage at 3.5%

We want to keep both houses for the long term, the loans could both run for at least the next 25 years if I let them, loan to value ratio on both is approx 75%.

Both are interest only.

I need to make provision to repay the mortgages in due course.

Paying interest for 25 years on 300+ grand goes against my instincts and I'm inclined to pay chunks off the Mortgage each year to clear them asap. By my rough calculations I could (depending on interest rates & our circumstances) clear them in 15 years ish.

but....

Over that kind of time frame could an investment portfolio prove a more effective use of my money?

Also, I don't know how inflation will affect things over a 25 year period but I guess in 25 years time 300 grand will sound a lot less than it does now, and you would hope that the houses will have increased in value a fair bit by that time

Overpay or invest? What would you do?

Lokolo

I would have at least 12 months salary in instant access savings and then plough the rest onto the BTL mortgage if you can overpay (without penalties).

Usually I would say 6 months salary but with 2 mortgages, if you (OH if you have a partner) lose job(s) then you could find yourselves in deep trouble paying 2 mortgages.

I would also be making sure your pension is sorted

THEN I would invest.

benood

It depends how much you earn I think. If you can cover the two mortgages without too much trouble from income then I would be inclined to invest on the assumption that you can afford to take a bit of risk - (my experience is about 7.8% annual return over 12 years, but it has been much better and worse at times), you'd have the benefit with the BTL of being diversified over two asset classes.

If, however, it's a stretch on the mortgages then I would go repayment.

crux

Pension is already sorted both I and OH have had plans going since early/mid twenties, OH's in particular should be a good one. The buy to let house is also part of our retirement planning.

I'm agreeing that a health cash contingency fund is smart.

As for covering the mortgages, well you never know, (I just lost 1.2k when the rental agent went belly up last month ) But I have contingency planned for much higher rates. At the end of the day we have equity in both property's and they are both good un's so we could always bail out.

I guess the ultimate question is can an average joe blogs investing their cash in S&S outperform average long term mortgage rates?

Loughton_Monkey

crux wrote: »

I guess the ultimate question is can an average joe blogs investing their cash in S&S outperform average long term mortgage rates?

You will get as many different opinions on this as you get answers, I suspect.

My own opinion is that there is a less than 50% chance that you could (make more on investments) and therefore a greater risk that you can't. If anyone tells you they have made much more than you want, legally, consistently, after tax, over a long period, then treat it with some scepticism.

My first and main reaction is to say even if you believe you can, then the 'excess' you made would be small. Is it worth the risk?
Just look at 2008. Stock Markets down 40%? Property Down 30%? [I just guessed those. It's late, and I don't want to check the real figures, but you know what I mean]

Ask yourself which is more likely. 1. Mortgage Interest Rates will go down, making the 'needs' of my Equity Investments less onerous, or 2. MI Rates will rise, making it even harder to 'beat' them with investments?

If I envisage myself in your position, I would have thought the way you did for 5 minutes, and then come down heavily on the strategy of dumping all spare cash (after my 'safety fund') into the BTL mortgage.

After things have 'settled down' a bit, I would then hope my LTV ratios to be much improved, putting me in a much stronger position to be ruthless in getting best (re)mortgage rates when they go up.

I would certainly convert, at the earliest opportunity, to "Offset" mortgages where possible - since these give you far more flexibility (plus ability to 'undo' when necessary). With the largest chunk of my savings in Property, and the next largest chunk in Equities, I don't think I would get much sleep at nights - especially while we are still living through such a major recession (with double dip and civil mayhem threatened).

blinko

can you increase teh mortgage on the 2.5% and reduce 6% one ?? i doubt they will let you but you never know

it sounds like you have your hands full here i would build up as above a safety net of 1 years rent and especially as prop prices are down 3.6% today you may need a little mroe

crux

blinko wrote: »

can you increase teh mortgage on the 2.5% and reduce 6% one ?? i doubt they will let you but you never know

I'm due to meet with our Mortgage broker soon to review the situation but last time we looked at it was a no go due to any additional borrowing taking the LTV over 75%.

Loughton_Monkey wrote: »

My first and main reaction is to say even if you believe you can, then the 'excess' you made would be small. Is it worth the risk?
Just look at 2008. Stock Markets down 40%? Property Down 30%? [I just guessed those. It's late, and I don't want to check the real figures, but you know what I mean]

Ask yourself which is more likely. 1. Mortgage Interest Rates will go down, making the 'needs' of my Equity Investments less onerous, or 2. MI Rates will rise, making it even harder to 'beat' them with investments?

I'm finding that argument pursuasive, I may be able to better the rate, but I suspect it would take serious effort in learning time, research time and ongoing management, the kind of time only someone with a genuine and serious interest in S&S investment as a hobby or job would willingly put in.

I guess most people would say that a 6.17% low risk, no effort return on investment is a no brainer and with the resulting LTV helping with future remorgage rates you could ague the return will be even greater.

Jonbvn

If you can afford it, I would normally say to hedge your bets and do a bit of investing and a bit of mortgage overpayment. They do not have to be mutually exclusive.

Loughton_Monkey

crux wrote: »

I guess most people would say that a 6.17% low risk, no effort return on investment is a no brainer and with the resulting LTV helping with future remorgage rates you could ague the return will be even greater.

Very true. I am one of the fortunate few without mortgage worries, and with pensions, savings, and investments. When my last Life policy matures in April (about £50K), I could quite easily put it into shares, or savings. With, say, 6 or 7% (estimated) shares, and 3% fixed rate savings, say, then it's a toss up.

But if I could get 6.17% Savings, I would definitely go for that.

benood

Loughton_Monkey wrote: »

You will get as many different opinions on this as you get answers, I suspect.

My own opinion is that there is a less than 50% chance that you could (make more on investments) and therefore a greater risk that you can't. If anyone tells you they have made much more than you want, legally, consistently, after tax, over a long period, then treat it with some scepticism.

My first and main reaction is to say even if you believe you can, then the 'excess' you made would be small. Is it worth the risk?
Just look at 2008. Stock Markets down 40%? Property Down 30%? [I just guessed those. It's late, and I don't want to check the real figures, but you know what I mean]

Ask yourself which is more likely. 1. Mortgage Interest Rates will go down, making the 'needs' of my Equity Investments less onerous, or 2. MI Rates will rise, making it even harder to 'beat' them with investments?

If I envisage myself in your position, I would have thought the way you did for 5 minutes, and then come down heavily on the strategy of dumping all spare cash (after my 'safety fund') into the BTL mortgage.

After things have 'settled down' a bit, I would then hope my LTV ratios to be much improved, putting me in a much stronger position to be ruthless in getting best (re)mortgage rates when they go up.

I would certainly convert, at the earliest opportunity, to "Offset" mortgages where possible - since these give you far more flexibility (plus ability to 'undo' when necessary). With the largest chunk of my savings in Property, and the next largest chunk in Equities, I don't think I would get much sleep at nights - especially while we are still living through such a major recession (with double dip and civil mayhem threatened).

I'll play devils advocate with LM's analysis:

Surely if you think it unlikely that property will fail to outperform the mortgage the advice must be to sell the property asap and pay off the mortgage?

The point of having both the BTL and a share portfolio is that you can diversify risk and therefore sleep easier at night, by investing via ISAs you can avoid all but basic rate tax on dividend income.

By paying down the mortgage you keep more of your net worth proportionately in a single asset class (property) which is in some ways more risky than staying levered up but in more than one asset. Admittedly performance of different asset classes seems rather correlated at the moment but this has historically not been the case.

If mortgage interest rates rise this does not necessarily mean they will be harder to beat with investments, indeed if interest rates rise the implication is that recovery will be underway and we'll be out of the economic woods, if there is inflation, which would be another reason for interest rates to rise then shares would be one of the better homes for your money.

crux

Thanks Benood

It may not be a rational investment, indeed it is sentimental, old family home etc. Left down to me I may have sold it but we have decided to keep it and so we need to make the best out of the situation. One things for sure, if we sell it now we will make a paper loss into real one.

This whole process of reviewing my financial life is throwing up many new and interesting topics, some in due course may become areas of genuine interest for me. I do however know that my current knowledge of investments is rudimentary at best and that spending a year or two paying down my mortgage while I learn about investing and decide if I have the stomach for it will not see me looking back with many regrets.