Extra mortgage, or dip into our portfolio?

usupnorth

Hi there

We are fortunate enough to have a decent amount of savings, which we could put into our forthcoming house move, meaning that we don't have to extend the mortgage at all to move up.

Currently, two thirds of our savings are in a portfolio of unit trusts, and one third is in cash ISAs, a total of around £60,000.

I would be grateful to know any obvious pros and cons to using savings over new mortgage, for the extra £40,000 we are likely to need for the house move, plus around £8000 costs. I know there are many more details you would need for a full analysis, but we just want to know that we're aware of the main considerations and
options.

On the bank's model, we can see that we would likely pay back £1.27 for every £1 we borrow over the 16 years the mortgage would run, in total.

Thanks!

missile

If you feel you will get better after tax returns on your investments than the interest you will be charged on the mortgage then do it. Many people would suggest it is a no brainer. I believe it is called "gearing". http://www.investopedia.com/terms/g/gearingratio.asp#axzz1xZFbsSLx

Mortgages are currently very low rate and perhaps likely to remain that way. In these troubled times, who really knows? I would not like to bet (my house) on it? My first mortgage was 14+%. Now, I have no mortgage and find that reassuring.

Only you can decide what is right for you and your family.

Totton

To me it looks as if there are two issues, firstly the choice of paying 27% interest or earning more than 27% over 16 years from the investments. The second choice is whether to carry a larger debt or not.

On balance I would go with taking the mortgage whilst using the investments to chase growth over 16 years, I would be confident that barring a disaster the investments would outperform the mortgage debt.

I have never felt so stress free since becoming mortgage free and I no longer have to worry about interest rates rising. Using the investments may provide an opportunity to cash in and pay off the mortgage earlier in the future.

Best of luck!
Mickey

psychic_teabag

Perhaps if you ensure that the mortgage is sufficiently flexible that you can pay it off without penalty if things change. Then taking the mortgage effectively defers the decision of whether to use your savings until circumstances change. (ie changes it from "whether" to "when".)

Or maybe an offset mortgage so that you can increase and decrease mortgage at will.

To a first approximation, 27% over 16 years is 1.7% per year. (Though I assume the early years are the more expensive ones.) So as long as you can beat that, the mortgage would seem to be the better deal.

usupnorth

Terrific replies, bang on the point - thank you.

I would still appreciate hearing any new 'cons' to the consensus view of taking the extra mortgage, but the case seems strong.

My instinct has always been to keep as much as the pot as possible, and be able to 'chase' growth and vary our exposure to risk (diversifying from the property market too) as we sit fit in the future. My wife's instinct, conversely, would be to take a chunk of the mortgage off with some cash. I will quote the 1.7% (thanks for that!), which is the 'real' interest paid on the decreasing balance - IF interest rates stayed at their present level for 16 years. Obviously, it's going to be more than that really, as the bank's model is based on current levels.

Many people just can't stand having debt, I think. I know of at least two friends whose main aim each month is to overpay the mortgage. Maybe it's right for them.

The portfolio would make 27% in 5 years, if it made 5% compounded growth per annum. Obviously, the portfolio is smaller than the mortgage, by a ratio of about 1 to 2.5, but it is food for thought.

The fact that we can indeed effectively defer the decision is another big tick for extending the mortgage, as mentioned in the replies. I have checked that we are looking at mortgage deals without penalties for paying chunks off. We did look at offseting, but I wasn't convinced that we would gain anything like what we could make with a portfolio.

So I am thinking that we will keep the existing part of the mortgage at 2% over base rate (fixed), which will be around 60% of the new mortgage, and the new 40% on a fix for 5 years, as a sort of hedge on the tracker.

missile

You appear to have decided? Please remember even a well balanced portfolio could loose 27% in 5 years.

bigadaj

If all the savings are in isas then the tax efficiency makes the returns easier to achieve, and as you say you would need to model the effects at more normal interest rates, certainly five per cent and quite Possibly eight per cent. Also need to consider how much the savings could save on the mortgage rAte ie lower loan to value.

kidmugsy

You're planning a geared investment in equities, as missile pointed out. What happens if you face a combination of higher interest rates, lower stock markets, and a reduced value of your new house?

Put another way, do you need the extra return you hope for from the gearing? If not, should you take the extra risk?

usupnorth

Thanks all again

No - not decided... I'm genuinely still open to pros AND cons, but I'd be lying if I said I didn't see more pros than cons to extending the mortgage at this point. So read this as testing the prevailing consensus, rather than promoting it.

Kidmugsy - the portfolio has limited exposure to equities (at the moment at least). It is broader than that, though I take missile's point that any portfolio can go down as well as up.

bigadaj - Resulting LTV on the new property is estimated at 58%, if we put no cash into it. We have a fair amount of equity in our current home.

physic teabag's earlier point about being able to change our minds at any time, by paying off a chunk of the mortgage looks like an unarguable safety-net, as long as our mortgage is penalty-free. Are there holes in this plan?

missile

Your's is a sound plan and likely to succeed, but not risk free. There are many undeclared factors, like your health, age, employment status and your attitude to gambling. These factors may help determine how you should balance the potential financial gain v your perception of the risk.

One should hope for the best and plan for the worst. Always have an exit strategy and maybe yours would simply be to liquidate your portfolio?

May I suggest, we really don't know enough to make the call.

usupnorth

It's OK missile - I was never looking for anyone to make a 'call' as such, but it has been useful checking out the considerations, many thanks.

[Still just testing the case...] On 'gambling'.... I haven't reached for a dictionary, but I always think the difference is that a gambler usually loses their whole stake if events don't go their way. A (rational) speculator is unlikely to do so. There is a big opportunity cost in having no exposure to risk - and even a real risk of 'losing' to inflation if one is too 'safe'.