Offset Mortgage (with substantial cash) versus Investing

jamesd

If you're willing to invest you should really have that dominating what you do with the money because the expected investment returns from typically used investments are greater than the mortgage cost. So the likely increase in value of the investments will accumulate money faster than offsetting can save money. Which means faster mortgage clearing if that's what you want done. But without the certainty of just making mortgage payments.

An offset mortgage has some advantages for this sort of thing:

1. You can put the money there when not invested and get a useful effective interest rate on it.
2. For those with variable rate mortgages you can use the offset feature to reduce the interest bill if interest rates rise enough to make that better than investing.
3. You can use the offset account as a place to hold a stoozing stooze pot, knowing that you have easy access to the money to repay the credit card borrowing whenever you need to.
4. Combined with an interest only mortgage the offset accounts offers even greater flexibility since the capital payments go into the offset account but can be taken out again as is useful, effectively allowing quite inexpensive borrowing when appropriate.

Because of the greater gain from investments it's most efficient for those who will invest to pay off the mortgage as far into the future as possible, so they gain the maximum growth from investing and the maximum benefit from inflation-related increases in income, which reduce the real value of the mortgage debt and make clearing it progressively easier over time.

principa

From my current experience, the only disadvantage with an offset mortgage is that it can make me feel richer than I am :-)

However, it has also changed the way I view my finances - my investment/purchase decisions directly increase my monthly mortgage payment. I'm not necessarily more risk averse, but definitely more strategic.

jimjames

TCA wrote: »

Thanks for the reply. So the mortgage term is 10 years? Or have you got a longer term with only the fix for 10 years? Are you looking at redemption fees?

You can have a mortgage term of pretty much what you want. Our last remortgage was 17 years and a new mortgage taken out 2 years ago was for 13 years. In most circumstances the shorter the term the higher the repayment as capital needs to be paid back over that shorter time but in your situation that will make less difference.

TCA

jamesd wrote: »

If you're willing to invest you should really have that dominating what you do with the money because the expected investment returns from typically used investments are greater than the mortgage cost. So the likely increase in value of the investments will accumulate money faster than offsetting can save money.

I suppose that's partly the question I'm asking and of course it's subjective. Saving paying mortgage interest at 4% is equivalent to 5% gross for a basic rate taxpayer. And after any fixed period the standard variable rate could be much higher. I'll ignore the benefits for a higher rate tax payer as that's an unknown in my situation, but bear in mind if using lump sums for investments there would be no tax wrappers for the majority of the money.

So using the figures in my initial example, if you personally had the £120k cash in question, you'd invest it and pay the mortgage interest at whatever rate? No temptation to offset the mortgage with the cash and take the certainty of probably 5% plus effective returns?

TCA

jimjames wrote: »

In most circumstances the shorter the term the higher the repayment as capital needs to be paid back over that shorter time but in your situation that will make less difference.

Yes, if effectively interest-free then it probably makes sense to pay it over as long a period as possible. Fixed debt at today's prices.

Perelandra

TCA wrote: »

Yes, if effectively interest-free then it probably makes sense to pay it over as long a period as possible. Fixed debt at today's prices.

No such thing as a free lunch.

I guess the question is:

Ignoring the fact that there's a house involved, how comfortable would you be in borrowing money at 4.1% to invest in the stockmarket. If you'd be comfortable with that, then using investing in shares can be, as jimjames has said, a good way of repaying the mortgage back faster. If you wouldn't be comfortable borrowing to invest, then I would steer clear of this option.

Personally, I'm happy to invest with part of my assets, but in the current climate I wouldn't want to borrow to invest more heavily (even if, over the long term, that strategy could be expected to pay the mortgage back more quickly. As my net wealth increases, I'd be more comfortable in taking on that additional risk.

TCA

Perelandra wrote: »

No such thing as a free lunch

This is true of course. I can't have my cake and eat it, so the offset cash sits there gaining no value.

Perelandra wrote: »

I guess the question is:

Ignoring the fact that there's a house involved, how comfortable would you be in borrowing money at 4.1% to invest in the stockmarket.

Thanks. This is probably it in a nutshell and the opinions I was after. You've articulated it much better than me. For my own part, although not risk averse, I'm not sure I'd take on debt at 4% plus to invest in the stock market. Figure in that the target is to pay for a house, then I'm even more wary. Not sure I can view that in the same way as pensions/ISAs retirement investing, where I probably feel able to take more risks.

Interesting to hear people's views though.

AlwaysLearnin

As implied above, it depends on your outlook. Some people get great satisfaction from the certainty of knowing that they need never make a mortgage payment again, which is effectively how you could look at this. That certainty can be be worth more than the potential increased returns.

Arguably irrational (although no-one can catagorically state that investments will grow at a higher rate in future), but everyone's different and you should be comfortable with how you're using your own money.

TCA

AlwaysLearnin wrote: »

Arguably irrational (although no-one can catagorically state that investments will grow at a higher rate in future).

If my only alternative was poor paying savings accounts, then investing would be a no brainer. But here in my scenario we're saying investments would have to grow at a higher rate than the mortgage rate and that's where the decision lies.

With regard to investing to pay off a mortgage, although not the same thing by any means, the memory of a failed mortgage endowment policy has just popped into my mind. I'm thinking I like the certainty factor of the cash offset.

Another thing with investing is of course that it's for the long term, so you wouldn't necessarily want to be cashing in stuff. I quite like the idea of the cash savings offset account which could be tapped if need be at the cost of your mortgage interest rate.

marathonic

Perelandra wrote: »

Ignoring the fact that there's a house involved, how comfortable would you be in borrowing money at 4.1% to invest in the stockmarket. If you'd be comfortable with that, then using investing in shares can be, as jimjames has said, a good way of repaying the mortgage back faster. If you wouldn't be comfortable borrowing to invest, then I would steer clear of this option.

It's an interesting topic. Having 10-year access to money at 4.1% is a nice position to be in.

Looking at the FTSE All-Share, the dividend yield appears to have peaked in October 2008 at 5.27% [1]. If you were to secure this product and have enough cash to offset it entirely (which, assuming you're securing it against a mortgage-free house, you would just by placing the money received on deposit), you could sit back and wait for the next financial armageddon before withdrawing and investing the lot.

It may never happen but if you were to have done this in the past and timed it perfectly, you could have had enough dividends to cover the interest on the mortgage and a little left over to pay the capital down (or re-invest).

You could have even spent the excess of dividends over interest and, if you were to decide to sell the investment today, your intial investment would be up 69%.

Now, the above assumes perfect timing, which is next to impossible. However, a lot of people might have enough appetite for risk to invest in a FTSE tracker using borrowed funds at a fixed rate as soon as the dividend yield exceeds that fixed rate. According to the chart in the link below, you would have had almost a year window to invest to secure a dividend yield in excess of this 10-year fixed rate offset mortgage.


[1] http://timetric.com/index/ftse-all-shares-yield-month-end-monthly-ons/