Offset Mortgage (with substantial cash) versus Investing

marathonic

Also, I read a lot of posts on various forums where people are contemplating increasing their mortgage to invest and the idea is shot down by people, also with mortgages, who are drip feeding into an S&S ISA at the same time.

In theory, the both equate to the same thing. There’s no difference in someone whose monthly investments in an S&S over the past year have reached £50,000 and someone who owns a house of a similar value but overpaid their mortgage by £50,000 and is now considering releasing the money to invest in one lump sum.

Bearing this in mind, my thoughts are that too many people have all their money tied up in their home with little to no investments elsewhere. Some people can’t deal with the risk involved but, given that a 5-year fixed rate is now available with HSBC for 2.49% (60% LTV/£1,999 fee), I don’t see why anyone in a high-value, mortgage-free house with 10+ years to retirement shouldn’t consider increasing their LTV to 60% and investing the proceeds.

I think it’s all in the mindset. Some people in this position would look at the mortgage as borrowings against their home whereas I would look at it as leverage against your home and your investment portfolio.

FatherAbraham

TCA wrote: »

Any thoughts on this? Am I missing something glaringly obvious? Interested to hear some different views.

If you can fully offset the mortgage with capital at any time, why bother with a fixed rate? Why not use a floating rate?

Warmest regards,
FA

Perelandra

marathonic wrote: »

Also, I read a lot of posts on various forums where people are contemplating increasing their mortgage to invest and the idea is shot down by people, also with mortgages, who are drip feeding into an S&S ISA at the same time.

In theory, the both equate to the same thing. There’s no difference in someone whose monthly investments in an S&S over the past year have reached £50,000 and someone who owns a house of a similar value but overpaid their mortgage by £50,000 and is now considering releasing the money to invest in one lump sum.

Bearing this in mind, my thoughts are that too many people have all their money tied up in their home with little to no investments elsewhere. Some people can’t deal with the risk involved but, given that a 5-year fixed rate is now available with HSBC for 2.49% (60% LTV/£1,999 fee), I don’t see why anyone in a high-value, mortgage-free house with 10+ years to retirement shouldn’t consider increasing their LTV to 60% and investing the proceeds.

I think it’s all in the mindset. Some people in this position would look at the mortgage as borrowings against their home whereas I would look at it as leverage against your home and your investment portfolio.

Certainly I wouldn't shoot it down (and hope I didn't give the impression that I was)- it depends on the risk appetite of the individual.

For me it would depend on the value of investing on the stockmarket. At the moment, I would value msot shares at "fair value"; if the share price were to go lower (the armageddon option in your other post!), then that would certainly look attractive for me...

At the moment, of my monthly savings/investments (including tax and employer contributions) approximately:

25% goes for mortgage repayment (of which 40% is overpayment, versus what I'd need to pay it off at term)
25% goes into the S&S ISA
25% goes into my employer's pension scheme
12.5% goes into my SIPP
12.5% goes into company share schemes

So as my overall wealth increases, so do each of the pots- but in a balanced way. It's a lower risk option than investing everything (as I also have the endowment policy history fresh in mind).

If there's a stockmarket meltdown, I'll have a nice stash of liquid savings that I can put on it. If it never happens; well, at least my investments are balanced.

TCA

FatherAbraham wrote: »

If you can fully offset the mortgage with capital at any time, why bother with a fixed rate? Why not use a floating rate?

Warmest regards,
FA

I initially was drawn to offsets via the mortgage product in my opening post but yes, the rate wouldn't matter. Except for if you wanted to use some of the cash.

TCA

Perelandra wrote: »

For me it would depend on the value of investing on the stockmarket. At the moment, I would value most shares at "fair value"; if the share price were to go lower (the armageddon option in your other post!), then that would certainly look attractive for me.

If there's a stockmarket meltdown, I'll have a nice stash of liquid savings that I can put on it.

I'm of similar thinking re the current market. I'm holding onto very recently matured lump sums and was originally thinking to invest them in their entirety straight off (given low savings rates) but opted to drip feed instead and await some market dips.

An offset mortgage with substantial cash offset could be a neat way to hold money while reducing mortgage payments but also allow for flurries into the stock market, if and when it dips.

marathonic

TCA wrote: »

An offset mortgage with substantial cash offset could be a neat way to hold money while reducing mortgage payments but also allow for flurries into the stock market, if and when it dips.

The only problem is that, anytime there's a significant enough drop that would make it worthwhile investing, emotions come into play. When there's a 20%+ drop in the FTSE, the surrounding economic indicators are all negative and people worry about investing - dropping their investments in a lot of cases where they should be raising them. You only have to look at the number of posts in various forums at the bottom in 2009 where people were asking should they stop pension contributions or, worse, pull their current investments out.

For this reason, it may be worth automating things a little. For example:

• Get the offset mortgage allowing access to the funds at any time
• Wait until a 20% drop in the market (and, however you feel about the economy, ignore it and invest)
• Wait until the market reaches all-time peaks again
• Sell and repay your offset mortgage

Too many people would see the x% drop and wait in expectation of further drops - possibly resulting in them never investing.

Another less risky option would be to invest, for example, 5% of the total available on every, for example, 5% drop in the market.

Thrugelmir

Why not apply for a lower LTV mortgage and pay a lower rate of interest overall?

The "offset" balance only contras out money you've borrowed and are being charged interest on. So isn't the Golden Goose all it appears to be.

marathonic

Thrugelmir wrote: »

Why not apply for a lower LTV mortgage and pay a lower rate of interest overall?

The "offset" balance only contras out money you've borrowed and are being charged interest on. So isn't the Golden Goose all it appears to be.

This is my own plan. The offset option works well if you're looking to stay out of the market for a time before investing. Personally, I want to get down to 60% LTV, extend my mortgage to as long a term as possible and concentrate on investments at that point. With the higher LTV's, the required rate of return, although achievable, is a lot higher - considering you can get a 5-year fix for 2.49% and this offset product is 4.1%.

Should my house value increase to the extent that my LTV drops below 50% LTV, I'd considering remortgaging to get the 10% equity to add to my investments.

I see 60% LTV as very low risk in relation to a residential property. If your LTV drops below this and you are remortgaging back up to 60% LTV to increase other investments, it's lower risk again.

I have absolutely no desire to decrease my mortgage below 60% LTV unless the banks start introducing mainstream products for lower LTV's.

TCA

Thrugelmir wrote: »

Why not apply for a lower LTV mortgage and pay a lower rate of interest overall?

The "offset" balance only contras out money you've borrowed and are being charged interest on. So isn't the Golden Goose all it appears to be.

Not sure of your point here. My theory was about "fully" offsetting the mortgage with cash and effectively not paying interest at all. Obviously if you move away from full offset then you'd want to pay the lowest interest rate possible but all of these low rate deals revert to some sort of standard variable rates at some point, so the effective interest saved over time by fully offsetting can still be substantial.

Marathonic is miles ahead of me in the thought process on this and quite rightly points out (as I think you're saying) that using the funds at lower rates of borrowing makes it easier to make money from investing in the markets because it's costing you less.

It's a nice option to have but my thinking (so far), isn't to use this as leverage into the stock market, but I like the fact that the cash is available to do so. Or do whatever. This thread is giving me lots to think about.

jamesd

FatherAbraham wrote: »

If you can fully offset the mortgage with capital at any time, why bother with a fixed rate? Why not use a floating rate?

That's an excellent question. There was an interesting Canadian study that found that buyers of fixed rate mortgages on average paid more than those on variable rate mortgages but I don't know how well this carries across to the UK. It should, because there are extra costs for a lender in guaranteeing the money for a fixed term, but I don't have statistics to prove it in the UK market.

If investments are used, the fixed rate reduces risk compared to a variable rate. With a variable rate there is a chance that mortgage interest rates will be high at the same time as investment values are low, making it more expensive to have the mortgage than it could otherwise be because it may be non-viable to sell investments to place them into the mortgage offset account. Might lose more from the investment losses than the benefit of the reduction in mortgage interest cost. But there's usually some cost for reduced risk, in this case paying a higher interest rate than necessary for a while.

TCA wrote: »

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?

I have an interest only base rate tracker offset mortgage. The mortgage offset accounts hold some emergency fund money, some stooze pot money and money awaiting investment. Investments are where the bulk of my money is.

I have a high affinity for efficient money use and high risk tolerance so for me it's a good combination. The chance to shift money into the mortgage makes it a nice place for cash when I don't think it's good to invest it and to reduce the risk of the variable mortgage rate if it ever gets to hugely high levels.

So I'd invest most of it because that's what I'm already doing myself.

Perelandra wrote: »

how comfortable would you be in borrowing money at 4.1% to invest in the stockmarket.

The borrowing isn't done to invest but to buy the property. The way you put it inverts the real situation since it's not so much borrowing to invest as deciding when and how to repay the mortgage borrowing.

Perelandra wrote: »

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.

I think that TCA is in a sufficiently financially comfortable position to both decide to delay repaying a mortgage and to borrow to invest - real borrowing to invest via stoozing or other methods. But whether the leveraged investing that this is if the borrowing is really primarily for investing is appropriate depends on risk tolerance of the individual. For me it's OK now. Was more risky for me when I first did it back in 2009, though that worked out really well.

AlwaysLearnin wrote: »

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.

I get significant satisfaction from knowing that I have now accumulated enough money so that I can with reasonable probability live to my minimum income standard for life without relying on means tested benefits. I wouldn't be in that position today if I'd paid cash instead of using a mortgage.

This is one of the trade offs, mortgage clearing leaves you with less in the way of assets to support yourself, so it somewhat raises the financial risk level, potentially leaving you forced to sell to free up money to live. Or before you reach the fully paid off state it cuts the time you can keep up the payments, so you'd fail to keep up sooner and might end up repossessed much earlier than otherwise. Use investing or offset accounts rather than directly overpaying on a mortgage reduces this risk.

Some of those posting on this topic might find isePankur of interest. This is deliberately mentioned at the bottom of a long post since it comes with things like mandatory tax return completion, because it's foreign investment income, and high risk levels. But also high likely returns - peer to peer lending at initial lending rates in excess of 20% with default rates that don't appear excessive. A potentially nice bit of interest rate arbitrage for those who have an appropriate risk tolerance and capacity for loss. At the moment there's an excess of money supply over demand so a lottery type of system decides who gets to invest in the better lending deals. As usual for such high risk investments, keep it to no more than 5% of investable assets unless your risk tolerance is higher than just the high that's the minimum requirement for using it. The tax return hassle, risk level and 5% diversification safety rule in practice mean it's unlikely to be suitable for those with less than £50-100k of total investable assets. But it's a potentially interesting alternative asset class for those who it's suitable for. Do resist the temptation to jump in with too much money just because the interest rates are interesting, just about any investment can fail.