Offset Mortgage (with substantial cash) versus Investing

AlwaysLearnin

Another great post jamesd

It think OP said that the fixed rate was fee free, in which case reduced risk for no cost.

jamesd wrote: »

I have a high affinity for efficient money use and high risk tolerance so for me it's a good combination.

There lies the key - risk and reward. You acknowledge that you took a bit of a punt in 2009 and it worked out for you, no doubt contributing to your financial position today. With hindsight a great move:T. Some people's risk tolerance wouldn't have allowed them to make that decision at the time though. That's the potential difference between good and average investors (and bad ones come to that....:p)

Again, it comes down to personal choice. Everything you say makes sense, but whether an individual has the wherewithal to follow it through is a different question.

Thanks

Perelandra

jamesd wrote: »

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.

I'm going to stick to my guns on this one- my question is a fair way to guage the impact of the investment decision:

The initial borrowing may be done in order to buy the house. However, at the point in time where the OP is deciding whether to pay off part of the loan, or whether to invest, his outcome will be exactly the same in these two scenarios:

Take the money that would have been put into offset savings, and invest in the stockmarket

vs

Pay off part of the mortgage, but then borrow an equal amount on a 4.1% loan to invest in the stockmarket.


The effect is the same in both cases. If an individual wouldn't be comfortable in borrowing to invest, then he might want to think twice about using an offset mortgage in this way. However, if the individual is comfortable with risk, then I agree that investing is likely to give a better return than offsetting.

racing_blue

I love what marathonic is saying & see the logic for someone who has a large house heaviliy leveraged, and an appetite for risk.

But in the original situation isn't the cheapest, cleanest and easiest solution just to buy the £160k house with cash? Rather than to pay a deposit of £40k, get a mortgage for £120k and fully offset it.

Respect to the OP for seeking a £160k house rather than a £500k house in that position

jamesd

Perelandra wrote: »

Take the money that would have been put into offset savings, and invest in the stockmarket

There's no mortgage and no property at present, so no offset account that the money would have been put into. The proposal is to take money that is currently in savings and investments and being drip fed into investments and use at least some of it to buy a property.

AlwaysLearnin wrote: »

It think OP said that the fixed rate was fee free, in which case reduced risk for no cost.

At least two costs:

1. a fixed interest rate that at present is higher than the best variable rates and might or might not average higher over the whole fixed term.
2. the relative inflexibility of being committed for ten years, presumably with some early exit penalties.

racing_blue wrote: »

But in the original situation isn't the cheapest, cleanest and easiest solution just to buy the £160k house with cash? Rather than to pay a deposit of £40k, get a mortgage for £120k and fully offset it.

Not cheapest because it means losing the likely gain from the margin between investment returns and mortgage interest rate.

Renting might or might not be more expensive. fairly likely to be more expensive than living in a place you own but that's not allowing for the foregone investment returns involved in buying.

racing_blue wrote: »

Respect to the OP for seeking a £160k house rather than a £500k house in that position

Definitely! I went for only a little over one times income multiple with my purchase. Leaves lots of excess income to improve the financial position.

AlwaysLearnin

jamesd wrote: »

At least two costs:

1. a fixed interest rate that at present is higher than the best variable rates and might or might not average higher over the whole fixed term.
2. the relative inflexibility of being committed for ten years, presumably with some early exit penalties.

1. not an issue if fully offset
2. Granted on inflexibility, albeit if fully offset you wouldn't need to move. OP - I notice YBS offer a 2 yr first time buyer fixed at 90% or 85% LTV with no arrangement fee (and £1k cashback and free standard valuation), which ties you in for less time and also allows more of your funds to remain available in the offset account.

racing_blue

jamesd wrote: »

Not cheapest

It costs to arrange a mortgage, which is why I believe that buying a house with cash would be the cheapest option.

jamesd wrote: »

because it means losing the likely gain from the margin between investment returns and mortgage interest rate.

Why should the returns on the investment I choose outpace the interest on the money I have borrowed- hasn't this assumption proved flawed with endowment policies?

marathonic

racing_blue wrote: »

Why should the returns on the investment I choose outpace the interest on the money I have borrowed- hasn't this assumption proved flawed with endowment policies?

Endowment policies only proved that the returns in general would rarely exceed the mortgage rates where charges were as high as they were with these products.

There's no point in comparing investing in today's world with that of endowment policies. Endowment policies usually represented very poor value and people didn't really understand what they were invested in.

One of the main headwinds against securing a rate of return in excess of mortgage rates is charges on your underlying investments.

Can you really compare products of the past where, in some cases, you were being charged a 5% entry charge and a 1.5% AMC, to some of today's products with no entry charges and a 0.3%, or lower, AMC?

Perelandra

racing_blue wrote: »

Why should the returns on the investment I choose outpace the interest on the money I have borrowed- hasn't this assumption proved flawed with endowment policies?

The returns from investments have historically been high enough to create sufficient margin; it's just that this margin is tighter than the (very high) net-after-charges assumptions that were used on endowment policies.

As to the "why"- if the risk to the lender were lower than the risk of investing in (say) equities, you could expect the equity investment to carry the high expected (but riskier) return.

The converse is also true, of course. If lending for mortgages was considered to be riskier than investing in equity, then the mortgage rate should give a higher return than the equity.

Perelandra

marathonic wrote: »

Can you really compare products of the past where, in some cases, you were being charged a 5% entry charge and a 1.5% AMC, to some of today's products with no entry charges and a 0.3%, or lower, AMC?

I remember those evil things....

TCA

Thanks to jamesd for that lengthy and very interesting post above. And also to Perelandra. I get what you're saying re using offset savings for investment and that it's effectively using the mortgage (and its interest rate) for that purpose. The question as to whether I'd borrow at the mortgage interest rate to fund my investments is therefore logical to me.

AlwaysLearnin wrote: »

OP - I notice YBS offer a 2 yr first time buyer fixed at 90% or 85% LTV with no arrangement fee (and £1k cashback and free standard valuation), which ties you in for less time and also allows more of your funds to remain available in the offset account.

Thanks, I'm now having a good look at other offset mortgage offerings and have seen these. I probably erred by mentioning a specific example in my opening post before I had fully thought out the logic of my suggestion. As has been said, being fully offset in cash makes the interest rate (fixed or variable) less relevant, and as you allude to, fees are important too.

racing blue - if I just bought outright then that's my cash gone and invested in a single asset. The beauty of this suggested approach is that you have access to your savings cash throughout the mortgage term. I'm self-employed and income can be irregular, so this would be a welcome safety net. As for buying a £500k house, I'm not interested in taking on mountains of debt just because it might be given to me. Although I doubt it would!