Offset Mortgage (with substantial cash) versus Investing

racing_blue

TCA wrote: »

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.

On the other hand, you could mortgage your (owned-outright) house at any time.

But you might decide not to - saving yourself the mortgage arrangement fee & exit fees, if nothing else!

AlwaysLearnin

With no arrangement fee, a free survey and £1000 cashback, OP may well make a few quid out of it! :beer:

On the subject of investing v’s mortgage, I came pretty late to the investing game. I was brought up with a cautious approach to personal finance and as a result didn’t understand the ‘scary world of shares’ (having a defined benefit pension from 21 sheltered me further), so when we bought a house I chose to go down the mortgage overpayment route. Did I get the highest potential returns? No (albeit we did pretty well on the capital gains!). If I had of known then what I know now would I have done it differently? Perhaps. Do I regret the course we took? Not at all! Why? Because, although I MIGHT have made more, we now own a house that is plenty big enough for our current and future needs and no longer pay any interest to anybody. When I achieved that it felt, and if I’m honest still feels, good. It was only when I got near to that stage of, in my mind, securing a roof for my family that I started to look in to investing. As I read more I started to understand more. Taking the advice of the likes of Tim Hale, Benjamin Graham (, certain people here…:)) etc, I started balanced portfolios in ISA and pension wrappers. 2008 & 2009 were testing early learning experiences!

I now have new aims - kids futures (both born in difficult circumstances – VERY good for the perspective!); getting out of the rat race before retirement age etc, and investments form an increasing part of the plans for these. I’m still pretty cautious though and avoid going in to things that I don’t think will give me a reasonable risk weighted return (I guess everyone does that ) or that I don’t think I understand enough to make at least some form of calculated decision on. My growth / inflation projections reflect my more conservative approach too, but I’m of the mind that if I outperform my projections then great, but if I underperform then I potentially won’t be able to do what I would like to do. Again, it may not be the route to vast riches, however if it means that I can achieve my aims then I will be more than happy, and if you’re happy, you don’t really need riches do you…?

racing_blue

TCA wrote: »

My attention was drawn yesterday to a new offset mortgage from Yorkshire Building Society - 4.10% fixed for 10 years with no fees - and I got my calculator out and did some googling on offset mortgages, not having read much about them before. Let's take an example:

Property purchase : £160,000
Offset Mortgage 75% LTV 10 years : £120,000
Cash savings for offset : £120,000

TCA I have read your post again & agree that in this scenario there is a strategy with very low risk and a good chance of some return:

- Fully offset the £120K & keep this parked until such a time as interest rates rise

- Move the money if interest rates rise, and "safe" savings vehicles once again appear yielding >4.1% net

- if my maths are right the relevant interest rate threshold would be 4.1% is an ISA, 5.125% for a basic rate taxpayer, 6.8% for a higher rate taxpayer.

racing_blue

TCA wrote: »

I'd still have full access to the cash if required and would save (in this case), mortgage interest at 4.10%. Obviously I'm not earning interest on my cash balance but also I'm not taxed on anything either, thereby freeing up more taxable income. Especially useful for higher-rate tax payers, which I may or may not be.

OK, potentially I could earn more by lumping money into the stock market (or lose more) but this has got me thinking, regardless of how overpriced I think the current housing market is.

This is the bit that confused me- I wondered if you were planning to invest the borrowed money in shares- but reading this again I'm not sure if that is what you meant.

The question that settled when I shook that around, was: "at what point (interest rate) does it become a good idea to borrow money to buy shares"?

I don't have an answer to that but am aware that a lot of commentators believe this is seldom a good idea. Yield on 10 year gilts 1.66% - maybe at this rate it starts to look attractive?

Beyond that, there is a ladder of risk that starts with an index tracker in an S&S ISA, and ends with the house on red at the casino?

jamesd

An share index tracker isn't the next thing after gilts, it's at the higher end of the range of things. In rough order the sort of things are: government bond funds, corporate bond funds, commercial property funds, assorted cautiously managed funds, global funds (tracker or not), whole region funds, single country funds (including UK trackers), commodity and emerging market funds, directly owned commodities. Leveraged funds of various types and corresponding leveraged ETFs fit in various place. Spread betting and a range of similar sorts of thing depend on the amount of leverage used but will be at the high end unless used for managing the risk of other things.

For one easy example, something like Invesco Perpetual Monthly Income Plus might be used as a fund to provide monthly income used to pay a mortgage. Though just one fund it's an example of an approach to things: invest and have investments also pay the ongoing cost of having the mortgage. Though using one fund would be reckless at the sort of level we're discussing here, it's a handy example with a yield currently over over 5%. A doubly leveraged FTSE tracker would pay around 6-7% (and move up and down at twice the rate of the FTSE!), though I don't know of one that actually pays the dividend, they are accumulation only so taking out money by selling would be the way to go. Add some commercial property funds, global and domestic equity income funds and a range of other things to get a good mixture.

racing_blue

Why might a bank lend money to a homebuyer at 4.1%, rather than avail itself of all those other options?

Is it not because the risk:reward ratio is more favourable than, say, a doubly leveraged FTSE tracker or similar?

And if that is true for a bank, why is it not true for an individual?

(Genuine question- I'm not being flippant or rhetorical)

TCA

racing_blue wrote: »

TCA I have read your post again & agree that in this scenario there is a strategy with very low risk and a good chance of some return:

- Move the money if interest rates rise, and "safe" savings vehicles once again appear yielding >4.1% net

I don't see interest rates on savings accounts going anywhere for the foreseeable future, which is why I'm looking at alternatives.

racing_blue wrote: »

This is the bit that confused me- I wondered if you were planning to invest the borrowed money in shares- but reading this again I'm not sure if that is what you meant.

Originally it was an "either or" question. Fully cash offset mortgage or invest the money itself straight into the stock market and keep renting. Poster marathonic took the discussion to the next level regarding using the cash offset savings account to fund investments, but that wasn't (and probably still isn't) the approach I'd go for.

racing_blue wrote: »

Why might a bank lend money to a homebuyer at 4.1%, rather than avail itself of all those other options?

AFAIK, banks are borrowing money for peanuts at the moment, so lending out at 4% plus is a healthy mark-up for them.

racing_blue

TCA wrote: »

ASAIK, banks are borrowing money for peanuts at the moment, so lending out at 4% plus is a healthy mark-up for them.

Sure, the business case for lending (or investing) borrowed money hinges on getting a better return.

But turn this on its head:

If better returns are genuinely available elsewhere, say in the stock market or more exotic stuff... are banks missing a trick by lending money to homebuyers at a paltry 3 or 4%?

Or...

Why would the professionals lend to amateurs at 4%, if the amateurs could take the money and bring home 7%? (which is roughly what a higher rate taxpayer would need to do to break even, outside of a tax wrapper)

TCA

racing_blue wrote: »

If better returns are genuinely available elsewhere, say in the stock market or more exotic stuff... are banks missing a trick by lending money to homebuyers at a paltry 3 or 4%?

Retail banks don't (or shouldn't) gamble with their deposits, which is effectively what the stock market is. They are (or should be) happy enough to borrow at less than 1% and lend out at 4 times that. As you said yourself before, it's also about risk and reward. I imagine homebuyers are perceived "relatively" low risk if the lending criteria is solid.

racing_blue

TCA, thanks, it is an interesting discussion for me as I have a large IO mortgage on a long fix. For several years, instead of making repayments, have saved the full cash & S&S ISA allowance (x2 adults). So now a large % of the mortgage is offset by savings and investments. The question then becomes when, if ever, to repay.

My thinking has more to do with the tax treatment of ISAs, than of superior investment returns. I made a decision that tax-free income stretching into the future trumped immediate repayment, but as the pot gets larger, so does my appreciation of the risks involved! Hence the reason for posts above

Good luck for your situation & choices