Offset Mortgage (with substantial cash) versus Investing

TCA

racing_blue wrote: »

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.

From what I'm learning I think you've made the right choice re using your ISA allowances...... paying off the mortgage early is money you can't get back (usually) ...... but of course the price of investments can down as well as up...... They say the longer you're in the market, then the better will be your returns, or at least market volatility is better handled over a long period. Would depend what you're invested in of course too!

jamesd

racing_blue wrote: »

Why would the professionals lend to amateurs at 4%, if the amateurs could take the money and bring home 7%?

Lots of leverage. A bank borrows from depositors and other sources perhaps ten to twenty times its own capital and that greatly increases the potential returns. For safety it's necessary that much of the money is placed into relatively low risk investments like secured mortgage lending so there is high confidence that almost all of the money will be repaid, lest the bank end up losing all of its own (shareholder's) money.

racing_blue wrote: »

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.

Soon after your death and that of any spouse is a good time. Prior to that it's likely to be a money losing proposition to repay so long as investments continue over the long term to pay more than mortgage interest costs. After a while you've probably accumulated very substantial reserves so that you could continue to pay for a long time even if there was a sustained drop in investment values and returns.

racing_blue

Just thinking about the original scenario again.

1) £160K in cash: Gross assets £160K. Net assets £160K. Nice position to be in.

2) Buy a house outright. Gross assets £160K. Net assets £160K

3) £160K property with £120k mortgage offset by £120k in cash:

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> Gross assets £280K. Net assets £160K. Current ratio (borrrowing/net assets) 75%

4) £160K property with £120K invested in financial markets

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> Gross assets £280K. Net assets £160K. Current ratio 75%

5) after a 30% drop in the value of houses, and a 50% drop in the financial markets (extreme scenario, but within the realms of possibility?):

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> Gross assets £170K. Net assets £50K. current ratio 240% & back to work we go...

racing_blue

I suppose most of us engage in leveraged speculation when we buy our house... what intrigues me is that TCA and others are doing through choice rather than necessity

TCA

IMO most people should view their house as a home, not an investment. A generation or more have probably done very well through property purchase (and now hold sizeable assets in their homes), but I think the days of meteoric price rises are over for now.

Using the borrowing to invest in stock markets is another thing entirely though. And I'm not in the leveraging boat yet. Full cash offset is as far as I'm convinced to go at the moment and on further investigation, having just returned to the UK after several years non-residence, it looks very unlikely that I'd even get a mortgage to put this plan into action any time soon. 3 years of taxable declared UK income required for those self-employed. Bah!

racing_blue

Hmm.

When I think of an investment, I think of something bought with a view to obtaining income, or with a view to selling later at a higher price.

With a house, the income is the rent it will attract (or the imputed rent, if the owner chooses be both tenant and landlord.)

I suspect most people when buying houses give at least a passing thought to the day they may wish to sell it on, and few would anticipate selling at a loss. Certainly if I ever buy another house I'll think carefully. A home is where you live. But in my head at least, the house itself must pass the racing blue litmus investment test!

As for borrowing to invest in stock markets- I hate myself for doing it! "The Snowball" and "Where are the customers yachts" contains some cautionary tales. If it wasn't for the ISA thing which I'm hoping will provide tax free income in my early retirement, I would be repaying personally

TCA

racing_blue wrote: »

I suspect most people when buying houses give at least a passing thought to the day they may wish to sell it on, and few would anticipate selling at a loss.

Nobody wants to lose money and people will strive to buy value for money but I don't think buyers necessarily look to make profits from their primary residence. Although I imagine they will expect their property to rise in value if prices are rising generally. Just my take on it though.

I always think that generally at market prices, unless you trade down, you're not going to make money anyway. You buy your house for £100k and sell it for £200k but you still need £200k to buy a comparable house. I'd also argue that given the huge amounts of interest people pay anyway, that a simplistic calculation like that doesn't tell half the story and some folks forget their borrowing costs.

But we digress. A house could certainly be described as part of an investment strategy if you used the mortgage to fund your stock market activity. I'm not quite there yet though....

TCA

I've been messing around with offset mortgage calculators but can't get my head round how they work out the results. e.g:

http://www.thisismoney.co.uk/money/mortgageshome/article-2034571/Offset-mortgage-calculator.html

Say borrow £120,000 (but fully offsetting with £120,000 cash savings) over 25 years (300 months). Interest rate 5%.

Using the calculator I get results as follows:

You could save an average £301.51 on your monthly repayments and still have access to your savings.

Estimated monthly repayment:£701.51
Reduced monthly payment with Offset:£201.51

I calculate that paying no interest on £120,000 over 300 months equates to a straight £400 per month. This above calculates the normal repayment as £701.51 and says at the top I can save £301.51 per month, which brings me back to my £400. All good.

So what's £201.51?

jamesd

Something that comes out of an uncheckable black box at the site hosting the calculator. Try a different one. It might be due to some peculiarity of the Barclays mortgage product.

TCA

Just went through 20 pages of Google search results and not one mortgage offset calculator displaying a repayment of £400 per month for the above scenario.

The majority show a reduced term at the regular repayment of capital and interest of £701.51 but I can't see a version other than Barclays/Woolwich which gives a reduced monthly payments amount. And that's the one which doesn't make sense.

Maybe the reduced payment option for offset mortgage is not that common a product.