Offset Mortgage (with substantial cash) versus Investing

jamesd

racing_blue wrote: »

To turn a profit, the net (rather than gross) saving interest has to exceed your mortgage rate. ... I believe this could well happen in the next few years and is what attracted me to this debate btw

It's been that way for quite a while now, though using investments rather than savings accounts. Bonds and shares and some P2P and such in a decently put together mixture have been doing really well compared to mortgage rates.

You can get quite decent rates today from major and minor building societies, over 5%, in their bonds that can be held inside a S&S ISA if they have five years or more to maturity. Just pick up a copy of the Financial Times Saturday edition and you'll find a couple of pages of tables of such things in the Money section, including one on these bonds and PIBS ans such. Their bonds of course are not covered by the FSCS guarantee, so if you were to buy a Nationwide bond paying over 5% and Nationwide went bust you could lose some or all of your money, depending on how bad the event was. Capital values also vary, though you can just hold to maturity to eliminate that risk.

You can also do fairly low risk investing in things like solar power and insulation using the mortgage money and those have returns on investment tax free that are a good deal higher than mortgage rates.

AlwaysLearnin

racing_blue wrote: »

(Alwayslearnin thinks you may even be able to get paid for this, which I find astonishing if true, because in every other situation I can think of it costs money to make a one way bet)

Don't get me wrong, not a lot, but possible.

As an example, this one is potentially available to OP and offers £1k cashback with no product or survey fee:

http://www.ybs.co.uk/mortgages/mortgage-finder.html#13222-product-details

So, from the £1k cashback you take the £130 application fee and £90 mortgage fee (payable on redemption - for total costs), which leaves £780 to cover legal fees, banking fees, initial interest while offset funds aren't in bank etc which, looking back on my records (albeit a remortgage), seems pretty doable.

OP - if you do go down this route, advice I'd give (from what I can remember) is to think about applying in branch if you have one near (the online application wasn't particularly intuitive, and it assigned us a branch in another town which was a real pain when taking ID doc's in etc), and keep on top of them (no news does not always mean good news, it sometimes means it's sat in someone's in tray...)


While typing, another 'one way bet' I thought of is Save As You Earn schemes, where you can either take the saved cash or buy the shares at the end, so all you stand to lose is a bit of lost interest, so they are out there.

racing_blue

Perelandra wrote: »

If you get a good fixed rate, then yes this may be possible, but I think it's unlikely if you get a tracker rate:

I downloaded some data on historic savings rates from here:

http://www.swanlowpark.co.uk/savingsinterestannual.jsp

And the historic base rates from here:

http://www.swanlowpark.co.uk/savingsinterestannual.jsp

And then charted them:

http://www.freeimagehosting.net/3ux5b

Not surprisingly, the gross rates you'd need, based on a tracker + 2.79%, have never been available. Interestingly, it looks like it's only been VERY recently that savings rates have exceeded the BOE rate (does that seem right?)

Fascinating link- I'd love to see those savings rates adjusted for inflation & might even have a tinker with the data later

In terms of profiting from rising rates, it is the OP's original strategy of taking a long fix while rates are low which I can see working over the next few years.

Indeed as Jamesd says in some ways is is here now. My IO mortgage is fixed at just under 3% and is "offset" by various cash and share ISAs, the average rate of the cash ISAs is just over 3%. Not exactly breaking the bank at Monte Carlo yet sadly

TCA

racing_blue wrote: »

Maybe I'm being obtuse, but still I'm not with you! The mortgage rate could be 1%, 5%, 105%, whatever. If you were fully offset, the interest payable would be same. Zero.

It's only zero because of the offset. If it wasn't fully offset you'd be paying interest out at the mortgage rate. You therefore are "earning" that particular rate, whatever it is. OK, it's a case of not paying out, as opposed to money coming in, but it's still a gain IMO.

racing_blue wrote: »

To turn a profit, the net (rather than gross) saving interest has to exceed your mortgage rate. I believe this could well happen in the next few years and is what attracted me to this debate btw

This is where we differ. I don't see savings rates exceeding mortgage rates for a decade or more. Possibly if you engaged in fixing your mortgage continually but the cost and hassle of that wouldn't appeal to me. I don't think I could get your 3% mortgage for 25 years.

Hence I asked the question about whether you guys thought investing would beat mortgage rates. Bearing in mind for the size of a mortgage, it would need to be done outside an ISA tax wrapper, so you need net returns to beat the mortgage rate.

My theoretical rate of 5% is close to the current standard variable rate for most banks, so that's my broadbrush yardstick over a 25 year term. Debatable I guess.

5% equates to 6.25% gross for a basic rate taxpayer. If you think you'll get over 6.25% in savings accounts then you take the 5% mortgage and bank your cash at 6.25%. If you think you can invest in the stock market and earn over 6.25% then you take the mortgage at 5% and invest. Personally I'd rather not "gamble" on investments, I'd settle for a passive mortgage interest-free approach. jamesd is better qualified than me to be dabbling in PIBS, shares etc....

Buying outright in cash obviously blasts away all interest payments and interest earning options but I like the idea of having access to that money, albeit borrowing effectively at the mortgage rate.

Again I've explained in terms of interest saved but I do see it as such. It's saying I leave my money in a mortgage cash offset account because I effectively don't want the hassle or risk of trying to pay my mortgage interest with other savings or investments.

Actually in real life, assuming I'm still earning enough in future years, I'd probably be investing anyway, so it wouldn't be an all-or-nothing proposition.

racing_blue

TCA, staying with your original post, if I understood right (which is a big IF!):

You already have £160k drip fed into unit trusts, but might lose the stomach for that sort of thing when you buy a house (have I misunderstood this bit?)

You'd buy a house for £160k with £40k of cash and a £120k 10 year fixed rate offset mortgage. At the same time fully offsetting the mortgage with £120k of cash.

There seem to be so many good points about this idea & I salute you!

- love the idea that you are buying a house that you can afford with no borrowing

- love the idea that you set up a 10 year facility to borrow on your terms if you choose

I'll keep up with your posts to see how it pans out

TCA

racing_blue wrote: »

You already have £160k drip fed into unit trusts, but might lose the stomach for that sort of thing when you buy a house (have I misunderstood this bit?)

Nearly right. This money is in fixed rate savings accounts of various terms, maturing over the next few years. All earning between 4.5% and 5.15%. What to do with it on maturity is what's got me thinking, given I won't be able to redeposit at similar rates. I'm currently dripfeeding monthly into index funds from the pots that have matured, so not a lot invested at the moment. The original plan was to dump the maturing funds in the stock market but having just returned to the UK, residential renting look expensive, so house purchase has entered my thinking.

racing_blue wrote: »

You'd buy a house for £160k with £40k of cash and a £120k 10 year fixed rate offset mortgage. At the same time fully offsetting the mortgage with £120k of cash.

That was the suggestion but the amounts are just for example, as is the particular mortgage product. The rate needn't be fixed if fully offset and only relevant when accessing the cash savings offset account as that's when you start paying mortgage interest.

racing_blue wrote: »

I'll keep up with your posts to see how it pans out

You might have a long wait because as someone who's been non UK resident for some years, it doesn't look like lenders will be rushing to give me money. Still investigating but likely I'd be better building up a new credit history/income history in the UK before applying.

racing_blue

TCA don't want to hijack your excellent & thought provoking thread. So have started another one, specifically for people to look at & agree with or shoot holes in my own mortgage / offset investment plan. If you are interested:

https://forums.moneysavingexpert.com/discussion/4585647

Bazofts_Revenge

A very interesting thread. I have done a similar thing. Mortgaged at base rate + 1% borrowing £56k. I pay out £67 a month interest but get back approximately £300 a month in dividends and £90 a month in solar Fit payments. I have £68k (21% buffer) invested across UK, Europe and the US but the bulk is in the UK. I am adding to the buffer in S&S approximately £1000 (including dividends) I don't have to pay the mortgage back for another 21 years. It is a gamble but so is life. I have the safety buffer plus a DB pension scheme and possibly some inheritances due in a decade or two.