Invest or Overpay Remortgage

mark55man

gadgetmind wrote: »

Bzzzzt, bad answer.

Unless you've held them for multiple decades (which I know you haven't ) and have compared them in depth with other investment vehicles (OK, maybe you have) then how they have done so far shouldn't guide your hand.

You need to ask yourself if it's the right asset allocation, right investment strategy, and at the right level of fees.

Based on what you say, I think it is, but you do need to ignore past performance particularly over a fraction of an economic cycle.

True - by done me OK I meant have significantly surpassed cash during the time I held them (and for my kids university money capital preservation was very important hence only 25%)


I have not done significant comparison against other equivalent funds - nor do I have a benchmark. My target for the kids pot is to grow more than inflation whilst not unduly risking capital - I was lucky in that the fixed income I Purchased increased 20% in the first 2 months (and doubly lucky that I avoided co-op). This has given me a margin of safety


Your point however is very well made and I will have a ponder over Christmas if I need to be a bit clearer on objectives

Rob_192

If it were me, I would be using a First Direct regular saving account or two (one for you, one for your wife) to get an initial 6% on anything saved. Then as the year comes to an end, make the decision on a year by year basis whether to pay a chunk off the mortgage to invest that sum in a S&S Isa.

The regular saver at 6% pa is totally risk free and you may as well take this in the first instance. I know it is only for the first year (on a rolling basis), but it provides a useful boast to any savings.

I have always followed this approach and remember it was 8% with FD until relatively recently and I do £900/month (me, wife and son, as he doesn't use his). This gives me a nice lump sum of over £3.7k three times a year to invest elsewhere. The beauty of this approach is that it sort of gives you the best of both worlds, in the short term you have the cash which can be accessed once a year as each regular saver matures, but if you don't need it then you can invest it etc. You can create greater flexibility by doing two regular savers and staggering them so you can get access to cash every 6 months if required

Our mortgage is now paid off, but it was through this approach that we achieved this. Now it's the method I use to save for retirement.

R

racing_blue

Mark, I went through the same thought process as you. Currently have an interest only mortgage versus a portfolio of investments in ISAs. The investments feel well on track to repay the mortgage in 20+ years time- whatever our world looks like then. We moved house recently and took the decision to borrow more, rather than dip into the ISAs.

I track performance versus a repayment mortgage & have often thought about posting on these forums for the general amusement of anyone who is interested in this sort of thing. My main motivation in all this is the flexibility, plus the punt that investments might outperform (although I won't be upset if they don't, a la "you pays your money you takes your chance").

A rhetorical question, to which I have not yet found a completely comfortable answer: if I feel a >2.99% return on investments is likely, then why is the bank choosing to invest in me (by offering me a mortgage at 2.99%) rather then in the wider market?

Also on the radar, some speculation that lifetime limits might be imposed on ISA contributions (did I hear 100k mentioned?)

gadgetmind

racing_blue wrote: »

A rhetorical question, to which I have not yet found a completely comfortable answer: if I feel a >2.99% return on investments is likely, then why is the bank choosing to invest in me (by offering me a mortgage at 2.99%) rather then in the wider market?

Because of rules regards their capital structure and specifically the ratio of capital to risk weighted assets.

http://en.wikipedia.org/wiki/Capital_requirement

http://en.wikipedia.org/wiki/Risk-weighted_asset

Your mortgage is secured, so assuming LTV is right, they can use a very low risk weighting on it. Equities OTOH ...

sabretoothtigger

Rob_192 wrote: »

I have always followed this approach and remember it was 8% with FD until relatively recently and I do £900/month

Also possible to do the minimum regular deposit per month and at any time use the allowance not already invested.
So actually I forgot I had 8% not the 6% it is now, but in any case I just put in 3k for the last couple months of the term.
At that rate its silly not to but I didnt have it previously and Im not comfortable with long term fixed rates though 8% would be tempting if it were available

I realise for some sub 10k is relatively small amount but it does give you the benefit of being agile and small [Buffet says this is why the first million is always the easiest - yea right]. Some current accounts will clear inflation with their special offer interest.
Like nationwide do 5% though Im not sure for how much longer next year or is it 1 year from opening?

Im not sure how big your bills are in total for an emegency fund but 10k or under should not be as costly as those who struggle to gain interest on 80k and not lose to inflation.

A rhetorical question, to which I have not yet found a completely comfortable answer: if I feel a >2.99% return on investments is likely, then why is the bank choosing to invest in me (by offering me a mortgage at 2.99%) rather then in the wider market?

The stock market can fall 20% and a bank cant (shouldnt) take that risk. The housing market in theory is not supposed to do that so easily.
The federal reserve is tip toeing in its efforts not to wake the bears but they are out there and easily 50% off todays prices is possible, thats not to say anything is overpriced but theres alot of fear potential. So it is best to stay liquid and/or diversified

Also mortgage is a secured loan, it doesnt exactly compare. Company assets are often written off, much of it can be goodwill value. You have to go bankrupt for the bank to lose in the same way, liquidity is a problem for them meanwhile though

racing_blue

gadgetmind wrote: »

Because of rules regards their capital structure and specifically the ratio of capital to risk weighted assets.

http://en.wikipedia.org/wiki/Capital_requirement

http://en.wikipedia.org/wiki/Risk-weighted_asset

Your mortgage is secured, so assuming LTV is right, they can use a very low risk weighting on it. Equities OTOH ...

Thankyou, it is kind of you to explain that. My point, probably made rather badly, was more about feeling fully comfortable with taking the levels of risk that this implies.

Still, this is what I have done over the last 5 years & it has worked out quite well so far. (Admittedly, there has been a 5 year equity rally)

But we all know the market can- and does- fall 25% in a week, as in September 2008. This would certainly set my mortgage repayment plans back a few years. One of the reasons I am carrying on investing rather than repaying the mortgage is because I think I have worked through how I might respond, emotionally and practically, to a market crash like that or worse. But it is not an entirely comfortable thought!

gadgetmind

racing_blue wrote: »

feeling fully comfortable with taking the levels of risk that this implies.

Anyone who has debt (including mortgage) and also invests in equities, is more or less making a leveraged investment into those equities.

History suggests this works well if done sensibly, which is why investment trusts use a small amount of leverage.

But we all know the market can- and does- fall 25% in a week, as in September 2008. This would certainly set my mortgage repayment plans back a few years.

If you didn't sell, and even kept drip feeding, then that fall actually gave you better returns than a steady rise would have done.

If you prefer, you can always reduce your investment payments when valuations look high, and increase them after a fall. This is in effect a way of "rebalancing" between your investments and your mortgage.

jamesd

mark88man wrote: »

But for now for this investment position what does that much cash really buy me - protection from a 12 month period redundancy - it may be arrogance as I am pretty good at what I do, or complacency due to being a long term employee but it just doesn't register as a risk worth that much mitigation

Good at what you do doesn't prevent you from being injured or ill and unable to work. PHI can protect against some of those things and is very useful but it's not going to cover all contingencies.

You can count money in a S&S ISA as part of your contingency reserves since it's available, but not desirable to sell if values are low. You can also count pension lump sum and income whenever that's available to you. But you really should have enough in cash equivalents to last for six to twelve months of spending or more. The minimums are OK for those getting started out in life but you're not and should have more.

mark88man wrote: »

At a certain point is it diluting your returns to have too much cash?

It dilutes your return but it reduces overall volatility as well as being there when you need it, whatever happens to the rest.

You're happy with investing, so best to invest rather than overpaying on a mortgage at your LTV. But do get that cash built up because you're taking an unnecessary risk by keeping it as low as you are.

mark88man wrote: »

I am keeping this pot logically/structurally independent from my other investments and pension as I don't think this would unbalance any other strategy and such compartmentalisation is good as these are very separate gaols

That sort of splitting can tend to reduce efficiency by forcing each piece to have its own contingency provision or just blocking use of some options. One of the better options is pensions for equity paying, since that effectively gets you tax relief on your equity payment. You need pension income anyway so you can gain by integrating the planning for both to increase the tax relief. If the age 55 for taking pension benefits constraint is acceptable. I'm getting almost 60% tax and NI relief on some of my pension contributions and it's really tough to beat that but even basic rate relief is good.

What's your plan for long term inability to work? Got one? At younger ages the only practical plan is benefits. Eventually people get to the point where they can realistically plan for a higher level of income than that, using a mixture of pension and non-pension investing. pension for 55 and up, non-pension before and to top up the after 55 to the level it'd have with state pensions on top.

What's your plan for retiring early. You seem to have one so you presumably have some sort of lump sum in your plan, unless it's solely use of a defined benefit work pension. That lump sum is a tool you can use to do mortgage clearing while boosting your retirement and contingency income.

jamesd

racing_blue wrote: »

But we all know the market can- and does- fall 25% in a week, as in September 2008. This would certainly set my mortgage repayment plans back a few years. One of the reasons I am carrying on investing rather than repaying the mortgage is because I think I have worked through how I might respond, emotionally and practically, to a market crash like that or worse. But it is not an entirely comfortable thought!

I doubt that it's a comfortable thought for any of us. We just know that we have to deal with it because the long term results make it worthwhile.

You can buy insurance, though, via things like options and covered warrants. They cost money to buy but do reduce the volatility if what you're buying to protect against happens. Just buy well out of the money products at drops of say 20% and higher. That means it takes a drop of at least that much before you get anything but that reduces the price.

atush

Markets can and do crash. But not normally 25%+.

But it is worth looking at history in this case and seeing how far apart these occurrences are, and what happens (quite often immediately or soon after) as in many cases you can make up what is lost by staying invested and not leaving the market.