Invest or Overpay Remortgage

racing_blue

Kidmugsy I look at it that way too:

gearing = all liabilities / (all assets - all liabilities)

where assets include property & investments, although I personally don't include the notional value of defined benefit pensions.

As we are talking about investing rather than repaying a mortgage, it's inevitable that some gearing will be involved (ie. the mortgage). My loose plan is to reduce gearing to zero by the time I retire. Probably by eventually using part of the investment fund built up to repay my interest only mortgage. Although there are other options: I could sell my house and buy outright something smaller with the equity released (keeping the whole S&S ISA investment fund for tax-free income); I could look to refinance; someone could leave me several hundred thousand pounds in a will (unlikely!) and I could pay off the mortgage with that. Etc etc

One of the things that attracts me is this flexibilty- investing alongside an interest-only mortgage I feel keeps a lot of options open.

jamesd

kidmugsy wrote: »

Oh come now; you are geared whatever your motive is.

I agree that overall you're geared. It's just nothing to do with the investment choice, just for buying a home.

How you repay the borrowing is a different choice from the choice to borrow in the first place. Unless you take out the mortgage solely and specifically to invest the money, having already purchased the property. In that case it would be gearing for investing.

jamesd

racing_blue wrote: »

One of the things that attracts me is this flexibilty- investing alongside an interest-only mortgage I feel keeps a lot of options open.

Agreed. With an offset mortgage it's even more flexible since you get the option to not pay mortgage interest on some of the money if interest rates make that useful.

mark55man

Thrugelmir wrote: »

I'm sure it's possible to find a fund that will meet the criteria. What's the likelihood of an investor choosing or being directed to this fund though.

One only has to look at the constituents of the FTSE to see the changes over the years. Most of the companies that constituted my PEP originally have all but disappeared or been morphed into a different entity.

I think you are being a bit disingenuous here. Clearly it would be possible to find a fund that matched any +ve or -ve scenario (eg Bitcoin fund up 4856% in a year or the Aapl Options fund - completely broke. I think the point is that in the world of low cost index funds most could be expected to beat 3% over 5-10 years


Taking sides here (or displaying confirmation bias) I remain convinced that a conservatively invested pot (ie whole of world mix of asset types) will on the balance of possibilities allow me to repay my mortgage quicker than just using the money to repay my mortgage. Primarily as my target rate is 2.99% - at 4.99% (as was) or higher I wouldn't be so sure


I accept the risk it won't and that would mean working longer (but not much). I accept the benefit of structuring the investment to give me some assets more readily accessible in emergency (and only then)

mark55man

jamesd wrote: »

How you repay the borrowing is a different choice from the choice to borrow in the first place.

This is the heart of it for me.


Equally and for now (despite inefficiencies in compartmentalising my investments) this scheme for me has the sole objective of repaying the mortgage loan quicker


Now I may think different when the pot has got big enough for me to repay but for now this is about getting there quicker not changing where "there" is

Thrugelmir

mark88man wrote: »

I think you are being a bit disingenuous here. Clearly it would be possible to find a fund that matched any +ve or -ve scenario (eg Bitcoin fund up 4856% in a year or the Aapl Options fund - completely broke. I think the point is that in the world of low cost index funds most could be expected to beat 3% over 5-10 years

My comments were made in the context of a 25 year period against that of a mortgage. Investors have short memories. Some of us have been holding equities long enough to remember the Nikkei crash and the Dot Com boom. Shares do carry a health warning for good reason. They are not a one way bet. Strip away the effects of QE and increases in underlying profitability aren't there to support valuations in all cases. In fact Q3 saw a high number of profit warnings from UK listed companies.


Expecting interest rates (mortgages) to remain low for a time span of 5 -10 years is highly optimistic.

bowlhead99

Thrugelmir: I agree, mortgage interest rates should not stay at their all time lows for all time. And stock markets can and do correct down etc.

However if you boil down a residential mortgage to what it actually is as an asset class, from the lender's perspective.

A loan with a long term, secured upon an asset that in nearly all cases is valued at greater than the loan principal, and is the very last thing that the borrower would want to default on, because it's his home. An asset which is typically marketable and which historically appreciates at least at the rate of inflation over 25 years, albeit not smoothly, while the loan principal is paid off leading to a reducing loan-to-value as the term goes on.

Clearly some loans turn out to be less profitable than they hope, and baskets of non-performing loans may be sold off for pennies in the pound. Following the credit crunch, such loans (and derivatives such as residential mortgage-backed securities) became very cheap, and some lenders went bust because of poorly made credit decisions and over-reliance on gearing. Corporate bond and equity investments can go bad too. Most investment is not "safe".

But ultimately the risk taken (and therefore the return demanded, in a competitive market) by a lender on a basket of residential mortgages is not massively high on the scale of all investment options. By contrast, the risk (and hopefully return available) to me on unsecured global equity markets across size, sector and development stage of the underlying company, is generally accepted to be higher.

If you had 30 years to retirement, people might tell you to be heavier on equities than fixed and variable interest securities, because the former typically produce better overall returns if you are happy to ride out the volatility. So taking that rationale a step further, it's not illogical to borrow at secured-on-property rates, to invest at equity rates for that sort of timescale.

Clearly you would want a diversified portfolio and ideally have enough income from a salary or whatever to ensure that regardless of your portfolio's performance, you don't default on the loan and be forced to cash in your property at a disadvantageous price. But I reckon the concept of leveraging an equity investment with cheap money isn't ridiculous, you just need the cashflow to service the debt and an acknowledgement that like any opportunity, it comes with risk.

mark55man

Thank you for couple of interesting posts.


I can be sure that my interest rates are at 2.99% for 5 years as that is the deal I am on. After 5 years I will be at the fortune of the markets, but by then I
* will be 5 years into 15 year period (original term was 2023, but now 2028)
* will have been saving for 5 years into this investment project
* hopefully will have benefitted from +2.99% return on this project + also benefitted through improved conditions from my job which is in a cyclical industry
* should the worst happen - I believe this plan will give me a better structure to my finances should my OH or I lose income


Bowlhead - I think your post sums up my analysis, and my real need was to get some confidence around the right way to invest for this set of circumstances. As this will be a drip feed I have time to correct, but would be good to head off in the right direction

mark55man

+ Thrugelmir 5 years ago I fixed at 4.99% fro 10 years because I foresaw the inflation but did not foresee that interest rates would be strapped to zero by QE. My decision to remortgage just now was based on the fact that I would be £1500 a year better off for 5 years even with early repayment charges and new product costs


so I do see interest rates going up but in 4-10 years and by the time I get there I will have much more robust finances + will be 55 and could (if I wished) repay the lot (just) from DC lump sum


I do agree that QE has distorted things and made the rich richer but perhaps selfishly, perhaps foolishly, I feel that I would rather be on the side of the central banks (America maybe tapering but Japan and Europe will be there shortly) than sat in cash / property (especially as this investment is over and above what I need for my security)

Thrugelmir

bowlhead99 wrote: »

But I reckon the concept of leveraging an equity investment with cheap money isn't ridiculous, you just need the cashflow to service the debt and an acknowledgement that like any opportunity, it comes with risk.

I don't disagree with your comments. There's one certainty in life and that's uncertainty. My concern always emanates from the voice of opinion that says they've discovered the Holy of Grail of success using hindsight. When in reality it boils down to luck and timing. Rather than any particular investment skill. Even the best were duped by Maxwell Publishing, Polly Peck, Enron, WorldCom and Northern Rock to name a few. Providing one accepts the risk then it's a personal decision.