ISA vs buy to let

adunato

Hello,

As I'm now in a position to have spare cash to invest I want to come up with a long term financial plan.

My situation:
- 23 years to go on a mortgage
- Ability to repay it in 10 years
- No considerable assets / savings at the moment (less than 10k)

My plan
- Repay the mortgage ASAP (ca 10 years)
- Once mortgage free invest into a long-term ISA account (3pc)

Discounted option
- Buy to let, whilst it may yield more than 3pc/year considering property value in line with inflation it seems to me that it's a non-starter with a 70% mortgage. Maybe later once the ISA has generated more capital.

As i'm starting to have some cash lying in the bank account beyond the rainy days pot I'd like to make a decision ASAP.

Any thoughts?

Thanks

kingrulzuk

If i was u then i would just think of paying off the mortgage first with all the savings i make.

ones u have don that then see how the market is and take it from there

atush

If investing in ISas, and you already have a cash emergency pot, i'd look at S&S isas over cash ones. Even if you could find one that is giving 3% (which I don't think are around any more).

BTL, no as you don't have enough capital. If you did, you'd have all your money in oen asset (ie property) once you take into acct the home you live in as well.

planteria

yes, i wouldn't bother with Cash ISAs. if you want to build up an investment in equities over the long long term i would you use a Pension and/or ISA.

jamesd

Your plan to pay more into a mortgage now is a plan to lose ten years of compound growth at a rate that has historically been higher than mortgage interest costs. Around 5% plus inflation, 8-9% total. Residential property has averaged around 6% long term and it's a fairly good time to buy in some parts of the country.

But your comment about BTL implies that you dislike risk and there are always ups and down with investments.

What are your retirement plans? How close to being 55 years old is the end of your mortgage term? I'm asking because it's efficient to use a pension tax free lump sum to pay off mortgage equity but this can only be done from age 55.

jimjames

In my view the initial question is flawed. In many ways the decision isn't between one option or the other but how to balance between them. Having said that, in your situation (presumably fairly young with long mortgage term) taking on a BTL doesn't seem to make much sense but considering other options than cash ISAs certainly would.

I'm just over half way through my mortgage with 12 years still to go. Rather than paying it off early I've been investing in S&S ISAs instead. I'm now in the situation where my investments are 3x the mortgage outstanding so if I wanted to I could pay the mortgage off with spare but I'd prefer to keep investing instead. Mortgage rate is 2.29% and I am confident I can beat that with investing but happy I can pay it off should I ever need to.

Remember with BTL you cannot redeem part of a house if you need some money. With investments you can do. Although they should be considered long term if you need money there is no reason why you cannot withdraw a few thousand should you need it now.

adunato

Thanks for all the comments. Very glad I posted here. What I take away from here is:
- BTL not a good idea right now as I don't have the cash to make sense of it and in any case I would end up having all my assets in properties
- Paying off the mortgage: not such a good idea given that I can be better off by investing the cash instead
- S&S ISA advised over Cash ISA. This last point I suppose deals with personal risk aversion. I will get more information about ISAs but in general how do you people deal with risk mitigation? Ideally I'd keep the bulk of my savings in a very low risk fund locked for a long period

teddysmum

The problem with S&S ISAs is that you may end up with less than you invested. Perhaps it's my age, but I would only consider them if I had money I could afford to lose (ie had loads of money).

adunato

teddysmum wrote: »

The problem with S&S ISAs is that you may end up with less than you invested. Perhaps it's my age, but I would only consider them if I had money I could afford to lose (ie had loads of money).

That's my point, the primary goal of saving for me right now is a pension fund so not exactly gambling money, if the situation changes I'll be more risk-prone but right now I'd rather go for long-term (not flexible) with low risk.

jimjames

adunato wrote: »

That's my point, the primary goal of saving for me right now is a pension fund so not exactly gambling money, if the situation changes I'll be more risk-prone but right now I'd rather go for long-term (not flexible) with low risk.

The problem is that to some the stock market may be considered gambling but the reality is very different. With gambling you are looking for an instant win and if you don't you lose your entire stake. If you invest wisely in funds rather than individual shares then your risk is much reduced but still present. Over time that risk of your money being lower reduces so even with the 50% drop in 2008/9 most markets are now back above that level. So although you would have lost money if you sold out in 2009 by keeping your nerve and holding on you are now in profit - the key is time.

If you are also investing monthly then you benefit from something called pound cost averaging - so when the market drops you buy more units than when it rises. In fact if you are investing monthly then you actually are better off if the market drops, the opposite of what you would expect.

Think along the lines of someone buying lunch everyday - would you prefer it to go up 10% every month or down - if you are a net buyer then price drop is better value.

planteria

you are better off if, during the period over which you are continually investing, it drops, but then regains the losses and finishes up higher.