Using lump sum to pay off mortgage?

kidmugsy

A striking characteristic of real return on UK equities is how erratic it is, if you plot it out in 20 year periods since 1700. (My link to that plot isn't working; sorry). Most investors on the go today had their views calibrated by the unusually high return period 1980-1999. In light of that I can see the case for clearing the mortgage. 2.89% tax-free and essentially risk-free might well appeal to someone more than a geared punt on equities, especially if accompanied by the regular investment of the income released to build up your "capital savings".

There is, apparently, no historical precedent for the current QE antics of the central banks, making taking a view on investing peculiarly hard.
Perhaps you could invest into a diversified portfolio such as the Harry Browne Permanent Portfolio, or one of its competitors?

atush

Why are you talking someone in to taking such a risk?

Exactly where did I say to invest 100% of the 80K capital this person has?

I don't hear you slamming JamesD like that when he tells people to not pay off their mtg, and even borrow more?

and as the mtg is only 50K, there could be an argument for a mix of cash and equities. In any case, the mtg has 11 years to run, so over periods of that long, equities outperform cash and should see their way back from any short term dips.

jamesd

mania112 wrote: »

A regulated IFA is not permitted to speculate on investment growth as a justification for investment.

So all an IFA can do to recommend pension investing is point out the tax return and ignore the uncertain but highly likely growth? I'm not sure that I've ever seen a pension projection that assumes no inflation and no investment growth at all. Of course, you know way better than I do what your professional constraints are in these circumstances so I do believe you when you write that you can't do it in this situation. But humans aren't constrained by IFA regulatory restrictions and are free to try to better their situation rather than minimise regulatory risk. Maybe an IFA just isn't an appropriate adviser to use in this situation.

mania112 wrote: »

Surely one should be debt-free ASAP. Peace of mind and the ability to retire early.

I have a mortgage. Interest only. I could have bought the property with cash by selling investments. I didn't. Peace of mind for me favoured becoming able to support myself, not having my capital all tied up in a property. Getting to the point where I could supporting myself if not working required taking the ups and downs that come with investing. DT1989 is in a different place, having already acquired capital and guaranteed incomes. For DT1989 it's more a question of other objectives, like relative priorities of investing to increase potential inheritance size or wondering more or less about investment performance. It's entirely sensible to consider the objectives and suggest ways that may improve the result, even if there are lower probability results that could make the result worse.

Peace of mind and retiring early are opposites in general, since retiring early tends to mean taking investment risk and sacrificing some peace of mind to get to the point where there's sufficient capital to provide the desired income level at the desired age.

mania112 wrote: »

What happens if the investments fall below the required amount to pay off the mortgage.

That's one of the key questions for DT1989 to consider. With a total pot size of £80k and combined annual income of £65k with eleven years still to go on the mortgage all that happens is that repayments continue as normal, since it is a repayment mortgage. This doesn't appear at the moment to be a situation where it would cause financial stress, though of course a full fact find would be nice.

The plan appears to be to use the income from the investments to do mortgage paying. That seems reasonable, in part because the capital value fluctuations won't affect it and income fluctuations tend to be lower, though not nil.

I assume that the only reason we're being asked is that there is some inheritance or other capital-needing objective, otherwise there would be no point in asking the question. But it'd be really good for DT1989 to say more about the objectives here.

mania112 wrote: »

If £30k isn't enough to play around with on the stock market (other investments are available!)

This seems more like a case for funds than individual shares.

bigadaj

mania112 wrote: »

A regulated IFA is not permitted to speculate on investment growth as a justification for investment.

Are you actually working on your own now or still training, it's a genuine question.

This question isn't cut and dried, the probability is that the OP could outperform the mortgage with investments, however there is risk in this and that needs to be explained.

I'm far more in favour of people understanding options rather than having something prescribed for them by an ifa at a relatively high expense with no guarantees, and with higher risk options being downplayed for those who are prepared to accept them primarily to actually reduce risk for that ifa and save his PI.

kidmugsy

The link seems to be working this morning. Scroll down to the second plot: it does show why a particular generation tends to be optimistic about equities.
http://thepriceofeverything.typepad.com/files/value-in-four-charts.pdf

uknick

OP, do you have a repayment mortgage?

If so, something to bear in mind is that the interest element of your mortgage payments will decrease as the capital decreases, but your invested capital will increase if you re-invest the interest/growth.

Therefore, you need to model the options over the life of the mortgage, not take just a snapshot today, to get the best estimate.

But, as said, the peace of mind of having a small mortgage can outweigh any small loss in saving income.

jamesd

uknick wrote: »

the peace of mind of having a small mortgage can outweigh any small loss in saving income.

Try a little experiment. Put 1.05 and use the x^y or y^x button on a calculator and type in 11 then enter. Subtract one from the result and multiply by the £50,000 starting value. You'll find that the answer is approximately £35,500 Pounds in today's money of lost gains if the money was invested and grew at the hundred plus year average growth rate of the UK market, which is about 5%.

Offsetting that is the interest cost of the mortgage for the remainder of the term and the spending on repayments. That's also significant but I'll leave it to you. I suggest that you assume 3% inflation in this calculation and adjust the cost each year for that or alternatively ignore inflation and increase the previous paragraph's growth rate from 5% to 8% to allow for it there and give a result in nominal instead of real terms. The second way is probably easier because mortgage cost calculators tend to ignore inflation.

uknick wrote: »

OP, do you have a repayment mortgage?

"I have a repayment mortgage of 50k"

uknick

jamesd wrote: »

"I have a repayment mortgage of 50k"

Doh!! missed that.

mania112

bigadaj wrote: »

Are you actually working on your own now or still training, it's a genuine question.

Qualified as of November 2013 - Been in the industry for 5 years.

I represent a Corporate Chartered Firm and we are directly regulated with regular visits/audits from the firm who run our compliance.

I believe this puts me in a stronger position than someone who has been qualified for 20+ years - and watching long established adviser fail exams perhaps reinforces that.

The industry is a live animal and it's very important to remain 'up to date'.

bigadaj wrote: »

This question isn't cut and dried, the probability is that the OP could outperform the mortgage with investments, however there is risk in this and that needs to be explained.

Agreed. A factfind needs to be completed. We are all speculating without knowing the client. However, this is surely more reason to err on the side of caution (as I think I have)?

I was flippant with 'pay off the mortgage' and I think I may have been influenced by my personal preference.

Still, I can't see how it is preferable to continue investing when cash is available to clear debt. One would have to be a speculative investor with other resources if it all went pear shaped, in my opinion.

bigadaj wrote: »

I'm far more in favour of people understanding options rather than having something prescribed for them by an ifa at a relatively high expense with no guarantees, and with higher risk options being downplayed for those who are prepared to accept them primarily to actually reduce risk for that ifa and save his PI.

I also believe the client needs to understand their options - this IS a job of the IFA.

You're right. There are no guarantees.

This is the pensions and retirement forum, not the investment section. I believe it's better to have paid off the mortgage in your 60's than to still be running the investment tightrope just to make a few extra quid.

And savings are made from no longer repaying the mortgage - this can then be invested (win win?).

I hope, whether you agree or not (and i'd like to hear from the OP on this one too), that you don't think all IFA's want to rip people off. If this advice was in the real world I would be losing out on a fee on the £50k not invested (and the ongoing fee of it thereafter).

mania112

mania112 wrote:

A regulated IFA is not permitted to speculate on investment growth as a justification for investment.

bigadaj wrote: »

Are you actually working on your own now or still training, it's a genuine question.

This question isn't cut and dried, the probability is that the OP could outperform the mortgage with investments, however there is risk in this and that needs to be explained.

I'm far more in favour of people understanding options rather than having something prescribed for them by an ifa at a relatively high expense with no guarantees, and with higher risk options being downplayed for those who are prepared to accept them primarily to actually reduce risk for that ifa and save his PI.

I didn't understand if you were quoting me because you disagree with this statement, or because you just wanted to ensure you were talking to me.

I can confirm this statement I made is true. Again, this is a pension forum, if you wanted to transfer your pension an adviser could not do so on the justification that there is a fund which will perform better than their existing holding. (for example)