savings vs. mortgage overpayment

boglehead

pip895 wrote: »

Your exposure to the property market doesn't change as you pay off your mortgage - your mortgage company doesn't unfortunately share the risk (at least not to any useful extent).:rotfl:

True but when "only" 50% of my net worth is in property, I know I will not feel the same pain than if I had 75% invested in it.

Especially if what I diversify into, isn't too correlated to housing (bonds / shares aren't that correlated, and precious metal actually has a negative correlation)

racing_blue

Great thread.

To give a slightly different perspective, you could look at gross assets and gearing- rather than net worth.

Rough guess you have gross assets of £2 million (a home worth £1.5m, pensions worth £350k and equities worth £150k)

£750k mortgage debt means gearing of £750k/(£2m-£750k) which is 60%. Are you happy with this? I imagine you are using this gearing to your advantage, thinking in terms of imputed rent and other more intangible things.

For many, part of retirement planning is charting a journey to a gearing of 0%. My view is that if you continue to invest in diverse assets in your 30s and 40s, finally paying down debt in the closing years of your career, you might stand well placed to gain from a bout of sustained inflation in the next 25 years.

But if you are not comfortable with 60% gearing, then paying down debt is the second quickest way to reduce it. Clearly the very quickest would be to sell your house and buy something cheaper.

Either way, things look good for you

atush

boglehead wrote: »

Lung cancer for one of my grandpas (but heavy smoker), colon cancer for the other one. On my wife side, they actually live quite long, so she is likely to hit the jackpot when she reach 80y/o :rotfl:

/

Colon cancer. Diet, exercise. Male, fry up every day? Meat all the time? Sounds lifestyle like the lung cancer so look to your lifestyle rather than theirs. It is more important if yo have family dying of cancer for no reason.

And yes, wifes family could be beter bet- but if they didn't smoke ad she does etc?

pip895

boglehead wrote: »

True but when "only" 50% of my net worth is in property, I know I will not feel the same pain than if I had 75% invested in it.

If the London housing market crashes 30% you could loose 500k on your house - you loose that weather or not you have a mortgage - in that sort of scenario personally I would be happier knowing my mortgage was lower (say 100k) and I still had a good wad of equity in my home. I cant see why you would feel less pain if you had a bigger mortgage and an extra 100k in equities. :huh:

boglehead wrote: »

Especially if what I diversify into, isn't too correlated to housing (bonds / shares aren't that correlated, and precious metal actually has a negative correlation)

Gold is negatively correlated to equities but I'm not sure it is to property is it?

boglehead

racing_blue wrote: »

Great thread.

To give a slightly different perspective, you could look at gross assets and gearing- rather than net worth.

Rough guess you have gross assets of £2 million (a home worth £1.5m, pensions worth £350k and equities worth £150k)

£750k mortgage debt means gearing of £750k/(£2m-£750k) which is 60%. Are you happy with this? I imagine you are using this gearing to your advantage, thinking in terms of imputed rent and other more intangible things.

For many, part of retirement planning is charting a journey to a gearing of 0%. My view is that if you continue to invest in diverse assets in your 30s and 40s, finally paying down debt in the closing years of your career, you might stand well placed to gain from a bout of sustained inflation in the next 25 years.

But if you are not comfortable with 60% gearing, then paying down debt is the second quickest way to reduce it. Clearly the very quickest would be to sell your house and buy something cheaper.

Either way, things look good for you

Racing blue - gearing is a nice way to look at it... it clearly looks to high (actually 65%... your estimate is actually quite close!)

Our mortgage is a 20yr one, and the plan was to retire in 20yr or slightly more when the mortgage was paid out. By then we would move out of London but keep the house for rental income, which should be quite nice at that point, and inflation adjusted - while we would use our pension lump sum to buy a cheaper property on the country side.

Paying off the mortgage earlier might not be a bad idea... at least would give the option to retire earlier if we needed/wanted to.

boglehead

pip895 wrote: »

If the London housing market crashes 30% you could loose 500k on your house - you loose that weather or not you have a mortgage - in that sort of scenario personally I would be happier knowing my mortgage was lower (say 100k) and I still had a good wad of equity in my home. I cant see why you would feel less pain if you had a bigger mortgage and an extra 100k in equities. :huh:




Gold is negatively correlated to equities but I'm not sure it is to property is it?

What 100k of equities give me is flexibility to sell that and get some cash in case of emergency. If the market crash (30% would not be fun!), i doubt the bank would allow to use a line of credit on that mortgage... worse case would lead me to sale the house at a low point and take the 500k virtual hit.

Regarding your question on gold vs. Property correlation, i am not sure, but would think they are not as correlated as one would expect. I will look for that. Good point.

guymo

boglehead wrote: »

Our mortgage is a 20yr one, and the plan was to retire in 20yr or slightly more when the mortgage was paid out.

… but the original post says it has 23 years to run. Confused!

racing_blue

On reflection, a fixed rate offset mortgage might be the OP's friend?

- pump extra savings in, guarantees an effective savings rate floor
- lock into current low interest rate environment
- allows withdrawal for investment in other asset classes if/when that seems attractive
- allows withdrawal to pay interest for a while in a SHTF scenario (job loss, 6% base rate, you know- plan for the worst hope for the best sort of thing)

Not wishing to labour the point about net vs gross assets, but there is a passing reference to 75% of net wealth being in property. But by my calculations it is more like 120%, or perhaps as high as 180% if exclude pensions?

boglehead

guymo wrote: »

… but the original post says it has 23 years to run. Confused!

my bad - the original one was a 25yrs 3%, and I remortgaged 6months ago with the 1.9% over 20yrs (2yrs fixed)

boglehead

racing_blue wrote: »

On reflection, a fixed rate offset mortgage might be the OP's friend?

- pump extra savings in, guarantees an effective savings rate floor
- lock into current low interest rate environment
- allows withdrawal for investment in other asset classes if/when that seems attractive
- allows withdrawal to pay interest for a while in a SHTF scenario (job loss, 6% base rate, you know- plan for the worst hope for the best sort of thing)

Not wishing to labour the point about net vs gross assets, but there is a passing reference to 75% of net wealth being in property. But by my calculations it is more like 120%, or perhaps as high as 180% if exclude pensions?

I am currently locked in my mortgage for another 18months - but seems like I might want to consider an offset mortgage when comes refinancing time (I was thinking of locking in for 5yrs then). Can you please confirm that the savings being used for an offset cannot be invested - even in money market? (hence just my emergency cash savings).
What hasn't been mentioned is that although I have 12months worth of expense saved, I would get a full year compensation if I was to get laid off - adding a bit of comfort in my current emergency funds.

Regarding your point on % of net worth, I'd be over 85% without the pension (btw if you were speaking net, I am struggling to see how you can get above 100% - in debt/equity terms then yes)