savings vs. mortgage overpayment

atush

Now see, that is what I don't understand (a bit like should I have a pension or just S&S isas). People get hung up on this instead of just splitting money and doing both.

Why not invest AND overpay your mtg in tandem? That is what we do, we have pension, cash, overpay mtg and save into equities all running along together.

In theory, at our current mtg rate, we shouldn't over pay at all. But I have reduced the amt we overpay to a lower amt.

boglehead

racing_blue wrote: »

Hi BH.

My view, the key decision was taking a mortgage in the first place. That was the moment that you decided to expand your balance sheet- both assets and liabilities. Once that decision was made, game on (to borrow Thrugelmir's analogy).

If endgame -retirement- involves being debt free, then at some point between now and then, you'll need to shrink the liability column to zero, right?

But a young guy, earning well, with good prospects and some appetite for risk? Rather than using income to shrink liabilities at this early stage of play, why not use it to expand assets? Looking for asset classes which are under long term mean value; and for local opportunities where some sort of unique edge exists.

Much later, as the game draws to a close, a planned exit from some of these investments will allow you to repay mortgage- which in real terms you might expect to have shrunk significantly anyway.

I can see that this approach is not right for many people, by the way. But hope it provides some sort of answer to your Q about my own approach. I'm enjoying this discussion - thanks.

I am really enjoying that discussion too. Such amazing members on that forum !!

I hear your point. My only concern is that not shrinking the liability leave you no option but 1) find assets that return more than the cost of your mortgage by the time you retire and 2) in case point #1 doesn't happen (depending on investment horizon), it only leaves you with the option of unwinding investment at the time of retirement (and/or selling your house), hoping you've made a profit to at least cover your principal...

That's a risk most people (including myself) do not feel comfortable with. However, if successful, that leverage is really a powerful tool - so I can see your incentive.

What do you think of the new budget for pension and ISA? It makes me think that I might want to leverage my 45% tax relief on pension a bit more... I love the flexibility they are in the process of pushing in

atush

but 1) find assets that return more than the cost of your mortgage by the time you retire and

Equities should always do this, wrapped or unwrapped (but I'd wrap in a pension or an Isa) over periods of 10-40 years.

boglehead

atush wrote: »

Equities should always do this, wrapped or unwrapped (but I'd wrap in a pension or an Isa) over periods of 10-40 years.

Atush - I hate to contradict you, but the answer is NOT always...

40 years, you are correct - but not necessarily over 10. From memory, the longest period of null return on the equity market (data set starting in 1880s), was about 18/20years... I might be wrong but I seem to recall it was in the 50s/60s

That showed that someone who had invested in that particular year (early 50s I recall), would have only made its money back 18/20yrs later.

Overall though, I'm with you - that's why I am investing over the long term and not trying to buy the market... with an aspiration to return 4% above inflation.

planteria

boglehead wrote: »

What do you think of the new budget for pension and ISA? It makes me think that I might want to leverage my 45% tax relief on pension a bit more... I love the flexibility they are in the process of pushing in

i think today's budget strengthens the arguments for Investment over Debt Repayment, with increased ISA limit and increased flexibility with and access to Pension pots. great news all round imo.

planteria

atush wrote: »

Equities should always do this, wrapped or unwrapped (but I'd wrap in a pension or an Isa) over periods of 10-40 years.

i would query this a little bit too, atush. i am with you in the principle. but it would be very possible to select funds/shares that completely fail to achieve their, and your, aims. i favour trying to 'beat the market' overall, but with that comes the risk of 'making a right hash of it' i suppose;)

boglehead

planteria wrote: »

i think today's budget strengthens the arguments for Investment over Debt Repayment, with increased ISA limit and increased flexibility with and access to Pension pots. great news all round imo.

Planteria - you're reading my mind... I might be putting a bit more in the pension once I filled both my wife and I's ISA + the JISA... especially since I am not sure how long will I still be able to claim a 45% tax relief for. I can see that one taken away in a few years (or when labour gets elected)

planteria

so can i.

even just the increased ISA allowance changes the lie of the land. i am already making plans to utilise the full allowance next tax year. in theory that will be at the expense of 3k or so debt reduction, but i'll probably just have to earn a bit more

planteria

did you make any decisions boglehead?

boglehead

Yes,
Out of the the £25k I still had to allocate (around 2k per month), 8k will go into the increase ISA allowance for both ISA my wife and I have.
75% of whats left will go to pension above what my employer matches. I have the feeling the tax relief of the HRT will be discountinued at some point... so i figured i would use my 47% tax relief while i still can (salary sacrifice also allows me to save NI)
The rest will be added to my emergency fund, currently standing at 12months of expenses... might be using this to get a BTL down the line.

Thanks all for your advice. I feel it really helped me make the right decision.