Mortgage or share returns

Thrugelmir

bwise wrote: »

However in any case I'm not sure that's right to focus on compound interest swelling the mortgage as inflation reduces the mortgage value in real terms over time. But I didn't want to cloud the issue by including inflation and other factors.

Above inflation wage rises was historically the key. With wage rises below the cost of living then debt could become a burden as disposable income becomes squeezed. Particularly once interest rates rise.

bowlhead99

bwise wrote: »

Yes you may get all sorts of returns or losses. But in the absence of a crystal ball I just wanted to check the logic putting aside all the potential unknowns.

For the purposes of my question, you can choose to insert any % S&S return you like as long as it is the total return, or any % interest rate. Essentially the question is asking if the mortgage interest rate is X% and the S&S return is Y%, excluding all other factors, if X is more than Y, pay off the mortgage, if X is less than Y, invest the money in Y.

As others have mentioned there is a bunch of other things to consider. We know you asked for the answer "based on the assumptions stated". But that almost sounds like you are trying to get a "textbook" answer that works for one very specific scenario and doesn't work real life, which is useless once you leave the virtual "exam room" that gave you the limited theoretical construct.

So, to answer the "based on the dumb assumptions" bit, then yes if all those assumptions are guaranteed to hold true each and every year... if you can earn 6% or £6000 before 20% tax giving 4.8 net then you should keep your mortgage in place instead of paying it off, because the mortgage company interest bill would only reduceby £4000 and only save you £3200 or 3.2 net after
tax relief.

But that's, as you say, "excluding other factors". And in the real world you have to make decisions "including all the factors".

Example, if you're a 20% tax payer you get 20% relief on your mortgage bill, but only where you are actually profitable and have tax to relieve. On the s&s investing side, if you're only a 20% taxpayer, you don't pay any further tax on equity dividends and you only pay a sub-20% tax on capital gains, and only when you actually liquidate assets that take you over the cgt exemption threshold, which might never happen if managed carefully.

If you are relying on drawing out the excess returns from investments to help with the interest bills on borrowing, you have to be aware that the returns from investments come in a completely unpredictable order. There's no point putting your head in the sand and saying "well I know that, that's why I am not trying to model in detail and just make basic assumptions". You basically have to model worst case scenario.

Depending on the order of returns, if you end up taking money out of investments at low valuation points rather than being able to let it all ride, you may never get past year ten of your 20 year plan that says investments will deliver a 6% annualised return. We can debate whether or not 6% annualised is realistic, but the point is, even if that is realistic overall you may not get to see the good years that deliver it, if they come after the lean years which wipe you out.

So in summary you can say that *mathematically* if one income number A (6%) is bigger than another expense number B(4%) then you are best to take the A and pay the B until the rate B creeps up and looks like it might exceed A, in which case stop chasing A and just pay off the liability that was creating B. BUT as A for any given period cannot be reliably predicted it is something of a dangerous game.

I think many of us have residential mortgages at the same time as investment portfolios, and that's fine as we never planned to necessarily settle the mortgage early, and we can pay it down over time out of salary while building our portfolio on the side for medium to long term goals. Fewer of us have a BTL business as this is a niche investment area. However in considering the finance for that business and the opportunity to use finance secured on that business for other personal investment options, you have to take it very seriously and conduct a full scenario sensitivity analysis on the range of outcomes that could occur; tax impacts, planning opportunities etc that might be available.

It is one thing saying "can you confirm this is right if these assumptions hold true?". No problem. A preschooler can tell you that 6 is bigger than 4.But the right question is usually "what's wrong with these assumptions".

kangoora

Asking for a simple yes or no answer on this board is like asking a politician what is their policy on, well, pretty much anything.

Although, 9 times out of 10, most yes/no questions do need the extra explanations or discussions they turn into.