Re-mortgage to invest in stockmarket?

skillboy

I have a UK property worth perhaps £200k with no mortgage. It is let out so the tenant provides me with monthly rental income.

Since UK mortgage rates are so low, does it make sense to re-mortgage the property (e.g. take out £100,000) and use that money to invest in a low cost index fund such as the S&P 500?

The mortgage rate might only be 2% yet the average annual return for the S&P 500 over the past 80 years has been around 9%.

I can't seem to find a good reason NOT to take the actions mentioned above.

Thoughts?

Thrugelmir

Is your investment horizon 80 years?

PEHsaver

as refinancing would give you a mortgage payment again can you not just invest the income that the property is generating? it would take a long time to get £100,000 into the markets , I wouldn't pay a large lump sum like this in all at once as if you timed it badly and the market drops drastically such as in 2008 you could loose a huge sum of money rather quickly and be paying to borrow it! , In this instance I would want to drip feed around £1,000 a month in but this would take over 8 years.

When I get a bonus at work I always invest it , but never all at once , I do it over the course of a few months in case I was to time it badly.

jamei305

You invest £100k tomorrow, then the stock market crashes leaving your investment worth £40k. By the time your fixed mortgage rate deal ends there has been a sterling & debt crisis leading to 12% interest rates, you loose your job, can't afford the £1000/month repayments, so then loose your house which is in negative equity anyway, and then mortgage company pursues you for the remaining balance. After a seven-year slump the stock markets start recovering, but Labour's "McDonnell tax" on filthy rich speculators means any sale proceeds from funds and shares held outside a pension are taxed at 90%. However with £5k now in your bank account you breathe a sigh of relief as you might be able to pay the rent on your flat for a few more weeks.

Malthusian

There are scenarios less apocalyptic than the above in which you could lose money.

The fundamental question is - how would you meet the mortgage payments if there was a recession and a stockmarket crash, and your tenant stopped paying their rent (which is precisely the time they're most likely to)?

If you'd have to sell shares then there's a significant risk of permanently losing money which you don't have with normal non-geared stockmarket investment.

When someone asks if they should invest in the stockmarket or overpay the mortgage, the general response is "if you're risk-seeking enough, invest in the stockmarket, as the rate of return should be higher than the mortgage", because the assumption is that they have a source of income independent of the stockmarket portfolio that they're currently using to make the normal payments with. (If they didn't they wouldn't be asking about overpayments.) That doesn't apply here, unless you give us more info.

iglad

jamei305 wrote: »

You invest £100k tomorrow, then the stock market crashes leaving your investment worth £40k. By the time your fixed mortgage rate deal ends there has been a sterling & debt crisis leading to 12% interest rates, you loose your job, can't afford the £1000/month repayments, so then loose your house which is in negative equity anyway, and then mortgage company pursues you for the remaining balance. After a seven-year slump the stock markets start recovering, but Labour's "McDonnell tax" on filthy rich speculators means any sale proceeds from funds and shares held outside a pension are taxed at 90%. However with £5k now in your bank account you breathe a sigh of relief as you might be able to pay the rent on your flat for a few more weeks.

I need a drink and a lie down after reading that nightmare scenario.

Old_Lifer

The average rate of return over the last 80 years is meaningless, when you are investing today for just a few years.


Investing in the stock market carries risk. Doing so with a large sum of borrowed money is in my opinion bonkers. So much could go wrong, which would have a large impact on you plans.

barnstar2077

I increased my term recently to allow me to pay a bit more into my pension. However, by doing so I am effectively lowering my monthly outgoings and making it easier for me to cope during tough times (by stopping the over payments into my pension I would be better off each month than I was before I changed my mortgage term.)

Also, if I was say five years from retirement then borrowing some money to pay into my pension again might make sense as I could max out my pension contributions (gaining an almost instant 25% from the government.) I could then pay the mortgage off from my tax free lump sum when I can access my pension.

100k though, that is a serious chunk of change to commit to. I agree with you that on paper it looks good, and it probably would work, but could you survive a few bumps in the road along the way?

WillGates

If I did that, the housing bubble would burst, property prices would fall 50% and I'd end up with 100% mortgage!

danm

Interesting....

If the OP had 100k mortgage outstanding, and an established emergency fund; and had asked the forum how they should invest 100k they had just come into; I don’t think many responses would have been to pay the mortgage off!

Thrugelmir

danm wrote: »

Interesting....

If the OP had 100k mortgage outstanding, and an established emergency fund; and had asked the forum how they should invest 100k they had just come into; I don’t think many responses would have been to pay the mortgage off!

Nor committing a £100k to a low cost S&P 500 tracker fund.

Interest rates are low for a reason. Not least that global growth appears to be slowing.