Investing to Pay Off Mortgage - thoughts?

ian1246

DireEmblem said:

Could you consider another tact, invest to cover your monthly mortgage payments?  You might need to save a little more, but based on historic averages, that little more will earn 7% a year, while your low mortgage interest rates should be under 2%.

Thats a good suggestion - our mortgage payments are currently £576 per month, dropping down to £529.23 per month on October 31st (Have reserved 3months in advance). At £529.23 per month, that's  £6,350.76 per year... so a return of 7% on investments would mean in theory £93,000 would provide a yearly return in excess of £6500, which could be withdrawn to cover the yearly cost of the mortgage. If we weren't splitting our spare income between Mortgage Overpayments & Investments... and just investing, I'd like us to hopefully be hitting that figure in around 8-9years time (If we have children - far sooner if we don't have children).

The issue is we have to juggle medium-term requirements with long-term requirements.

In the short-term, we are trying to start a family so hopefully will have children. If we have children... in the medium term we are going to definitely want to upgrade to a bigger house - likely around the time we've had a 2nd child and that 2nd child turns 3 years old (30hrs free childcare) or goes to School, meaning Child-Care costs will be greatly reduced. That's roughly a 7-8 year time-frame from now (hopefully have our first child in the next 12months and then 2nd child 3-4years later).

By overpaying the mortgage by a reasonable amount and building up our equity in our property (we started at a 25% deposit 5 years ago... and another 7-8years will put us paying the mortgage for 12-13years of a 25year term) , we are hopefully ensuring we will be able to move to a good sized house suitable for our future family in 7-8years time which, barring ridiculous house-price increases, should be reasonably affordable in terms of mortgage payments - regardless of what happens to the Markets. That's the medium term goal.

The Long-Term Goal is to be completely mortgage free. I imagine when it comes to moving to a bigger house in 7-8years time, rather than cashing in our investment and loosing the growth returns, we may well simply keep them invested and keep adding to them with spare-cash, so that hopefully with our future-house mortgage, we may one day be able to do what you suggest i.e. meet future-house's mortgage repayments from investment returns and hopefully exceed our future-mortgage amount in investment value and thus have the ability to be mortgage free (Or Mortgage Neutral!). The benefit of this would be that the time-frame we are talking about in such a scenario (Mortgage Free/Neutral on Future-House) would be over a much longer period than the initial 7-8years we are talking about for the medium-term goals, so a less risky proposition (in terms of more likely to make a positive return).  But those will be decisions to be made in 7-8years time.

Hence... the current 50/50 approach between overpayment and investment, both to try and cover the medium term goal (ability to upgrade to a bigger/more expensive house with a reasonable rather than insanely excessive mortgage) and long-term goal (to be completely mortgage free/neutral for the rest of our lives).

Thrugelmir

If find an investment guaranteed to return 7% annualised at the current time let us all know.  

ian1246

Thrugelmir said:

If find an investment guaranteed to return 7% annualised at the current time let us all know.  

There is none. Hence the overpayment side of things... 

PaulW922

An advantage to over-paying is that over time it will hopefully reduce your loan to value size making it easier to get a better deal in future, although your current LTV looks pretty good 

Sailtheworld

ian1246 said:

DireEmblem said:

Could you consider another tact, invest to cover your monthly mortgage payments?  You might need to save a little more, but based on historic averages, that little more will earn 7% a year, while your low mortgage interest rates should be under 2%.

Thats a good suggestion - our mortgage payments are currently £576 per month, dropping down to £529.23 per month on October 31st (Have reserved 3months in advance). At £529.23 per month, that's  £6,350.76 per year... so a return of 7% on investments would mean in theory £93,000 would provide a yearly return in excess of £6500, which could be withdrawn to cover the yearly cost of the mortgage. If we weren't splitting our spare income between Mortgage Overpayments & Investments... and just investing, I'd like us to hopefully be hitting that figure in around 8-9years time (If we have children - far sooner if we don't have children).

7% is really unlikely. That figure, I think, comes from studies looking at historical investment returns over the last couple of centuries and doesn't account for inflation. It's 'only' 3 - 5% ahead of inflation or 1 - 3% ahead of government bonds. Assuming investors of today demand the same premium for risk taking it should be noted that inflation is zero and yields on gilts are negative. This might or might not change but I'd caution against plugging in 7% investment return into a spreadsheet for comparison purposes.

I think your idea of splitting spare cash between mortgage overpayments and investments is a good one. The investment gives you exposure to potential stock market returns and the mortgage overpayment helps reduce overall risk. Win win.

Sebo027

Sailtheworld said:

ian1246 said:

DireEmblem said:

Could you consider another tact, invest to cover your monthly mortgage payments?  You might need to save a little more, but based on historic averages, that little more will earn 7% a year, while your low mortgage interest rates should be under 2%.

Thats a good suggestion - our mortgage payments are currently £576 per month, dropping down to £529.23 per month on October 31st (Have reserved 3months in advance). At £529.23 per month, that's  £6,350.76 per year... so a return of 7% on investments would mean in theory £93,000 would provide a yearly return in excess of £6500, which could be withdrawn to cover the yearly cost of the mortgage. If we weren't splitting our spare income between Mortgage Overpayments & Investments... and just investing, I'd like us to hopefully be hitting that figure in around 8-9years time (If we have children - far sooner if we don't have children).

7% is really unlikely. That figure, I think, comes from studies looking at historical investment returns over the last couple of centuries and doesn't account for inflation. It's 'only' 3 - 5% ahead of inflation or 1 - 3% ahead of government bonds. Assuming investors of today demand the same premium for risk taking it should be noted that inflation is zero and yields on gilts are negative. This might or might not change but I'd caution against plugging in 7% investment return into a spreadsheet for comparison purposes.

I think your idea of splitting spare cash between mortgage overpayments and investments is a good one. The investment gives you exposure to potential stock market returns and the mortgage overpayment helps reduce overall risk. Win win.

Allowing for an inflation rate of 3% your 7% annualized return becomes 4%. That's a 4% in the plus column as opposed to the erosion of cash savings through inflation. Furthermore there is no guarantee that house prices will rise to beat that return, infact the market in, for example, Glasgow has been almost stagnant for 20 years, obviously it's a different story in London. Although paying off a mortgage has tremendous value from a home security and emotional perspective. 

83705628

Look there's a lot of speculation back and forth.
House prices are fully valued, don't have expect anymore growth there.
A reasonable expectation from a VLS fund over the foreseeable future, your kind of timeframe, is 4-6%. I don't see it being much higher, i don't see it being that much lower. So it's part worthwhile and the 50:50 idea is fine.

Sailtheworld

Sebo027 said:

Sailtheworld said:

ian1246 said:

DireEmblem said:

Could you consider another tact, invest to cover your monthly mortgage payments?  You might need to save a little more, but based on historic averages, that little more will earn 7% a year, while your low mortgage interest rates should be under 2%.

Thats a good suggestion - our mortgage payments are currently £576 per month, dropping down to £529.23 per month on October 31st (Have reserved 3months in advance). At £529.23 per month, that's  £6,350.76 per year... so a return of 7% on investments would mean in theory £93,000 would provide a yearly return in excess of £6500, which could be withdrawn to cover the yearly cost of the mortgage. If we weren't splitting our spare income between Mortgage Overpayments & Investments... and just investing, I'd like us to hopefully be hitting that figure in around 8-9years time (If we have children - far sooner if we don't have children).

7% is really unlikely. That figure, I think, comes from studies looking at historical investment returns over the last couple of centuries and doesn't account for inflation. It's 'only' 3 - 5% ahead of inflation or 1 - 3% ahead of government bonds. Assuming investors of today demand the same premium for risk taking it should be noted that inflation is zero and yields on gilts are negative. This might or might not change but I'd caution against plugging in 7% investment return into a spreadsheet for comparison purposes.

I think your idea of splitting spare cash between mortgage overpayments and investments is a good one. The investment gives you exposure to potential stock market returns and the mortgage overpayment helps reduce overall risk. Win win.

Allowing for an inflation rate of 3% your 7% annualized return becomes 4%. That's a 4% in the plus column as opposed to the erosion of cash savings through inflation. Furthermore there is no guarantee that house prices will rise to beat that return, infact the market in, for example, Glasgow has been almost stagnant for 20 years, obviously it's a different story in London. Although paying off a mortgage has tremendous value from a home security and emotional perspective. 

House prices don't really come into it. They'll go up or down regardless of whether you do or don't overpay the mortgage. The comparison is 4% return vs mortgage rate. I think it's probable that over a decent period investment returns will beat mortgage rates but plugging 7% investment return into a spreadsheet is pointless. Flawed assumption = flawed outcome.

Plug in 4% investment return and it'll still beat the mortgage but at least the margin will be more realistic. Mortgage overpayments have a guaranteed return so then it's a case of deciding if that potential margin is worth giving up a guaranteed return and the risk being taken.

From my own personal perspective I extended my mortgage during the GFC all the way out to retirement to maximise pension savings. I thought it would be a sad day when I had to pay off the mortgage but my attitude has changed - I find the mortgage limits my flexibility to take a lower paid job or do something more interesting so I've started overpaying. Not complaining but I'm starting to resent that mortgage.

DireEmblem

I think the general rule of thumb, at least for retirement, is to save enough that you can live of withdrawing only 4% a year, so your investment still has a chance to grow with inflation.  This would have a different goal, so maybe you could get away with slightly higher.  Either way you look at it, long term, the stock market should return more than what you should potentially save overpaying and saving on interest.

83705628

DireEmblem said:

I think the general rule of thumb, at least for retirement, is to save enough that you can live of withdrawing only 4% a year, so your investment still has a chance to grow with inflation.  This would have a different goal, so maybe you could get away with slightly higher.  Either way you look at it, long term, the stock market should return more than what you should potentially save overpaying and saving on interest.

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Long term being at least 20-30 years if you're comparing it with a mortgage rate.