Investing to Pay Off Mortgage - thoughts?

Thrugelmir

Hopefully you've decent job security to opt for a 37 year mortgage term. At 2.32% over the entire term you'd pay £117k in interest. Hopefully your investments will bear fruit. 

barnstar2077

Can I ask why a LISA and not a SIPP?  I am not advocating either one, just interested in your answer.

kinger101

^^
If a basic rate taxpayer, LISA beats SIPP.  SIPP is taxable on withdrawal at marginal rate, whereas LISA isn't.

Sebo027

Sailtheworld said:
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.

I don't see how house prices cannot come into it when you are considering it as an asset that has a value. 

If you invested £200k in a property and it does not appreciate in value over a given period of time then it will infact be worth less than it was when you bought it. Is that a risk free investment? Perhaps if we are only concerned with the actual written capital invested at a point in time. 

Subsequently investing a lump sum of £150k, and holding £50k equity in a mortgaged property valued at £200k, will, if invested sensibly, statistically speaking, have a higher probability of making the investor a high return over a 10-20 year period. 

Sailtheworld

Sebo027 said:

Sailtheworld said:
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.

I don't see how house prices cannot come into it when you are considering it as an asset that has a value. 

If you invested £200k in a property and it does not appreciate in value over a given period of time then it will infact be worth less than it was when you bought it. Is that a risk free investment? Perhaps if we are only concerned with the actual written capital invested at a point in time. 

Subsequently investing a lump sum of £150k, and holding £50k equity in a mortgaged property valued at £200k, will, if invested sensibly, statistically speaking, have a higher probability of making the investor a high return over a 10-20 year period. 

The house has been purchased so that's a done deal - it will go up or down in price. That'll happen whether the OP invests today's monthly cash flow or pays off the mortgage.

Yes if you plug in historic market returns and extrapolate 20 years into the future you'll have a better return vs paying off the mortgage - always. So what?  That's just one factor.

You need to consider appetite for risk. Some would think it obvious to invest £150k instead of being mortgage free; others wouldn't be able to sleep at night.

You also need to consider risk adjusted returns. There's a reason expect returns are higher from investing - risk is higher. Does the higher expected return trump the guaranteed return from paying off the mortgage. How sure can we be that the next 20 years look like the last 20 years?

Not all the answers are available from a spreadsheet.

ian1246

So, just to post another update - sadly our house sale fell through. Our buyer pulled out due to "Devastating Personal Circumstances". We did manage to then find a 2nd buyer - someone who had an inheritance and was looking to buy our house to rent out - but he then also changed his mind when he actually did his research on being a landlord, wasting our time!

Since then, we've had no luck selling our house (3 bed semi-detached with a fairly small 3rd bedroom), despite dropping our price- we've had a few viewings from people looking to upsize, but our 3rd bedroom has put them off. I suspect our issues with selling are a combination of the market being saturated with properties for sale, coupled with the main "buyers" most likely to be interested in our property being first-time buyers (Good sized house, small 3rd bedroom), who are struggling to get mortgages and likely waiting for after the stamp-duty holiday expires to look at properties (possibility of house prices dropping?).

Its a bit gutting.... but there is one silver lining: Wife is pregnant, due date 21st May 2021!

Given this, we re going to stay put for Baby and look to move likely in Spring or Summer 2022 when Wife will have returned off Maternity. This is a much shorter-time frame than the initial 5-7years we had in mind for the planned move when I first posted this thread, but also a much longer time frame than what we had planned when we sold our house in August 2020.

The plan now, then, is to simply overpay in order to build up as much equity as possible for when we do try again to move, since with a Baby on the way it means Wife will be going down to working part-time when Baby arrives, which in turn will effect how much we can borrow and thus how much we can afford for our future home.

I did consider investments.... but realistically, less than 2 years is too much of a short time frame to hope for a good return.

We are, however, going to open up a LISA each (me £50 a month, her £55 a month. Increasing the amount each April to reflect Inflation i.e. 2% Inflation will mean increasing LISA contributions to £51.00 & £56.10 in April etc...) , the intention being when I retire at 60 (Wife will be 57) with my full DB pension, we can draw from my LISA to top up our income by the equivalent of (today's value) £500 a month. Assuming a conservative 6% return (4% After Inflation), that LISA will then run out shortly after Wife turns 60.... but we will then be able to draw from her LISA the equivalent of £500 a month (today's value) until I hit state pension age (69years old).

Her DC pension would be simply left alone as long as possible to continue to accumulate returns without actually drawing on it - a safety net for Wife should something happen to me.

Its been a busy year!