Invest or pay off house

newbieinvestor75

Alexland said:

There is a good thread about the consultation to increase the minimum age you can access your personal or workplace pension. Its looking like existing pensions with unqualified access to start at 55 might get protected rights so you might get access in 20 years certainly very unlikely to be as late as state pension age.

https://forums.moneysavingexpert.com/discussion/6240982/increase-to-minimum-pension-age-from-55-to-57-new-hmt-consultation#latest

We are contributing around 50% of our earnings into pensions and then after tax trying to make the most of our ISA allowances. This includes filling S&S LISAs (for age 60+) each tax year and putting much of the remaining allowance into S&S ISAs where we use an investment trust that provides a smoothed dividend yield around double the mortgage interest rate with the possibility of capital growth. We have just switched our low LTV mortgage to interest only to increase our S&S ISA contributions and will eventually repay the mortgage from the pension 25% lump sum (there is already more than 4x there).

It's not that risky running an unnecessary mortgage as the S&S ISA investment trust already provides enough 'passive income' (not that we like that term around here as it tends to be used by scammers and BTL sales people) to cover all the mortgage interest and some of our basic living expenses but for now all dividends get reinvested.

Oh wow 50%! That’s fantastic!
For my personal circumstances I’m not sure this would work for me as I want to semi retire early but interested to hear your thoughts 

Alexland

newbieinvestor75 said:

For my personal circumstances I’m not sure this would work for me as I want to semi retire early but interested to hear your thoughts 

It's such a good tax saving that it seems crazy to turn it down. That's why we have gone interest only on the mortgage to build up even more in S&S ISAs to use before getting pension access.

Are you already on target that you could complete your pension contributions in your mid 40s to start drawing at 55 if allowed? It seems very unlikely if you and employer have only been contributing 10% total. My models are generally based on 2% growth above inflation and fees, an extra £9k pa for each year before state pension starts and 1/35th drawdown (SWR 2.86% for early retirement).  We also have money set aside to help the kids with university and house deposits.

MaxiRobriguez

newbieinvestor75 said:

MaxiRobriguez said:

£93k salary servicing a £125k mortgage. You could be making yourself much more tax efficient!

I'd be sacrificing the full £40k allowance into a pension. 10 years of that you'll get a pension pot of nearer half a million by the time you're 45 and then you can pay nothing further into it whilst you work part time if you want to do that, knowing that investment gains for the next 10 years before you can access get you closer towards lifetime limit.

That gives you an effective £53k salary, so push £20k annually into a S+S ISA. Ten years of that will give you £300k give or take at 45 and you can wind that down alongside part time work until your pension as per above is accessible.

In the meantime that gives you an effective post tax/post investment salary of around £25k. That should be enough to service a mortgage debt of £125k (banks sometimes lend at those ratios) which I guess is what, £700p/m? Add on bills, cars and whatnot and you're probably looking at expenditure of £18k annually which gives you £7k headroom for everything else. 

That doesn't touch your current savings at all....

Obviously that cuts your income quite significantly so may not suit if you have some expensive pastimes, but is an indication of what you could do to get yourself into a position whereby you could fully retire rather than work part time at 45 should you wish.

Thanks for the response. I guess this is really focusing on investing for retirement at 55 where as I am looking to balance retirement savings, with semi-retirement savings and living now but thanks for taking the time to write this.

I do wonder wether getting say £20-£25k in my pension works and then investing heavily in a stocks and shares ISA for withdrawal in my mid-late 40s?

The retirement date is your choice.

Your pension can only be accessed from 55, but that wrapper will need to fund potentially 40 years worth of living so it's in your interest to build it up significantly rather than forgo it purely because you can't access it earlier.

You can use the S+S ISA to bridge the ga from whenever you want to retire (i.e 45), to the point you can access the money in the pension (55).

The "plan" I gave you above allows you to roughly withdraw £30k income from your investments from 45 onwards until you die. The first ten years you withdraw from the S+S ISA, the following 40 you withdraw from the pension. It's fag packet maths so you'll want to fine tune it but it shows that with discipline and targeted tax efficient savings and investments, you could retire fully from 45, rather than work part time for a bit then, should you want to give up work completely.

Mickey666

newbieinvestor75 said:

• Any other tips!

Thanks

You don't really have any savings while you are in debt.

Look at this another way.  You're 35, have a very good salary and (could almost) own your home outright.
Should someone in this position borrow 50% of their house equity in order to start investing in the markets where there is a (admittedly small) risk of making a loss?
Or, since they have no mortgage, invest an equivalent amount each month in the markets, safe in the knowledge that should they make a loss it will have very little consequence?

Eco_Miser

Mickey666 said:

You don't really have any savings while you are in debt.

Not true. For example, I am in debt to my energy company (it's the way the budget account works in winter). However I have savings of many times that debt, but you say I really don't. Nonsense!

The same holds true for someone with a mortgage and investments - if the investments are earning more than the mortgage costs, it's a perfectly reasonable position.

NorthernJoe

Eco_Miser said:

Mickey666 said:

You don't really have any savings while you are in debt.

The same holds true for someone with a mortgage and investments - if the investments are earning more than the mortgage costs, it's a perfectly reasonable position.

Indeed though if the value of the mortgage is greater than the investments it is a form of leveraged investing. 

Most people are comfortable with that level of "risk" but, as ever, perception of risk is a very individualised 

Mickey666

Eco_Miser said:

Mickey666 said:

You don't really have any savings while you are in debt.

Not true. For example, I am in debt to my energy company (it's the way the budget account works in winter). However I have savings of many times that debt, but you say I really don't. Nonsense!

The same holds true for someone with a mortgage and investments - if the investments are earning more than the mortgage costs, it's a perfectly reasonable position.

I guess I should have said you can't really have any savings IN EXCESS of your debts.  Thus, if you have £1000 in 'savings' but owe your energy company £200 then you really only have £800 in savings because you're 'borrowing' £200 by not paying the energy company.

Similarly, if you're borrowing against your house to invest and the investments return more than the mortgage interest then you may consider that to be a perfectly reasonable position (fair enough) but it wouldn't really be true to say you're using your 'savings' to invest because you're actually borrowing your 'savings'.  And that borrowing comes with a risk to your home.

IMO, 'savings' are what you have left after paying off all debts, in which case there is no risk to your home.

It's just another way of looking at things.  A more 'honest' way, IMO, than believing you have 'savings' while you still have debts - and last time I checked, a mortgage was definitely a debt

Eco_Miser

Mickey666 said:

Eco_Miser said:

Mickey666 said:

You don't really have any savings while you are in debt.

Not true. For example, I am in debt to my energy company (it's the way the budget account works in winter). However I have savings of many times that debt, but you say I really don't. Nonsense!

The same holds true for someone with a mortgage and investments - if the investments are earning more than the mortgage costs, it's a perfectly reasonable position.

I guess I should have said you can't really have any savings IN EXCESS of your debts.  Thus, if you have £1000 in 'savings' but owe your energy company £200 then you really only have £800 in savings because you're 'borrowing' £200 by not paying the energy company.

No, you shouldn't say that. In your example I would have £800 savings in excess of my debt.

Mickey666 said:

Similarly, if you're borrowing against your house to invest and the investments return more than the mortgage interest then you may consider that to be a perfectly reasonable position (fair enough) but it wouldn't really be true to say you're using your 'savings' to invest because you're actually borrowing your 'savings'.  And that borrowing comes with a risk to your home.

I didn't borrow against my home to invest. I borrowed against my home to buy the home, the normal use of a mortgage. I just didn't bother cashing in my investments, which just about covered the mortgage anyway.

Mickey666 said:

IMO, 'savings' are what you have left after paying off all debts, in which case there is no risk to your home.

It's just another way of looking at things.  A more 'honest' way, IMO, than believing you have 'savings' while you still have debts - and last time I checked, a mortgage was definitely a debt

Yes, a mortgage is definitely a debt, and the cash and investments I have are definitely savings. The overall position is savings minus debt. Trying to call that overall position your 'savings' is confusing and incorrect. It leads to you saying you can't have savings while you still have debt, which I demonstrated above is nonsense.

jimjames

Mickey666 said:

Eco_Miser said:

Mickey666 said:

You don't really have any savings while you are in debt.

Not true. For example, I am in debt to my energy company (it's the way the budget account works in winter). However I have savings of many times that debt, but you say I really don't. Nonsense!

The same holds true for someone with a mortgage and investments - if the investments are earning more than the mortgage costs, it's a perfectly reasonable position.

Similarly, if you're borrowing against your house to invest and the investments return more than the mortgage interest then you may consider that to be a perfectly reasonable position (fair enough) but it wouldn't really be true to say you're using your 'savings' to invest because you're actually borrowing your 'savings'.  And that borrowing comes with a risk to your home.

If you are paying your mortgage and have investments in excess of your debts then there is no risk to your home. I've been paying into S&S ISAs over the last 10 years rather than overpaying my mortgage so you could say I've been over leveraging. Instead I now have investments worth 10x the mortgage balance rather than just having cleared the mortgage and having zero investments and zero mortgage. All down to personal preference but from a purely financial perspective it was more beneficial to invest than pay off mortgage.

Alexland

jimjames said:

If you are paying your mortgage and have investments in excess of your debts then there is no risk to your home.

Well there is a small possibility if you have chosen a poor investment or are required to sell it down while the price is lower than the value of your home at the same time your income dries up although we are starting to design for 'double failure' scenarios.

That's why I like holding an investment trust in our ISAs as it provides stable income to pay the mortgage and some of our bills anyway so it would be a triple failure of the investment value being lower, the job being lost and the dividends stopping (oh and running out of cash, and not getting a redundancy payment, and not being able to sell personal assets) before we had a problem paying the mortgage.....