Invest or pay off house

Mickey666

Eco_Miser said:
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.

OK, I'll try again.  You can only have savings if they are in excess of your debts, otherwise they are not 'savings' they are 'borrowings'

In your first post you stated:
Here are some facts:

• Savings - £105,000 - £20k in a stocks and shares ISA
• Debt - £125,000 mortgage on a property with estimated value of £260,000. Make 10% overpayments each month

I read that as £105k 'savings' (with £20k of it in stocks and shares ISA) and mortgage debt of £125k.  In my book you only have £105k in 'savings' because you haven't used it to pay your mortgage debt.  In other words, you are 'borrowing' your 'savings'.  I'm not saying that's necessarily a problem, if properly managed, just that it's the reality.

I don't have a mortgage.  If I were to get a mortgage tomorrow for £200k, would you really think I suddenly have an extra £200k of 'savings'?

george4064

Mickey666 said:

Eco_Miser said:
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.

OK, I'll try again.  You can only have savings if they are in excess of your debts, otherwise they are not 'savings' they are 'borrowings'

In your first post you stated:
Here are some facts:

• Savings - £105,000 - £20k in a stocks and shares ISA
• Debt - £125,000 mortgage on a property with estimated value of £260,000. Make 10% overpayments each month

I read that as £105k 'savings' (with £20k of it in stocks and shares ISA) and mortgage debt of £125k.  In my book you only have £105k in 'savings' because you haven't used it to pay your mortgage debt.  In other words, you are 'borrowing' your 'savings'.  I'm not saying that's necessarily a problem, if properly managed, just that it's the reality.

I don't have a mortgage.  If I were to get a mortgage tomorrow for £200k, would you really think I suddenly have an extra £200k of 'savings'?

I think there is some confusion with the terminology. Depends if you define savings as assets or net assets. I think you’re referring to savings as net assets whilst Eco is referring to savings as assets, neither of you are wrong just that you’re looking at things through a slightly different lens.

Liabilities = mortgage
Assets = money in bank accounts etc

Net assets = Total Assets - Total Liabilities

To answer your question, by taking out a £200k mortgage (assuming in your case that means equity release) you’ll get 200k in your bank account. Your assets will have increased but your liabilities (mortgage) would have equally increased, so there is no net difference.

steampowered

Mickey666 said:

I don't have a mortgage.  If I were to get a mortgage tomorrow for £200k, would you really think I suddenly have an extra £200k of 'savings'?

Yes, that is entirely possible. 

Let's take an example: 
- You take a mortgage of £200k.
- You are a higher rate tax payer.
- You top up your pension by £200k (assuming you can do this over time to claim higher rate tax relief).
- You now have £280k in your pension (due to 40% tax relief).
- Pensions return about 7% per year on average, so after 5 years of average performance you have £392k.

Your £200k mortgage has now turned into £392k in your pension due to investment returns and tax relief. 

That's why it is more sensible to invest, than it is to pay off a mortgage ASAP.

Mickey666

I think you missed the word "suddenly" in my post and have gone on to answer a question I didn't ask.

But I get your point . . . anyone without a mortgage on their home should rush out asap, take out the biggest mortgage they can afford, and put it all in their pension fund. 

Eco_Miser

Mickey666 said:

Eco_Miser said:
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.

OK, I'll try again.  You can only have savings if they are in excess of your debts, otherwise they are not 'savings' they are 'borrowings'

No. Savings are savings, and debts are (possibly) borrowings. Your incorrect use of terminology is causing confusion.

Mickey666 said:

In your first post you stated:
Here are some facts:

• Savings - £105,000 - £20k in a stocks and shares ISA
• Debt - £125,000 mortgage on a property with estimated value of £260,000. Make 10% overpayments each month

no I didn't, that was newbieinvestor75

Mickey666 said:

I read that as £105k 'savings' (with £20k of it in stocks and shares ISA) and mortgage debt of £125k.  In my book you only have £105k in 'savings' because you haven't used it to pay your mortgage debt.  In other words, you are 'borrowing' your 'savings'. 

That's nonsense. Gobbledegook. newbieinvestor75 has £105k in savings because they saved it. They owe £125k because they borrowed against the value of the house they bought. They didn't 'borrow' their' savings'. They 'borrowed' their house.

Mickey666 said:

I'm not saying that's necessarily a problem, if properly managed, just that it's the reality.

I don't have a mortgage.  If I were to get a mortgage tomorrow for £200k, would you really think I suddenly have an extra £200k of 'savings'?

Yes, sort of, you'd have £200k sitting in your bank account, and a mortgage debt of £200k. No change in net worth (except the costs of the mortgage), but you'd have £200k 'savings' to play with. Although since you just borrowed it, rather than saving it up over time, perhaps 'savings' isn't the right word, but it is an asset, possibly sitting in a savings account.

Mickey666

If that's the way you wish to interpret these things then that's your choice, but the concept of 'saving' money by not paying down debts is certainly an 'interesting' one.
I prefer being more honest with myself not having any debts.  It might be a 'nonsense and gobbledegook' approach to you but it got me retired at 50 and I don't lose sleep worrying about how my over-leveraged 'savings' are performing.  

MaxiRobriguez

It's perfectly sensible and grammatically correct to list both savings and debts separately.

If you want an overall picture the term is 'net assets'.

Alexland

Yup, net worth = assets (cash savings, house, S&S investments, etc) minus liabilities (mortgage, 0% credit cards, etc)

jimjames

Mickey666 said:

If that's the way you wish to interpret these things then that's your choice, but the concept of 'saving' money by not paying down debts is certainly an 'interesting' one.
I prefer being more honest with myself not having any debts.  It might be a 'nonsense and gobbledegook' approach to you but it got me retired at 50 and I don't lose sleep worrying about how my over-leveraged 'savings' are performing.  

Are you really suggesting that if you have a mortgage you have no emergency savings unless they are in excess of the mortgage? That seems crazy. Mortgage is the one debt that most people would accept as it is so long term and having an emergency fund is pretty important for most people. It's your apparent redefinition of savings as net worth is rather confusing which isn't helping clarity.

steampowered

Mickey666 said:

But I get your point . . . anyone without a mortgage on their home should rush out asap, take out the biggest mortgage they can afford, and put it all in their pension fund. 

For people who are in the position of having inadequate retirement savings but are mortgage free, it makes complete sense to take out a mortgage to boost their pension.

This is because pensions get tax relief (20% for basic rate tax payers, 40% for higher rate tax payers) added by the government. The pension also receives investment returns (6-7% on average over the long term). 

It's simple mathematics that in almost every scenario people are likely to be financially better off making the most of tax relief and investment returns in a pension than they are clearing the mortgage ASAP, particularly higher rate tax payers.

Anyone who "loses sleep" over the fact that they have long term investments - regardless of whether that is shares, a pension or a buy-to-let property - has an irrational and unhealthy fear of investing. It just shows a complete lack of understanding of what investments are and how they work.