Pay off mortgage Or Invest Money

[A.steve]

8 hours ago, house-down said:

On the other hand I cannot think of many areas which would give me a 7% risk free rate of return so I am guessing this is the best thing to do.

In your situation, I took an offset mortgage and offset it.

I am, however, going to throw a curve ball - as it's an idea in which I'm interested.

I don't think it controversial to say:

• Equity investment is inherently riskier than Gilts, NS&I and savings accounts (now paying 6% on 1-year terms).
• Base rates really started to rise from 17 December 2021.  At that time the FTSE 100 was at ~7270 and interest rates had just moved from 0.1% to 0.25%.
• Today, interest rates are 5% - and the FTSE 100 is at ~7274.
• If prices were 'rational' - we would expect the FTSE 100 to be paying dividends 60 times larger than in December 2021... in order to justify the market cap.

Obviously... I know that prices do not need to meet my 'rational' expectations... but the observation still seems relevant.

Are we going to see a correction to the price of equities?   If so, on what scale?  Is the prospect of falling equity prices what's making Mr Bailey pull a funny face here and talk about rapidly falling inflation?

[Johnno1167]

15 hours ago, Sackboii said:

Have you considered paying large sums into a pension each tax year ? Limit now raised to £60k pa.

Taper relief gets you. As your threshold income rises above the taper threshold (200K), your allowance reduces by £1 for every £2 above it . 

[TenYearToGetMyMoneyBack]

8 hours ago, DarkHorseWaits-NoMore said:

Any interest earned in an offset mortgage (that cancels out the debt interest) isn't classed as income and isn't liable to taxation. Both the debt and the capital offset fall with inflation, the repayments are paid from the capital offset.
Where's the risk in this strategy?
Is there some time lag in balance calculations or something that incurs some marginal cost?
Eg. Say a 2 year offset deal with no fees.

Edit: The Financial Services Compensation Scheme (FSCS) 85k limit might require some planning.

I'm only familiar with Natwest. With the mortgage I have:

I believe interest is calculated daily. They definitely send me a statement every three months telling me how much money I have saved.

There are no fees or redemption charges, which was a big appeal to me as I had two endowments maturing less than a year after I took out the mortgage.

However, interest has always been SVR. Are fixed rate offset mortgages available ?
Regarding fees how often did you see ultra low rate mortgages with an arrangement fee that over a couple of years would push the effective rate up a % or more.

Definitely DYOR but I believe that if the bank goes bankrupt the savings will simply be deducted from the mortgage balance before it gets sold on to the likes of Northern Rock Asset Management.

 Of course, as others have said you could have 100% certainty be paying off the mortgage or take a mix and match approach, perhaps pay off a big chunk and put the rest on an offset. 

[Sackboii]

50 minutes ago, Johnno1167 said:

Taper relief gets you. As your threshold income rises above the taper threshold (200K), your allowance reduces by £1 for every £2 above it . 

Employer (rather than employee) contributions are the way forward.

[Nick Cash]

8 hours ago, Shep said:

Yes, you're correct 3.83% x 1.82 = 6.97%

You multiply or divide by the following depending on which way you are working it out (multiply up from net, divide down from gross).

- 1.25 if you're a basic-rate taxpayer
- 1.66 if you're higher-rate taxpayer
- 1.82 if you're a top-rate taxpayer

https://www.moneysavingexpert.com/savings/best-cash-isa/

In line with many others we too faced this dilemma. It’s very hard and quite time consuming to get enough return on savings or investments as a top-rate tax payer. 
 

We prioritised family needs and decided to pay off mortgage quickly. Always now debt free. The freedom now to pick and chose what to spend on be it education, holidays, home improvements etc etc is invaluable. 
 

Whatever strategy you choose you can never be poor (assuming no apocalypse).

My only advice for you would be to not to run your life trying to maximise savings and investments. There is no need and very little enjoyment.

[dugsbody]

2 hours ago, Nick Cash said:

We prioritised family needs and decided to pay off mortgage quickly. Always now debt free. The freedom now to pick and chose what to spend on be it education, holidays, home improvements etc etc is invaluable. 

This idea that only by prioritising the mortgage overpayment can it be paid off more quickly leaving you free to make those other choices is not true.

I too may want to pay off my mortgage early. I just choose to do it in a bit lump sum after my stock market investment has hopefully generated better returns.

Historically, if I pursued my strategy (stock market) and someone else purely chose to ignore the stock market and always overpay their mortgage, I'd be the one mortgage free first.

[house-down]

The problem is that tax on dividends and CGT on share sales are often ignored - In my example you would need to to able to get 7% from gilt investments (risk free) to match 3.83 % personal mortgage and a similar figure for share portfolio.  

If you adjusted for risk premium (Sharpe ration) the share portfolio likely requires a 10% risk adjusted return.

My point is that the pre tax net gain is often overlooked....

One reason I dont want to pay down the mortgage is I think the government will allow and indeed encourage inflation so you are better being a borrower in those circumstances

[mynamehere]

 

It used to be very common to see people self offset, ie keep cash in a savings account and a mortgage at 1.5%, because the taxable income wasn't that significant.

Very different picture now, tax is real concern, especially with child benifit etc to think about. There are huge flows from non-isas savings to mortgage debt for this reason, so need to be careful reading to much into drops in mortgage net lending.

Edited July 11, 2023 by mynamehere

[Locke]

If you can get an offset savings account against your mortgage with a higher interest rate than the mortgage, then you would be best off doing that. If the interest rate on the account is say 5% and your mortgage 3.5%, then you would only pay income tax on the 1.5% difference.

The other advantage with the offset mortgage is the flexibility. If rates do go down in the next few years (LOL) then you have that cash available to invest instead of having paid off the mortgage directly.

9 minutes ago, house-down said:

The problem is that tax on dividends and CGT on share sales are often ignored - In my example you would need to to able to get 7% from gilt investments (risk free) to match 3.83 % personal mortgage and a similar figure for share portfolio.  

Yep. Paying off debt is a risk free investment and does not count as income.

Quote

One reason I dont want to pay down the mortgage is I think the government will allow and indeed encourage inflation so you are better being a borrower in those circumstances

That is only true if your pay rises faster than your interest rate. It's fascinating that people keep posting this ridiculous propaganda.

Edited July 11, 2023 by Locke

[dugsbody]

20 hours ago, house-down said:

Is my maths wrong that despite me paying 3.83% on my mortgage and earning 4% on the savings the effective tax rate that I need to earn is in fact 7% to just break even?

Put differently I need to earn 7% before tax to match paying 3.83% mortgage.

I don't think this is quite correct because it depends on where you'd invest that money. If instead of overpaying the mortgage you put the money into a S&S ISA then you'd only need a return of > 3.83%.

 

[dugsbody]

3 minutes ago, Locke said:

That is only true if your pay rises faster than your interest rate. It's fascinating that people keep posting this ridiculous propaganda.

Interest rates do not rise perpetually, whereas salaries generally do.

[Nick Cash]

1 hour ago, house-down said:

The problem is that tax on dividends and CGT on share sales are often ignored - In my example you would need to to able to get 7% from gilt investments (risk free) to match 3.83 % personal mortgage and a similar figure for share portfolio.  

If you adjusted for risk premium (Sharpe ration) the share portfolio likely requires a 10% risk adjusted return.

My point is that the pre tax net gain is often overlooked....

One reason I dont want to pay down the mortgage is I think the government will allow and indeed encourage inflation so you are better being a borrower in those circumstances

You’ve given it much thought already. Do whatever you feel most comfortable with. No one has a crystal ball, we all have differing risk profiles. The strategy you decide on will be the best for you. If you invest in shares there may be no CGT to worry about.

Don’t obsess over fractions of a percent. 

[Nick Cash]

1 hour ago, dugsbody said:

Interest rates do not rise perpetually, whereas salaries generally do.

However a lot of company pensions have yearly increases set below the current rate of inflation. One of mine has a maximum yearly increase of 3%. Won’t take too many years of 7% inflation to make a huge difference.

 

[Johnno1167]

4 hours ago, Sackboii said:

Employer (rather than employee) contributions are the way forward.

Doesn’t make any difference , employer inc salary sacrifice payments are included as well as own employee contributions into company and/or private pension . 

[Nick Cash]

1 hour ago, dugsbody said:

This idea that only by prioritising the mortgage overpayment can it be paid off more quickly leaving you free to make those other choices is not true.

I too may want to pay off my mortgage early. I just choose to do it in a bit lump sum after my stock market investment has hopefully generated better returns.

Historically, if I pursued my strategy (stock market) and someone else purely chose to ignore the stock market and always overpay their mortgage, I'd be the one mortgage free first.

Yes, true. But a top rate tax payer can afford to use both strategies. And should. We did both. And reviewed annually after each years bonuses.

[DarkHorseWaits-NoMore]

On 10/07/2023 at 14:53, house-down said:

...a 650K mortgage which now needs to re reset at 3.83% for five years I am seriously thinking of paying it off.

 

6 hours ago, dugsbody said:

...I don't think this is quite correct because it depends on where you'd invest that money. If instead of overpaying the mortgage you put the money into a S&S ISA then you'd only need a return of > 3.83%.

How do you get 650k into a Stocks & Shares ISA that has a 20k/year input allowance? To tax wrap gains but with added risk noted.

How do you get 650k into a Offset mortgage and keep the capital insured with the Financial Services Compensation Scheme (FSCS) 85k limit?
I think you'd need to take out 8x 85k Offsets Mortgages from different lending organisations or double up with the misses 2x by 4x.

 

 

 

Edited July 11, 2023 by DarkHorseWaits-NoMore
add detail

[TenYearToGetMyMoneyBack]

1 hour ago, DarkHorseWaits-NoMore said:

How do you get 650k into a Offset mortgage and keep the capital insured with the Financial Services Compensation Scheme (FSCS) 85k limit?
I think you'd need to take out 8x 85k Offsets Mortgages from different lending organisations or double up with the misses 2x by 4x.

 

A confirmation of what I posted earlier

https://www.a-m-i.org.uk/wp-content/uploads/2018/04/Apr-2018-The-right-of-set-off.pdf

As for the idea that you could get an offset savings account paying a higher rate than the actual mortgage I suspect that is fantasy. It would be a guaranteed way for the bank to lose money. 

[DarkHorseWaits-NoMore]

Agreed, at best only matching interest rates as far as I've seen recently.

[mkz]

Similar sort of question, but I have a different solution in mind and wondered if there was a catch I haven't spotted yet. My 5-year 2.09% fix expires at the end of this year, and there will be about £56k outstanding and a remaining term of 15 years. I have the cash to pay it off, but it seems like there's a better option. I can reserve a rate now for a 2 year fix (6.24% is available) and I can reduce the term to 2 years, and keep the cash in a 2 year fixed rate cash ISA (5.4% is available now, and maybe a better rate soon). That means total interest payable on the mortgage of £3,712.35 and total interest earned on the savings of £6211.29. What have I missed, please?

[house-down]

13 minutes ago, mkz said:

Similar sort of question, but I have a different solution in mind and wondered if there was a catch I haven't spotted yet. My 5-year 2.09% fix expires at the end of this year, and there will be about £56k outstanding and a remaining term of 15 years. I have the cash to pay it off, but it seems like there's a better option. I can reserve a rate now for a 2 year fix (6.24% is available) and I can reduce the term to 2 years, and keep the cash in a 2 year fixed rate cash ISA (5.4% is available now, and maybe a better rate soon). That means total interest payable on the mortgage of £3,712.35 and total interest earned on the savings of £6211.29. What have I missed, please?

You are amortising the mortgage balance so you cant compare the two - You have to compare the APR pre post tax 

[mkz]

11 minutes ago, house-down said:

You are amortising the mortgage balance so you cant compare the two - You have to compare the APR pre post tax 

Couldn't you do the same thing? I know you can't put £650k into a cash ISA and you have to pay a load of tax on the interest, but even so, you can get nearly 6% on a 5 year fixed-rate savings account, so if you put it all (or most) in that and reduce your mortgage term to 5 years you'd get the same effect, no?

[house-down]

If I am going to lock my money away for five years at 6% what is the point rather then just pay back mortgage?  The idea of havig cash is liquidity today so you can buy something when the price is right including a house or shares 

 

Thats the worst option 

Offset would be nice but Halifax dont do it and I cant move mortagge providers so not an option 

[A.steve]

1 hour ago, house-down said:

If I am going to lock my money away for five years at 6% what is the point rather then just pay back mortgage?  The idea of havig cash is liquidity today so you can buy something when the price is right including a house or shares 

 

Thats the worst option 

Offset would be nice but Halifax dont do it and I cant move mortagge providers so not an option 

You don't need to accept a 5-year bond to get 6%... One year terms on savings yield more than 5 year terms.

The prices are saying that the market expects interest rates to fall much sooner than in 5 years.

Even if you did buy a 5-year bond... if 5-years is shorter than your mortgage term, it still presents you with more options than early repayment (especially if you assume that mortgage borrowing will be harder to arrange in future.)

Offsetting has a tax efficiency, of course, because being paid zero does not attract tax - whereas receiving x% and paying y% causes tax liabilities on the x% without tax relief on the y%.

Liquidity isn't free... though I am rather disappointed at how difficult it is to efficiently invest in bonds.  There used to be flexible term savings offers - one might see 2-year fixed rate deals... but where you can withdraw early for a small proportional loss of interest.. perhaps 30, 60 or 90 days.  It made sense to me that this should be feasible... as, if someone else wanted to cash out of a 6%/anm 2-year maturity position after 1-year... I can imagine myself wanting to buy their bonds with 1-year term and 6%/anm yield.  The only reason for a problem is price-gouging by banks.    I wonder if fintech will bring a solution in future?

 

[jiltedjen]

Test

[jiltedjen]

Really strange I can post test, but I was going to write something about inflation and get a 403 error access to recourses denied