Sell shares to overpay mortgage?

[nest egg]

Would be great to get advice on the following. I have approx.17.5k EUR worth of BOI shares bought a few years ago. Openly speaking, purchased them before I knew what I was doing. No surprises, they're worth less than was paid for them (-4.5k). The biggest loss is on the shares bought earliest on.

Not all doom and gloom, learnt a few things over the years and in 2021 have a ~10k gain on other shares sold, and therefore will owe the tax man ~2.8k in CGT after the annual allowance.

Cutting my losses on these shares is probably the best course of action, given they would need to make substantial gains in % terms for me to break even, and I have a tangible gain this year to consider.

Other relevant information 1) Maxing AVCs, 2) Mortgage of 405k @2.6%, ~45% LTV) 3) No other debt 4) Emergency fund in place, 5) Am reducing the mortgage with the shares sold above.

The prudent thing to do would be to make a bigger lump sum off the mortgage, using the proceeds of the BOI share sale, which is possible without penalty.

Options

1. Sell the lot > Save €1,500 in CGT this year & €500 annually in mortgage interest thereafter.
2. Sell 7k's worth bought first & have the biggest loss > Saves €1,200 in CGT & €180 p/a in mortgage interest. Take a punt on the remaining shares, reassessing the decision at least once a year
3. Keep the lot > Forego CGT saving & annual interest saving > Take a punt on the full 17.5k, reassessing at least once a year

More or less decided option 3 isn't a runner, unless anyone thinks BOI is seriously undervalued and/or has a very bright upside. Between 2 and 3, could be swayed either way.

 

[Brendan Burgess]

1) You should not borrow to invest in shares which is what you are doing when you buy shares while you have a mortgage.

2) If you have liquid shares, you do not need an emergency fund, as you can sell the shares quickly if you need the money.

3) If you sell the shares, you have the emergency fund sitting in cash.

4) Usually I would say clear the mortgage with the cash first.

5) But as the CGT loss is useful to you and might not be useful to you in the future, I would use it now.

So sell the shares in full and pay down the mortgage.

Brendan

 

[nest egg]

1) You should not borrow to invest in shares which is what you are doing when you buy shares while you have a mortgage.

2) If you have liquid shares, you do not need an emergency fund, as you can sell the shares quickly if you need the money.

3) If you sell the shares, you have the emergency fund sitting in cash.

4) Usually I would say clear the mortgage with the cash first.

5) But as the CGT loss is useful to you and might not be useful to you in the future, I would use it now.

So sell the shares in full and pay down the mortgage.

Brendan

Good perspective. What I could also do though therefore is keep a portion of my emergency fund in liquid shares, this is obviously riskier than keeping it in cash, so would need re-evaluation periodically, considering how stable the employment situation is. Whether using cash or shares, the net effort of this approach will be to paydown more of my mortgage than I was considering to do.

 

[PebbleBeach2020]

I've bank shares myself. By not selling them now when you have a CGT tax liability in effect increases the cost of holding these shares. Its a no brainer, sell yr shares and minimise your CGT.

 

[Paul O Mahoney]

We sold Boi realised the loss, sold shares from her RSUs etc maximised last years AVC and the extra tax credit from that created a tax refund, which will cover the CGT of the share sales.

Its probably never going to happen again but it was nice to do all that and minimise tax

 

[DublinHead54]

1) You should not borrow to invest in shares which is what you are doing when you buy shares while you have a mortgage.

By following this logic you completely limit your potential returns......a balanced approach should be considered.

 

[Brendan Burgess]

By following this logic you completely limit your potential returns.

Hi Dublinbay

Yes, you limit your returns. But you also limit your risk so it's a very balanced approach.

Brendan

 

[DublinHead54]

Hi Dublinbay

Yes, you limit your returns. But you also limit your risk so it's a very balanced approach.

Brendan

I don't think its balanced, it is very risk averse. Is your advice to the Op that he should not make AVC (tax benefit / exposure to stock market) and only overpay mortgage?

There is a benefit to gaining exposure to the stock market whilst having a mortgage, it is not as black and white as you make out in my opinion

 

[Brendan Burgess]

If there is a big tax incentive to borrow to invest in the stockmarket, then it is usually right to so. So borrowing to invest in a pension is often right.

There is a benefit to gaining exposure to the stock market whilst having a mortgage,

Think about it like this.

Say you own a house worth €600k with a €400k mortgage.

Would you ask the bank for another €100k so you could buy shares?

Brendan

 

[Steven Barrett]

1) You should not borrow to invest in shares which is what you are doing when you buy shares while you have a mortgage.

This isn't correct Brendan. Borrowing money to invest in the stock market is getting a loan for the specific purpose of investing in the markets. This is not what they have done. They have borrowed with the specific purpose of purchasing a home, of which the loan is secured against.

Giving the long term nature of mortgages, it may not be possible for people to clear off their debt for decades to come. There's a lot of life to live in that time and that has to be paid for. Limiting your assets to your pension, home and emergency fund is not good planning. It is alright to have debt, as long as it is manageable. Paying off the mortgage early shouldn't be at the expense of everything else.


Steven
www.bluewaterfp.ie

 

[Brendan Burgess]

This isn't correct Brendan.

Hi Steven

Could you explain the difference in the following two scenarios to me.

A) Steven has a house worth €600k, a €500k mortgage and €100k in shares.
B) Brendan has a house worth €600k, a €500k mortgage and €100k in shares.

How we got there is just not relevant. They are the exact same.

Brendan

 

[Steven Barrett]

They're not mutually exclusive Brendan. If that was the case, anything you purchase would be with borrowed money.

 

[DublinHead54]

If there is a big tax incentive to borrow to invest in the stockmarket, then it is usually right to so. So borrowing to invest in a pension is often right.



Think about it like this.

Say you own a house worth €600k with a €400k mortgage.

Would you ask the bank for another €100k so you could buy shares?

Brendan

That is not a real life scenario.

If I had a house worth 600k with a 400k mortgage secured against it and a 100k lump sum. I would assess my options to continue to service the debt which I assume I can given I met the criteria to get the mortgage. I would then assess my own personal situation and opportunities vs risk. I would not simply pay off the mortgage by default, and that should not be the default advice given to people.

Right now with interest rates as low as they are, the opportunity cost of investing in shares can be worth it. If interest rates were 10% it would obviously be a different choice.

 

[NoRegretsCoyote]

I would then assess my own personal situation and opportunities vs risk. I would not simply pay off the mortgage by default, and that should not be the default advice given to people.

It depends on your income of course in the circumstances. With a €200k household income you can afford to take risks. With an €80k household income it would be pretty silly.

Once you are maximising tax-relieved pension contributions the default thing to do for most people with a lump sum is to pay down mortgage. There are lots of reasons to do otherwise but this should really be your starting point.

 

[Brendan Burgess]

They're not mutually exclusive Brendan.

Of course, they are not exclusive.
They are the same.

But people who would be horrified at the suggestion that they should borrow to invest, do that, by investing money in risky assets while they have borrowing.

Brendan

 

[Brendan Burgess]

I would assess my options to continue to service the debt which I assume I can given I met the criteria to get the mortgage. I would then assess my own personal situation and opportunities vs risk. I would not simply pay off the mortgage by default, and that should not be the default advice given to people.

It is absolutely the correct advice to tell people to pay off their mortgage.

A lot of people have a mortgage at 4% while they have their savings in a deposit account earning zero, "just in case."

The OP is paying 2.6% on his mortgage.

That is a risk-free, tax-free, guaranteed return on his investment.

He should not invest it in shares where

• it's risky
• it's taxed

So he needs to earn about 5.5% before expenses and tax just to match the 2.6%. And that is giving him no premium for the risk involved.

Brendan

 

[DublinHead54]

It depends on your income of course in the circumstances. With a €200k household income you can afford to take risks. With an €80k household income it would be pretty silly.

Once you are maximising tax-relieved pension contributions the default thing to do for most people with a lump sum is to pay down mortgage. There are lots of reasons to do otherwise but this should really be your starting point.

I agree that a 200k income with 80k outgoings vs 80k income with 80k outgoings would yield different decisions.

The opportunity cost of returns in riskier asset classes should not be discounted until only after you have paid down your mortgage. There is potential for a balanced evolving personal finance management strategy that can be followed.

 

[NoRegretsCoyote]

There is potential for a balanced evolving personal finance management strategy that can be followed.

True.

But for a lot of people it just won't be worth it.

Say you have €50k. Over 8 years at a mortgage of 2.5% you get an implicit after-tax return of 5%, so turning your €50k into €70k guaranteed.

Then assume an expected gross return of 10% for an ETF. After deemed disposal (if I understand right) you have made €78k or so after tax. And even with that kind of expected return there is a big range of outcomes for equities based on historical performance.

I am just not sure the return is worth the risk for most people.

 

[Brendan Burgess]

The opportunity cost of returns in riskier asset classes should not be discounted until only after you have paid down your mortgage. There is potential for a balanced evolving personal finance management strategy that can be followed.

You are making this sound complicated and something which requires financial advisors and deep thinking.

It is not complicated and it does not require financial advisors.

You should not borrow at 2.6% to buy risky shares where the return will be subject to tax.

If you have shares and borrowings, you should sell the shares and clear the borrowings.

Brendan

 

[Jim2007]

By following this logic you completely limit your potential returns......a balanced approach should be considered.

This is not remotely close to a balanced approach. The OP has a massive exposure to high risk assets and high risk asset classes and he should do all he can to reduce that exposure ASAP.