# Planning to buy a 1M+ property



## owly_owl (27 Jul 2022)

*Personal details*

Age: Mid 30s
Spouse’s/Partner's age: 30s

Number and age of children: one cute baby, less than 1 YO


*Income and expenditure*
Annual gross income from employment or profession: 160K-200K (100K base salary, 15K guaranteed bonus. The rest is RSUs and other bonuses) 
Annual gross income of spouse: 80K

Monthly take-home pay: 6.5K~

Type of employment: Salaried employee

In general are you:
(a) spending more than you earn, or
(b) saving. Our spend has been very low so far (1K-1.5K per month, not including mortgage)


*Summary of Assets and Liabilities*
Family home worth €350k with a €160k mortgage
Cash of €20k
Defined Contribution pension fund: €200k
Investment Portfolio 1: 35K
Investment Portfolio 2 (can't by used in Ireland for tax reasons): 190K

*Family home mortgage information*
Lender: AIB
Interest rate: around 2.5%
If fixed, what is the term remaining of the fixed rate? 4.5 years
My partner bought the property on her own

*Other borrowings – car loans/personal loans etc*

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card?


*Other savings and investments:*

Do you have a pension scheme? Yes, 200K saved so far for both partners

Do you own any investment or other property? Yes, investment value listed above

*Other information which might be relevant*

Life insurance: We have it from work


*What specific question do you have or what issues are of concern to you?*

1. We'd like to move to a nicer area and a bigger house in the next 1-3 years but not sell our current house (we can rent it). We're looking at 1M-1.5M houses in South Dublin. When it comes to 1M+ houses, is it better to rent or to buy? Is the rental yield different for more expensive houses?
2. My partner owns our house. Can she get a second mortgage jointly with me? How much would banks be willing to lend?
3. We'd like to set up a bare trust for the baby. Can we open a brokerage account for the bare trust?
4. Since we're not Irish and not domiciled here, does it make sense to start the bare trust somewhere else, like the UK?


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## Blackrock1 (27 Jul 2022)

owly_owl said:


> *Personal details*
> 
> Age: Mid 30s
> Spouse’s/Partner's age: 30s
> ...



rent on the kind of house you are thinking about will be 5-6.5k per month, itll be a lot cheaper to mortgage it  (mortage around 4 on 1m at 2.5% over 30 years(

say you buy a house for 1.3m, you will need a 20% deposit - 260k, that leaves 1.04m as a mortgage, you wont get that on those salaries, am i missing something or what makes you think you can afford this? at the very least the other property would need to be sold to release the equity and make it easier to borrow the larger mortgage.


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## Brendan Burgess (27 Jul 2022)

owly_owl said:


> Family home worth €350k with a €160k mortgage
> Cash of €20k
> Defined Contribution pension fund: €200k
> Investment Portfolio 1: 35K



If you sell your current home, you will have a deposit of €250k 

You have about €200k of income for mortgage purposes, so the bank will lend you €700k

So you could just about manage to buy a house for €950k - with an exemption a bit more. 

Without selling your home, you can't buy a house for €1m. 

Even if a bank was willing to allow you to keep your existing home, you should not do so, as you would be too exposed to the Irish property market. 

Brendan


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## Brendan Burgess (27 Jul 2022)

owly_owl said:


> 3. We'd like to set up a bare trust for the baby.



Don't be worrying about things like this for the moment.
You want to borrow an enormous sum of money to provide the baby with a cute home. 

So focus on getting the deposit together, buying the house and then getting the mortgage down to a comfortable level.

Brendan


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## Brendan Burgess (27 Jul 2022)

owly_owl said:


> Investment Portfolio 2 (can't by used in Ireland for tax reasons): 190K



Talk to someone like Marc Westlake https://everlake.ie/contact-us/   about all this.  He has very good knowledge of investment and financial planning for non domiciled individuals. 

What would the tax hit be on the €190k?  It might be worth your while to just take the hit now and improve your firepower in the house buying market. 

Or is there someway of borrowing against the €190k?  

Brendan


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## Brendan Burgess (27 Jul 2022)

owly_owl said:


> We'd like to move to a nicer area and a bigger house in the next 1-3 years



If it's not immediate and might be as long as three years away, then stop all pension contributions which are not matched by your employer.  Maxing the cash on hand is what you want. You can make up the lost contributions later.

Brendan


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## jim (27 Jul 2022)

Blackrock1 said:


> rent on the kind of house you are thinking about will be 5-6.5k per month, itll be a lot cheaper to mortgage it  (mortage around 4 on 1m at 2.5% over 30 years(
> 
> say you buy a house for 1.3m, you will need a 20% deposit - 260k, that leaves 1.04m as a mortgage, you wont get that on those salaries, am i missing something or what makes you think you can afford this? at the very least the other property would need to be sold to release the equity and make it easier to borrow the larger mortgage.


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## Steven Barrett (27 Jul 2022)

> The hit will be too much for us unfortunately. This account has some funds with too much gains


You do know that unless you leave it there until you die, you have to pay the tax at some stage. Not cashing in an investment when you need the money because of the tax liability flies in the face of the reason of investing i.e. putting the money away today for use at a time in the future. 

You are looking to buy a new home. Your incomes, while decent, won't qualify you to get the level of mortgage that you want. Getting a smaller mortgage and using the assets that you already have it the most clear solution to this problem. That includes selling the current house (which will be an ongoing cost to you as well). A €1m mortgage is going to cost you €3,650 a month for 30 years. That is a big mortgage and is over 50% of your current take home pay. 

And that's before factoring in all the additional costs of life that are going to come along. 


Steven
www.bluewaterfp.ie


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## owly_owl (27 Jul 2022)

Steven Barrett said:


> You do know that unless you leave it there until you die, you have to pay the tax at some stage. Not cashing in an investment when you need the money because of the tax liability flies in the face of the reason of investing i.e. putting the money away today for use at a time in the future.


You're assuming I'll stay in Ireland forever and I'm not planning to do that. I will not pay tax on this money if I use it somewhere else.


Steven Barrett said:


> A €1m mortgage is going to cost you €3,650 a month for 30 years. That is a big mortgage and is over 50% of your current take home pay.


My take home pay is 6.5K. With my partner's take home pay we're closer to 10K.


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## Steven Barrett (27 Jul 2022)

owly_owl said:


> You're assuming I'll stay in Ireland forever and I'm not planning to do that. I will not pay tax on this money if I use it somewhere else.


That still doesn't solve your problem of getting as much equity as possible to get the mortgage down so you can afford to get it. Your RSU's are a constant, you can start again. 

Reminds me of when Homer Simpson got his hands stuck in the vending machines.


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## Brendan Burgess (27 Jul 2022)

owly_owl said:


> You're assuming I'll stay in Ireland forever and I'm not planning to do that. I will not pay tax on this money if I use it somewhere else.



Hi Owly

It's very easy to say "If I sell these shares, I will pay tax. So I won't sell the shares."  And then stick to that forever.

And I would guess that you are correct not to bring the shares into Ireland and sell them.

But you should keep it under review and it may become right to sell the shares. 

How much tax will you pay?

Forgetting about the tax, would it make sense to sell them to diversify your investments?

If selling them gives you an opportunity to buy the house you want earlier, then it _might _be the right thing to do.

A lot of people make big financial mistakes in an effort to pay less tax. 

Brendan


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## owly_owl (27 Jul 2022)

Brendan Burgess said:


> But you should keep it under review and it may become right to sell the shares.


Sure. I actually forgot to mention my vested RSUs ("Investment Portfolio 3"), currently worth 35K. I sell most of the RSUs upon vesting and can consider selling the rest if needed.


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## Brendan Burgess (27 Jul 2022)

You should edit the original post to put in the full information.

Brendan


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## Gordon Gekko (27 Jul 2022)

You’ll pay no tax on any gain in relation to your home either which is an argument for diverting surplus resources into it.

I’d also be wary enough of assuming that the ‘RSU train’ will go on forever. Lots of multinationals are suffering from declining profits and falling share prices.


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## jasdpace@gmail. (28 Jul 2022)

Hi Gordon,

Your posts are usually great so forgive the audacity of this question. I have a recollection that you are an "all-in" equities man in terms of pension investment, etc. Presumably, this is based on the premise that in the medium to long haul, share prices will rise (.....on account of rising profits). Accordingly, I was a little surprised by the more cautionary position of the above post. Is this fair?


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## Steven Barrett (28 Jul 2022)

jasdpace@gmail. said:


> Hi Gordon,
> 
> Your posts are usually great so forgive the audacity of this question. I have a recollection that you are an "all-in" equities man in terms of pension investment, etc. Presumably, this is based on the premise that in the medium to long haul, share prices will rise (.....on account of rising profits). Accordingly, I was a little surprised by the more cautionary position of the above post. Is this fair?


There's a big difference between investing in equities with your savings and the RSU's which are given to staff as part of their compensation package. Share price goes down, so does your compensation package.


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## Gordon Gekko (28 Jul 2022)

jasdpace@gmail. said:


> Hi Gordon,
> 
> Your posts are usually great so forgive the audacity of this question. I have a recollection that you are an "all-in" equities man in terms of pension investment, etc. Presumably, this is based on the premise that in the medium to long haul, share prices will rise (.....on account of rising profits). Accordingly, I was a little surprised by the more cautionary position of the above post. Is this fair?


Hi.

Yes, on a globally diversified basis, rather than in one company.

And the risk gets amplified when it’s the company you work for. If it gets into trouble, you’re potentially losing wealth in the form of shares plus income in terms of your salary etc.

It’s why the advice is usually to encash RSUs as soon as you can.

The future is in all likelihood bright for the market in general over the longer term but for any single company, who knows?


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## Brendan Burgess (28 Jul 2022)

People with a mortgage should not invest directly  in shares, even in a diversified portfolio of shares. 

They are, in effect, borrowing money at the mortgage rate to buy shares. This requires the after-tax and after-charges performance of these shares to exceed the cost of borrowing. It may well do so, but the downsides in terms of risk, way exceed the potential upsides. 

And it's even more important that people with a mortgage should not invest in a portfolio comprised of only one share, which is what the OP is doing.  

And it's even more important again that someone with €900k of debt should not be investing in shares. 

Brendan


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## jasdpace@gmail. (28 Jul 2022)

Fair enuff guys - I shouldn't post before having a few cups of coffee!


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## Steven Barrett (28 Jul 2022)

Brendan Burgess said:


> People with a mortgage should not invest directly  in shares, even in a diversified portfolio of shares.
> 
> They are, in effect, borrowing money at the mortgage rate to buy shares. This requires the after-tax and after-charges performance of these shares to exceed the cost of borrowing. It may well do so, but the downsides in terms of risk, way exceed the potential upsides.
> 
> ...


You know I continue to disagree with this. While there is no harm in reducing your borrowings, people overpaying their 30 year mortgage may reduce that term to 20 years. In those two decades of debt (not all debt is bad), they will have other cashflow needs that investments can be used to fund. 

I also disagree that the risks of investing in a global index over a prolonged period outweigh the benefits. 

In relation to the OP, he gets his salary and his wealth from the same company. He also has a clear need for that money now, which is reason enough to cash in his position. 


Steven
www.bluewaterfp.ie


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## Brendan Burgess (28 Jul 2022)

So Steven

To be absolutely clear. You would recommend to people that they should borrow money long term to invest in a global index?

For example, a person with a €1m house and €600k of a mortgage should borrow €200k to invest in a global index, if his lender were happy to lend him €200k at the mortgage rate.

Brendan


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## Clamball (28 Jul 2022)

Your cash savings are low for your income (especially as you said you are a good saver) so I am wondering if your salary was a recent increase?  Will you have future potential to grow your salary?

Do you and your spouse plan to have more cute babies (congrats by the way) in the next 1-3 years, and will your spouse continue to work with subsequent large childcare costs.

I am assuming that you plan to stay in Ireland for at least another decade if you are planning to move to a better area and nicer houses so I would agree that buying rather than renting is best overall.  

I agree with Brendan you will get approval for ~ 683K for mortgage.  You can scrape together 280K in cash if you sell your current home which means you can afford a house of about €965K

Mortgage  - 700K
Home - 190K
Saving - 20K
Fund 1 - 35K
Fund 2 - 0K - you won’t cash this!
Fund 3 - 35K

Your mortgage will be ~ 3600 - 4000 per month over 30 years.  Your joint income is ~ €10k per month, then add childcare as the next big expense. 

If you don’t sell your current home you won’t have the 20 % mortgage deposit.  But if you aggressively save you potential RSU’s over next 3 years you could build up a cash fund of ~ 250K which would mean you could hold on to your current home and still buy a house of ~€1M

It would be great to see your financial position at the end of the year or in 12 months, I think with your saving potential you will be in a lot stronger position.  I think you have to balance applying and buying while you are both working full time but waiting maybe ~ 24 months to maximise savings and hope the house you want won’t increase too much in price.  Best of luck!


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## Steven Barrett (28 Jul 2022)

Brendan Burgess said:


> So Steven
> 
> To be absolutely clear. You would recommend to people that they should borrow money long term to invest in a global index?
> 
> ...


Brendan 

Life isn't that straight forward. Yes, it is a good idea to pay down debt quickly but it is not at the expense of everything else. If your goal is to reduce a mortgage term from 30 years to 15 years, that is still a long time to be overpaying. And a lot of life events happen in that time. Is someone then supposed to borrow for those big life events that happen during that period? And then repay it as a personal loan at a much higher rate. 

If we look at the return of the S&P 500 over the last 10 years, it did 14.63% per annum. Over the last 20 years, it has returned 9.26%. If bring it back to 22 years to include the dotcom crash as well, the returns reduce to 5.65%. After tax, we are still within mortgage rates. 

I am not saying do one over the other, there is nothing wrong with doing a bit of both. 


Steven
www.bluewaterfp.ie


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## Sarenco (28 Jul 2022)

Steven Barrett said:


> If bring it back to 22 years to include the dotcom crash as well, the returns reduce to 5.65%. *After tax, we are still within mortgage rates.*


I don't think that's true.

Over the full 22 year period, mortgage rates averaged around 4.25% by my calculations.  Deduct taxes and fees/costs from your 5.65% return figure and you would have been better off paying off the mortgage (as things turned out).

I remain of the view that, because of our tax code, it rarely makes sense to invest outside a pension vehicle while carrying debt.


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## Steven Barrett (28 Jul 2022)

Sarenco said:


> I don't think that's true.
> 
> *Over the full 22 year period, mortgage rates averaged around 4.25% by my calculations. * Deduct taxes and fees/costs from your 5.65% return figure and you would have been better off paying off the mortgage (as things turned out).
> 
> I remain of the view that, because of our tax code, it rarely makes sense to invest outside a pension vehicle while carrying debt.


I didn't run the average mortgage rate over 22 years, so I accept your figures. But you can see that even if you get off to the worst possible start by investing in 2000 and invest in Ireland's high tax environment, you are not that far off doing better by investing. That is in one of the worst scenarios. Avoid two major recessions close together (no one can predict the future and these once in a lifetime events as coming thick and fast) and you have an increased chance of doing better. 

I maintain my opinion that you don't have to do just one or the other but a bit of both. 


Steven
www.bluewaterfp.ie


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## Brendan Burgess (28 Jul 2022)

Steven Barrett said:


> If your goal is to reduce a mortgage term from 30 years to 15 years, that is still a long time to be overpaying. And a lot of life events happen in that time. Is someone then supposed to borrow for those big life events that happen during that period? And then repay it as a personal loan at a much higher rate.



Hi Steven

I think this is where a lot of people go wrong in their financial planning.  They  think of 30 years and 15 years and maybe they do spreadsheets to prove some point or other. 

It's actually much simpler than that.  You should not borrow money to invest in the stockmarket.   That is the key point and there is no need to complicate it with 30 year forecasts. 

The exception is that it's ok to have a rainy day fund, but not a very big one.
And if you anticipate "big life expenditure" then you should build up a fund to pay for that. 

So I will answer the question I asked you.

_For example, [should] a person with a €1m house and €600k of a mortgage borrow €200k to invest in a global index, if his lender were happy to lend him €200k at the mortgage rate?_

I would strongly advise someone with a mortgage of €600k not to borrow a further €200k  to invest in the stock market.

And the corollary of that is that someone with an €800k mortgage and €200k in the stock market, should sell the shares and pay down the mortgage - perhaps keeping a small amount available for the "big life expenditure" that they won't be able to pay out of income.

Brendan


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## Steven Barrett (28 Jul 2022)

Brendan

You keep on saying these people are borrowing to invest in the stock market. They are not, this is disposable income that they have. 

Let's go back to the beginning. They take out a mortgage to buy a house. It is perfectly reasonable and sensible to do so. Otherwise they are trying to save for their lifetime to accumulate this money to buy the house outright. This debit is paid back over 30 - 35 years, a long time. But at a fairly reasonable rate (at the moment anyway). 

They may try to pay down this mortgage earlier than the 30 years but they will still probably be paying it for 2 decades at least. Any overpayments they make into that mortgage is gone and they cannot release equity from it to pay for any future expenditure. 



Brendan Burgess said:


> The exception is that it's ok to have a rainy day fund, but not a very big one.
> And if you anticipate "big life expenditure" then you should build up a fund to pay for that.


The next stage is building that rainy day fund to pay for holidays and other near term expenditure. 

Then there is the big life expenditure that they _"should build up a fund to pay for". _Where should this money be put? I want to save for my child's education costs? Do I build up a fund in a deposit account? Or do I invest this amount over the years and use capital markets to pay for some of the cost of the education so the entire cost doesn't come from earned income? This is my entire argument. 

As to debt, obviously the more debt a person has, the more exposed they are. Things like Covid 19 can upturn even high paying occupations and turn them to zero overnight. This needs to be looked at and living on debt because you have a good income is not a good thing. It is not building wealth either. Then there are cases when people have very little debt but don't pay it off as they don't want to deplete the investments that they have built up, when they should and start again. 

Not all cases are the same and it is important to understand what people are trying to achieve and what matters to them. It's not always straightforward. 


Steven
www.bluewaterfp.ie


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## Brendan Burgess (28 Jul 2022)

Hi Steven

Please tell me the difference between the following two people. Both have a house worth €1m. 

A   - who took out a mortgage of €800k and has €200k in shares
and

B - who took out a mortgage of €600k and later borrowed another €200k to buy shares? 

There is no difference. 

Someone who has a mortgage of €800k while having €200k in shares, has borrowed to buy shares. 

That is difficult for some people to understand.  

Let me rephrase the question.

Would you advise someone with a mortgage of €600k to add €200k to it to buy shares? I presume not. 
But you would advise someone with a mortgage of €800k and €200k in shares not to sell the shares to pay down the mortgage. 

I think it's called the "endowment fallacy".  

Brendan


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## galway_blow_in (28 Jul 2022)

The only way anyone " borrows to invest in the stock market " is if they buy on margin- CFD,s 

Rest is just ideological opposition to buying stocks while debt exists elsewhere for the same individual


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## NoRegretsCoyote (28 Jul 2022)

Brendan Burgess said:


> _For example, [should] a person with a €1m house and €600k of a mortgage borrow €200k to invest in a global index, if his lender were happy to lend him €200k at the mortgage rate?_


The answer is not always "no".

Suppose you are a couple both aged 35 with a €250k joint income, a €1m house, a €600k mortgage, and zero in any other wealth.

An €800k mortgage is sustainable and over several decades (and no less) it will return more than what you will pay in mortgage interest.

I agree with @Sarenco that buying equities outside a pension doesn't make sense due to tax treatment in Ireland.

But in principle it's fine to hold debt secured against residential property while also investing in equities.

I see far more money makeover threads with people overweight Irish residential property than overweight in global equities.


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## moneymakeover (28 Jul 2022)

Is it better then to save in a deposit account for a rainy day fund?

Over time people will need a rainy day fund for
Car
Holidays
College fees
Annual tax bill rental income

Better to have the savings than to borrow?
If the savings fund is say 40k does it make sense to place in deposit account or in equities?
Previously with low zero interest rates maybe?
Now with interest rates picking up perhaps the deposit account?


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## Brendan Burgess (29 Jul 2022)

NoRegretsCoyote said:


> But in principle it's fine to hold debt secured against residential property while also investing in equities.


But then you are borrowing to invest in equities! 

And you should not do that. 

All the discussion of "sustainable mortgage" is clouding people's judgment of this very basic issue. 

Brendan


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## Clamball (29 Jul 2022)

I want to own a house that suits my needs so when I have some financial stability I save as much as possible and buy the best house I can afford and then pay off the mortgage over the next 20-35 years.  The moment I move in I am so broke, all my savings and more have gone into the house purchase.  The future value of the house does not bother me because it is my home.

After a couple of years when I can afford the mortgage and life is good I find I am saving a bit each month, it is building up nicely.  So I invest in shares, I will be thrilled if they go up in value, but disappointed if they tank, but I am willing to take a risk.  Maybe after 10-15 years my shares are valued at €200K, happy days.

All I have is the one major debt, the house.  If life does not go pear shaped I will retire with the house, my pension fund and maybe some wealth I grew along the way.  I never made the decision to use all my extra cash to pay down the mortgage, I could have, but I also serviced the debt at the rate I agreed when I started out.

Maybe my assets might have increased faster in value if I paid off my mortgage first but my house is not an asset, it is where I am living.  It is a home.  In my mind I have to treat my home and my savings separately.


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## Brendan Burgess (29 Jul 2022)

Clamball said:


> Maybe my assets might have increased faster in value if I paid off my mortgage first but my house is not an asset, it is where I am living. It is a home. In my mind I have to treat my home and my savings separately.



A very common mistake that people make. 

Think of it like this. 

Scenario A
1) You own a house with no mortgage attached to it.
2)  Would you borrow €300k to buy €300k worth of shares? 

Scenario B
1) You own a house with no mortgage attached to it.
2) You have an unsecured loan of €300k at the mortgage rate. It is not attached in any way to your home or anything else and you are paying this off over 20 years.
3) You have €300k worth of shares. 

Would you sell the shares and repay the loan? 


Brendan


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## Itchy (29 Jul 2022)

Brendan Burgess said:


> Please tell me the difference between the following two people. Both have a house worth €1m.
> 
> A   - who took out a mortgage of €800k and has €200k in shares
> and
> ...



Person A is far more secure than person B, all else being equal.


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## Blackrock1 (29 Jul 2022)

Itchy said:


> Person A is far more secure than person B, all else being equal.


how so? they both owe 800k and own 200k worth of shares.


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## Itchy (29 Jul 2022)

Blackrock1 said:


> how so? they both owe 800k and own 200k worth of shares.



T&C's of credit and protections from recourse are more beneficial for person A. 

I see the elaboration of the point further down the thread


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## Clamball (29 Jul 2022)

Brendan Burgess said:


> A very common mistake that people make.
> 
> Think of it like this.
> 
> ...


OK I will play,  I see a lot of am I a low risk or high risk person in both these scenarios.

Scenario A I would not borrow €300K to buy shares.

Scenario B. I would sell the shares to pay off the €300K loan.

But I have seen you argue before to hold onto properties that had a cheap tracker rate because they were good value, so in scenario B would you not have advised me to hold onto the cheap unsecured loan and grow my wealth with the €300K of shares?

I think when you remove the home from it, it makes more sense to me but when it is the family home I have that in a totally different section in my brain, and I behave differently.


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## Brendan Burgess (29 Jul 2022)

Clamball said:


> I think when you remove the home from it, it makes more sense to me but when it is the family home I have that in a totally different section in my brain, and I behave differently.



But this is a bias which you need to overcome to make the right financial decision. 

Brendan


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## DublinHead54 (30 Jul 2022)

What is really the point of paying down your mortgage quicker? 

All you are really doing is locking away your free cashflow in an asset that can't be realised unless you sell your home. 

The semantics of it saves you X amount in interest or is a guaranteed risk free return are financially correct but miss the point many make here. 

Say I've paid off my mortgage 15 years early, what do I suddenly do with the free cashflow?invest in equities? Spend friviously. 

The last point in my opinion is we miss the concept of risk tolerance and risk taking here. Overpaying a mortgage is a risk free return, investing in equities is a riskier option and that's down to the individual to decide.


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## PGF2016 (30 Jul 2022)

Looks like the OPs question has been lost in all the off topic back and forward.


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## Brendan Burgess (30 Jul 2022)

Dublinbay12 said:


> The semantics of it saves you X amount in interest or is a guaranteed risk free return are financially correct but miss the point many make here.



How on earth can you describe proper financial planning as "semantics"? 

We are discussing wealth maximisation and wealth preservation.   There is nothing "semantic" about it. 

The mistake people are making is splitting their finances into separate silos, rather than taking a complete, holistic, view. 

A mortgage may have a term of 20 years. But that is irrelevant. It is a convention and nothing more than that.  So paying it off earlier or later doesn't mean very little. 

The question is "how do I maximise and preserve my long-term wealth?"  
The first principle is "Do not borrow to invest in equities". 
If you have a loan on which you are paying market interest while you have equities, you are borrowing to invest in equities. 

Much of the time you do this it will work out for you over the long term. But some of the time, the downside will be disaster.  

Borrowing increases risk and the potential extra reward does not justify it.  

Brendan


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## Brendan Burgess (30 Jul 2022)

Dublinbay12 said:


> All you are really doing is locking away your free cashflow in an asset that can't be realised unless you sell your home.



You are doing more than this. You are maximising your wealth. 

If you have a lower mortgage, then you will have lower repayments in the future. 

So if you anticipate expenditure exceeding your income for a period e.g. children going to college, then you should be building up a fund in the few years preceding this.

Of course, if you have cleared your mortgage by then, you will probably be able to fund your excess expenditure from your income.

Brendan


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## Brendan Burgess (30 Jul 2022)

PGF2016 said:


> Looks like the OPs question has been lost in all the off topic back and forward.



Hi PGF 

I think his question was answered early on. 

The later debate is useful. 

I will review it to see if it can be split off into a Key Post independent of the original question with a topic "Should I sell my shares to pay down my mortgage?" 

Brendan


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## Brendan Burgess (30 Jul 2022)

Ah, the Key Post already exists.






						Key Post - Overpay mortgage or contribute to pension or do something else?
					

This comes up in a lot of different threads, so I will set out some principles here to kick off the discussion. I will edit it in the light of feedback.  There are many options with your savings in excess of your emergency cash fund  Pay down your mortgage Build up a fund to enable you to trade...



					www.askaboutmoney.com
				




And specifically the case for not investing in equities while you have a mortgage: 






						Key Post - Overpay mortgage or contribute to pension or do something else?
					

This comes up in a lot of different threads, so I will set out some principles here to kick off the discussion. I will edit it in the light of feedback.  There are many options with your savings in excess of your emergency cash fund  Pay down your mortgage Build up a fund to enable you to trade...



					www.askaboutmoney.com
				




Maybe in threads like the present one, we should refer people to this Key Post rather than rehash the argument again.

Brendan


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## PaddyBloggit (30 Jul 2022)

Brendan Burgess said:


> Maybe in threads like the present one, we should refer people to this Key Post rather than rehash the argument again.


+1


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## DublinHead54 (1 Aug 2022)

Brendan Burgess said:


> How on earth can you describe proper financial planning as "semantics"?
> 
> We are discussing wealth maximisation and wealth preservation.   There is nothing "semantic" about it.
> 
> ...



Brendan,

I disagree with your approach and reasoning on this.  Investing in Equities can create greater wealth than overpaying your mortgage. That's why it is a riskier option. 

Overpaying a mortgage is maximising paper wealth, a house is illiquid and that wealth can't be used to fund lifestyle expenses. 

I've always said each person's scenario is bespoke and there is no one fits all strategy. Debt isn't bad.


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## Brendan Burgess (1 Aug 2022)

Dublinbay12 said:


> I disagree with your approach and reasoning on this.



I have no problem at all with that.  Different people have different opinions.

We have a very substantive disagreement. 

It is wrong to dismiss another person's opinion as  "semantics"!


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## DublinHead54 (2 Aug 2022)

Brendan Burgess said:


> I have no problem at all with that.  Different people have different opinions.
> 
> We have a very substantive disagreement.
> 
> It is wrong to dismiss another person's opinion as  "semantics"!



Brendan,

I did not dismiss your opinion or state it was semantics. Your point was financially correct in the context it was used, but in my opinion you missed the holistic picture of including risk based approach and factoring in life's uncertainty hence the use of semantics. 

Financial decisions aren't a one size fits all. I'm not qualified to give advice, but I agree with @Steven Barrett approach on this topic. 

In my opinion overpaying your mortgage has a benefit but you are locking away cash you have in your pocket now in an illiquid asset on the expectation that you will have more cash in future to replace it.


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## Duke of Marmalade (3 Aug 2022)

_Boss _my tuppence worth.  Of course you are right that financial economics would not support retail punters  borrowing to invest.  Two main reasons for that.  The first is the asymmetry in tax treatment.  Taxed on investment profits, no tax relief on interest.  The second reason is that you are effectively suffering double charges on each side of your financial balance sheet.
But possibly your position is too absolutist.  Consider that the Government launched an unlimited issue of savings certs earning 2.5% p.a. tax free. This is the equivalent to the savings in paying down your mortgage. But would it be right to advise that *all *of your savings capacity should go into these certs?  (ignore sovereign risk in this thought experiment)
On @Dublinbay12 's point about overpayment of mortgage being a loss of access to the cash in case you need it in the future, would it not be possible to remortage?


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## Brendan Burgess (3 Aug 2022)

Duke of Marmalade said:


> Consider that the Government launched an unlimited issue of savings certs earning 2.5% p.a. tax free. This is the equivalent to the savings in paying down your mortgage. But would it be right to advise that *all *of your savings capacity should go into these certs? (ignore sovereign risk in this thought experiment)



Hi Duke

I am not sure of your point here. 

If you can borrow money at 2% and you can invest it for a guaranteed net return in excess of 2%, of course you should do it. 

But you should not borrow at 2% to invest in a risky asset. 

Brendan


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## Brendan Burgess (3 Aug 2022)

Duke of Marmalade said:


> On @Dublinbay12 's point about overpayment of mortgage being a loss of access to the cash in case you need it in the future, would it not be possible to remortage?



Not usually. It's hard to get a top-up these days. You certainly can't be sure that you would get one. You probably would for a household improvement.  But you wouldn't get a top-up for a car or to pay for college expenses.

But the same applies to pension contributions as well.  You can't usually access the money until you retire. 

Brendan


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## Duke of Marmalade (3 Aug 2022)

Brendan Burgess said:


> Hi Duke
> 
> I am not sure of your point here.
> 
> ...


Two scenarios:
A has €600k mortgage at 2.5% p.a.  She has inherited €200k.
One option is to use some or all of it to pay back the mortgage.  This opportunity is a risk free 2.5% p.a.; superior on financial economic arguments to any other investment.
Should the whole €200k be paid off the mortgage?  I think that is your position.

B has no mortgage but the Government is paying 2.5% p.a. tax free on its An Post deposits.
The opportunity is a risk free 2.5% p.a.; superior on financial economic arguments to any other investment.
Should the whole €200k be put on this An Post deposit? Maybe but it seems less obvious than Scenario A but I can't see the difference.

Further thought.  Although scenarios A and B present the exact same risk/reward trade offs one might argue that A is in a less position to take on any risk.  Still, that introduces the concept of risk appetite and diminishes the case for an absolutist position.


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## jim (3 Aug 2022)

Duke of Marmalade said:


> but the Government is paying 2.5% p.a. tax free on its An Post deposits


And the term is, say 20 years - akin to what a mortgage might be. So youre locking it away for that period. This makes it less attractive.

I believe @Dublinbay12 is spot on. This just boils down to an individuals risk/reward attitude i.e take the safe option of paying down mortgage but loosing access to your liquid funds versus take riskier/more rewarding option of investing in equities over a period equal to outstanding mortgage term - thus retaining access to your funds.

For me, i would choose the 2nd option because:

1. I retain access to liquid funds
2. My risk tolerance is such that i would have a *very high degree of confidence* of getting a return on equities > return on paying down mortgage.

In fact, in spite of BB's (and others) compelling arguements for paying down mortgage - its actually a no-brainer.

But everyones circumstances are different and in reality a bit of both approaches is the best approach.


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## Brendan Burgess (3 Aug 2022)

Sorry, I must be a bit slow tonight. 

If someone is giving me 2.5% net of tax and risk-free with access to it whenever I like, that would be a very attractive investment if the mortgage rate was 2.5% or lower. 

But that situation never arises.  

An Post is giving just under 1% for 10 year money, with penalties for early encashment.
The lowest mortgage rate for 10 years is 2.4%. 

That will always be the situation. 

So the question is whether someone should borrow money at 2.4% fixed for ten years to invest in equities for 10 years.   The Society of Actuaries allow projections based on a maximum of 4.5% before charges and taxes.  Say 4% after charges. And 2.4% after tax. 

Of course, it could be higher or lower.  I don't think that the risk is worth taking for most people. But whenever I pass the local Paddy Power, it's got a constant stream of people going in and out.  They judge the risk to be worth taking. I don't.

Brendan


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## jim (3 Aug 2022)

Its not the same though as borrowing money to invest, as you keep arguing BB. Nobody is suggesting anyone borrow to invest.

Its disposable income we re talking about investing. Along side someone having borrowed for their home (not for equities).this is a crucial distinction that, from my read, is repeatedly lost in the debate.

So its not investing borrowed money into equities. The borrowed money has already being invested in ones home.

Eg:

1. Johns home has 100k mortgage.
2. John inherits 100k.
3. Johns options are:
A) risk free return of say 2%, money locked away.
B) riskier retun of say 4%, money accessible.

If he goes for option B, its not correct to say that he is borrowing that 100k just because he has an existing mortgage. That borrowed 100k is already invested in his home.


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## Duke of Marmalade (3 Aug 2022)

Ok _Boss _I won't labour my thought piece any more, but I do take it that in the hypothetical situation where the Government was offering a super generous 2.5% tax free interest you wouldn't put all you investible funds in it, though as I understand it you would put all your investible funds into paying down a mortgage.
@jim your logic would seem to dictate that if you had a mortgage free home you would mortgage some of it at 2.5% to invest in equities.


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## Brendan Burgess (3 Aug 2022)

Duke of Marmalade said:


> Ok _Boss _I won't labour my thought piece any more, but I do take it that in the hypothetical situation where the Government was offering a super generous 2.5% tax free interest you wouldn't put all you investible funds in it, though as I understand it you would put all your investible funds into paying down a mortgage.



Ah, I see your point now. 

I would use all my cash to reduce a mortgage at 2.5% so I am getting a return on my money.
But if I were mortgage-free, I would not invest all my money at 2.5%. 

You are saying that there is no difference. 

I think that there is and I don't think that it's psychological. I am investing borrowed money.

The actual choice I have now is about 1% tax-free if I leave my money in State Savings or take my chances on the stockmarket and hope to beat that over time. 

But it's an interesting question and I will reflect on it.

Brendan


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## Duke of Marmalade (3 Aug 2022)

Ok _Boss_ and of course I am with you 95% of the way in the non hypothetical real world. Someone with a 2.5% mortgage is facing a 2.5% opportunity cost of investing in equities.  It doesn't rule that option completely out of the park.


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## DublinHead54 (4 Aug 2022)

Duke of Marmalade said:


> _Boss _my tuppence worth.  Of course you are right that financial economics would not support retail punters  borrowing to invest.  Two main reasons for that.  The first is the asymmetry in tax treatment.  Taxed on investment profits, no tax relief on interest.  The second reason is that you are effectively suffering double charges on each side of your financial balance sheet.
> But possibly your position is too absolutist.  Consider that the Government launched an unlimited issue of savings certs earning 2.5% p.a. tax free. This is the equivalent to the savings in paying down your mortgage. But would it be right to advise that *all *of your savings capacity should go into these certs?  (ignore sovereign risk in this thought experiment)
> On @Dublinbay12 's point about overpayment of mortgage being a loss of access to the cash in case you need it in the future, would it not be possible to remortage?



@Duke of Marmalade to my knowledge you can only remortgage if funds are to be used for home improvements i.e. you can't release equity to go buy a new car etc. 

This boils down to there are uncertainties in life that can't be accounted for by only making financial decisions based on the numbers. Therefore it isn't always prudent to lock away all your free cash flow in an illiquid asset to save on the interest, much like it isn't prudent to punt all your free cash flow into a single share. 

For example, I have a 30 year mortgage with an ability to overpay 500 per month, I do that for 3 years resulting in 18k over payment. In 3 years time I have an urgent need for 18k, I have that 18k as equity in my PPR but I can't access it. So I have to get a personal loan at a higher rate over shorter time, this largely removes the benefit of overpaying. In that scenario the 500 per month is more valuable held as a cash / cash equivalent vs being locked away in an in illiquid asset. 

If overpaying a 30 year mortgage results in you reducing the term to 25 years, the individual is essentially giving up free cashflow today to have more free cashflow in 25 years time. You save 5 years of interest and then have 5 years of no mortgage vs the original 30 year mortgage. 

I am not against overpaying mortgages, but I don't believe it is a black and white mathematical decision.


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