Planning to buy a 1M+ property

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.
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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
 
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.
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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
 
PGF2016 said:
Looks like the OPs question has been lost in all the off topic back and forward.
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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
 
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
 
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.

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,

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.
 
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"!
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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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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 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)
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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
 
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?
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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
 
Brendan Burgess said:
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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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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Duke of Marmalade said:
but the Government is paying 2.5% p.a. tax free on its An Post deposits
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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.
 
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
 
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.
 
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.
 
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.
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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
 
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.
 
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?
Click to expand...

@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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