Steven Barrett
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But they are not borrowing to invest. They are not using their savings to pay down debt. It is not the same thing. As long as their debt is manageable, there is no issue with this.
But they are not borrowing to invest. They are not using their savings to pay down debt. It is not the same thing. As long as their debt is manageable, there is no issue with this.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
If I could get that €100k at 2% fixed for 10 years, yes without hesitation.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
I think you should hesitate. You need to think about it.If I could get that €100k at 2% fixed for 10 years, yes without hesitation.
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
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.
Understanding market risk can be a complex subject and everybodys financial scenario is different.
Does your opinion extend to that people shouldn't make pension AVCs whilst carrying a mortgage?
Would you offer that same advice to a 20 yr old and a 60 yr old?
It is not that complex a subject, unless you want it to be. Everyone's financial scenario is not that different. Irrespective of your age or other financial circumstances, you should not borrow to invest in shares. It is black and white. Talking of "balance" only complicates matters. Borrowing money to invest in shares is just not worth the risk.
No, that is a completely different issue because of the tax breaks on pension contributions. It is often a good idea to make pension contributions while you have a pension. But where the mortgage is very high, paying down the mortgage is often a better use of money.
The advice not to borrow to invest in shares (outside a pension scheme) applies irrespective of age. Of course, a 20 year old has a longer horizon and potentially more time to recover. But at the same time, they probably don't own a house, so the advice to get the deposit together without borrowing is clear.
Brendan
I would never recommend this to a client. High risk asset classes with little or dwindling returns supported by leverage is just nonsense - in any case such a suggestion would see the client heading for the door. If you are going to do something like this the returns would have to be very rewarding and they are not.But they are not borrowing to invest. They are not using their savings to pay down debt. It is not the same thing. As long as their debt is manageable, there is no issue with this.
I disagree with your statements of fact and claim that anyone who invests in the stock market whilst carrying a mortgage is 'borrowing' from the bank. It's a misleading and potentially confusing statement.
You are saying 7% however you are ignoring compounding which is the key issue. 7% compounded will quadruple a portfolio in 20 years. Opportunity cost by paying mortgage off is therefore hugeI think it’s pretty reasonable to argue that investing in shares whilst carrying debt is effectively borrowing to purchase the shares.
The point is that on average a personally-held share portfolio might deliver around 7% a year over time. But that’s subject to tax and management fees.
Let’s assume 3% dividend yield, so I’m losing 1.5% via income taxes. Let’s assume that the other 4% is subject to CGT, so another 1.33% of leakage. And let’s assume a 1% annual fee.
So if things go well, I might net around 3%, which happens to approximate the average mortgage rate. And I could lose money, i.e. there is no guarantee that I’ll make that 7%.
Or I could just pay down my mortgage and derisk.
The tax relief on a pension contribution changes the risk/reward equation completely.
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.
Would your advice to them be different because, in the past, Steven topped up his mortgage but Brendan already had a €500k mortgage?
I think it’s pretty reasonable to argue that investing in shares whilst carrying debt is effectively borrowing to purchase the shares.
The point is that on average a personally-held share portfolio might deliver around 7% a year over time. But that’s subject to tax and management fees.
Let’s assume 3% dividend yield, so I’m losing 1.5% via income taxes. Let’s assume that the other 4% is subject to CGT, so another 1.33% of leakage. And let’s assume a 1% annual fee.
So if things go well, I might net around 3%, which happens to approximate the average mortgage rate. And I could lose money, i.e. there is no guarantee that I’ll make that 7%.
Or I could just pay down my mortgage and derisk.
The tax relief on a pension contribution changes the risk/reward equation completely.
It's common practice to have a portfolio of assets with different risk profiles.
It's called a portfolio for a reason.
1. People have different financial situations determined by size of mortgage, income, age and a host of different variables.
3. In majority of scenarios the lump sum or additional free cash flow is not enough to clear the mortgage. Fixed rates mean mortgage monthly payments remain the same despite overpayment.
4. Costs associated with break fees and switching to get best mortgage rates are not considered in your example.
5. Tax benefits of AVCs to get stock market exposure.
Other relevant information 1) Maxing AVCs,
Well it won’t, because of tax.You are saying 7% however you are ignoring compounding which is the key issue. 7% compounded will quadruple a portfolio in 20 years. Opportunity cost by paying mortgage off is therefore huge
A portfolio of assets?
A mortgage is a liability?
Of course someone should have a balanced portfolio - different shares and different asset classes.
Adding debt to a portfolio increases potential returns but increases risk as well.
There is no need for it.
Brendan
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