500k question

[bennno]

Asking for a friend....

House sale + lower priced house purchase + work bonus + shares sold. Leaves 500k cash roughly, no debt other than 300k mortgage @1.74% with 7k early repayment in next 24 months.

So options

1. Pay off mortgage early (pay ERC), Q then how to invest £200k to protect capital & deliver income?

2. Leave mortgage balance of £300k as is, how best to invest £500k?

Person 1 top rate tax payer, partner below minimum earnings threshold. Lots in pension - plus ongoing so will hit max, so less keen on this.....

Suggestions greatly appreciated, reward for best one.

[Phil.]

Option 2 and speak to Intelligent Money (or similar) about investment options.

If he’s near Birmingham I know some good people who are investing for me. £500k is their minimum investment. Fees are low and advice good.

[cloud_dog]

bennno said:

Asking for a friend....

House sale + lower priced house purchase + work bonus + shares sold. Leaves 500k cash roughly, no debt other than 300k mortgage @1.74% with 7k early repayment in next 24 months.

So options

1. Pay off mortgage early (pay ERC), Q then how to invest £200k to protect capital & deliver income?

2. Leave mortgage balance of £300k as is, how best to invest £500k?

Person 1 top rate tax payer, partner below minimum earnings threshold. Lots in pension - plus ongoing so will hit max, so less keen on this.....

Suggestions greatly appreciated, reward for best one.

The current thinking is that with low interest rates you are likely (no guarantees) to be better off investing rather than paying down a mortgage, especially if you have the bandwidth/capacity to use pension or LISA investment option. Having said that, it really comes down to the individual risk tolerance and there is a psychological satisfaction in paying down the mortgage / owning your home outright.

With this amount of money I would definitely speak to an Independant Financial Adviser (independent bit very important). There is going to be so much more to consider here depending on ages, commitments, plans, inheritance considerations etc etc.

[NickCQ]

bennno said:

House sale + lower priced house purchase + work bonus + shares sold.
Leaves 500k cash roughly, no debt other than 300k mortgage @1.74% with 7k early repayment in next 24 months.

Lowest risk option is to spread £300k (less principal repayments over 24 months) in 4 high-interest bank accounts to pay off the mortgage in 24 months' time. Negative carry should only be 25 bps (e.g. versus Marcus at 1.5%), although there may be some tax to pay on the interest.

Invest the remaining £200k, need to maximise S&S ISA usage (£20k allowed pa).

If not using ISA allowance through regular savings, maybe split the £200k 50/50.

Put the first £100k in low-risk bond-weighted trackers through Vanguard and shift £20k into the S&S ISA each year. Once in the ISA, invest in a more equity-weighted portfolio depending on how long it is until you need the cash. If 40 years from retiring, 80-100% equities, if saving for large bills in the near future such as school fees, 20% equity maybe more appropriate.

Invest the remaining £100k outside the ISA in higher-risk trackers, again depending on timeline to needing the money. After 5 years have passed and you have put the first £100k in the S&S ISA, you can think about shifting this money across too.

[anonymous-user]

Borrowing against your home to invest in the stock market would IMO be risky - unless you already have substantial investments elsewhere and just see mortgage as a cheap source of finance.

"Borrowing to invest" carries risk. If the value of the investments falls you've lost real money while still carrying all the original debt.

Sure, everyone who invests in a personal pension or ISA while having a mortgage is in this situation - and their overall decision making will depend upon age, commitments, overall assets, marginal income tax rate, extent of availability of tax wrappers etc etc.

There's no easy answer.

[DonkeyApple]

Yup. Not an easy answer and both scenarios are pretty valid.

Personally, I wouldn’t incur redemption fees unless it was extremely clear that there was a significant saving in doing so.

I think I would take the balance less the outstanding mortgage amount and seeknto invest that, over a suitable time period, being as cost and tax efficient as possible into the markets with a 10-20 year outlook, maybe if pensions are all OK then seek to use partner’s spare allowances to take an ‘income’ Each year etc.

With the remaining £300k, as suggested, dot it around to keep it under the FSCS scheme level and earning the highest income but leave as cash so that when the mortgage deal expires you can make a clear descision as to whether to clear or offset going forward, this freeing up what is currently being spent each month in that regard and either investing that or choosing to spend it it etc.

[cloud_dog]

DonkeyApple said:

Yup. Not an easy answer and both scenarios are pretty valid.

Personally, I wouldn’t incur redemption fees unless it was extremely clear that there was a significant saving in doing so.

One of the ways to work around the ERC, should the OP (friend) choose to repay the mortgage, would be to contact the mortgage company and reduce the term of the mortgage thereby increasing the payments and increasing the ability to more quickly repay without impacting on early repayments / inuring an ERC. The OP/friend would still need to work within the early repayment terms, i.e. some lenders it is based on the O/S value at the start of the year and you can only repay up to 10%, or it might be a fixed rate, i.e. Nationwide used to allow up to £500pm of over payment (switched to the 10% model now).

EDIT: Just to say this possibility is not guaranteed as some mortgage providers can be hesitant or unwilling to do so but, it is worth checking / doing if that is the chosen route.

Edited by cloud_dog on Thursday 28th November 12:09

[Cheib]

Before considering any of the above

- How old ?
- what’s the LTV of the mortgage ?
- where in the country ?

If this person is living in an area where there are reasonable prospects of house price growth and they aren’t too old there’s a lot to be said for having leverage against your home.

When you’re young and can afford to service the debt I would advocate keeping the mortgage. Noting at all wrong with sensible levels of debt.

[NickCQ]

Cheib said:

When you’re young and can afford to service the debt I would advocate keeping the mortgage. Noting at all wrong with sensible levels of debt.

Interest rates are low now, but they might go back to historical norms in future.
Given that you have to pay off the debt at some point, might as well do it now when you definitely have the cash rather than wait?

[cloud_dog]

I think the option of investing or paying off/down the mortgage is a very subjective one and is a personal choice, whichever decision a person makes is the correct one for them.

Having said that, I am in agreement with Cheib.

[Cheib]

NickCQ said:

Cheib said:

When you’re young and can afford to service the debt I would advocate keeping the mortgage. Noting at all wrong with sensible levels of debt.

Interest rates are low now, but they might go back to historical norms in future.
Given that you have to pay off the debt at some point, might as well do it now when you definitely have the cash rather than wait?

That’s my point about needing to look at where the OP lives etc and expected levels of HPI (House Price Inflation)....if you live in an area where there’s say 5% HPI expected it’s a very different proposition from living somewhere where there’s bugger all chance of growth.

Also something that I never/rarely see mentioned on here is that your Primary Residence is an asset that is free from CGT...so again if you live in an area where positive/decent HPI is expected it can make sense to own a larger house with cheap leverage against it for 20 years than in an investment that has no tax benefits.

That is what I did and it’s definitely been a positive for my financial position (I’d maxed out ISA’s/Pensions etc)

[bennno]

Thanks all, it’s an area with good house price growth but his principle residence already plenty big enough and worth 750-800k. Individual mid 40’s near maxed out pension, keen to retire very early etc.

ERC on outstanding mortgage is circa 5k - alternatively interest on the 300k mortgage is £500 month so it’s a 10 month payback effectively. Friend checking if ERC reduces over time if not then £5k ERC to save £20k over 4 year residual fixed interest term. So it’s potentially worth paying him off mortgage balance.

With the other 200k surprised nobody has mentioned buy to let, seems there is a clamour for some mortgaged BTL owners to sell currently due to pending rules regarding offsetting interest charges, but £200k appears to be able to buy a 2 bed flat in the south east that will return £650-750 month after costs - or can anybody do better than this In another part of country, or think of another use of the £200k. Must reasonably protect capital and provide an income.

Edited by bennno on Saturday 30th November 14:35

[anonymous-user]

bennno said:

surprised nobody has mentioned buy to let

If you crunch the numbers Joe Average's "go to" investment looks pretty hopeless for new entrants.

[Derek Chevalier]

rockin said:

bennno said:

surprised nobody has mentioned buy to let

If you crunch the numbers Joe Average's "go to" investment looks pretty hopeless for new entrants.

In the South East it looks poor for established investors once you strip out all costs.

[98elise]

Derek Chevalier said:

rockin said:

bennno said:

surprised nobody has mentioned buy to let

If you crunch the numbers Joe Average's "go to" investment looks pretty hopeless for new entrants.

In the South East it looks poor for established investors once you strip out all costs.

As a landlord in the south east I agree. Then factor in the possibility of Labour forcing you to sell for less than market value.