Balancing mortgage & investments

[CarDoodle]

I’m considering moving house in the near future as with growing children we could use the extra living space. I am currently mortgage free in a smaller property (not a PBCD unfortunately)

Over the past few years I’ve been putting money aside mainly through stocks & shares ISAs (simple global tracker type arrangements - nothing too glamorous). I had broadly earmarked this money (+ future contributions) for a point 20+ years in the future to facilitate an early(ish) retirement bridging me to when I could / would draw down on a pension pot.

Now I’m looking seriously at mortgages again I am curious what others do with their savings arrangements when debt is mixed in?

I think my options are:

1. Cash it all in (keeping an emergency fund) and tip in to the house reducing debt on day 1. Point forward savings mostly building up ISA again

2. Cash in SOME of the pot (likely the most liquid elements - cash etc) and use to reduce debt on day 1, leave most/all S&S in ISA wrapper rising / falling in value; Point forward savings mixed between overpayments/savings

3. Cash in NONE and take on the larger debt with investments rising / falling to the side; Point forward savings mostly overpayments in near term

4. HYBRID - mix of the above somehow

The savings are around one half of the potential mortgage amount. Separately I have a pension which is 100% equities (25+ years timeline) which I will continue contributing to throughout.

My risk appetite has usually benchmarked in the 60-80% range (Finametrica etc).

If someone else was asking this I would be saying it comes down to expected return on investments (something like 5.5% inc. inflation based on my mix) vs the interest rate on the debt (looking like 1.5ish% for a 5 year fix). Of course I have a horse in the race this time...

Option 1 I think has legs only if the equity investments are sufficiently ‘in the money’. We have seen these swing through 2020. I don’t think I will be ‘forced’ to crystallise a poor position as I have the other options. Downside is that I would lose the tax wrapper for the historic contributions (not sure if this is something I need to worry about too much or not?) and exposure to equities outwith pensions.

Option 2 is currently the leading contender in my mind as it will absorb some of the lower risk bits and pieces that are returning little these days, with the remaining equity investments keeping some investment exposure. Regular point forward overpayments would reduce the debt steadily. Downside is that my remaining investments might need rebalanced depending on how much I strip back (I would still be in the 60-80% risk window, but towards higher end).

Option 3 is adding leverage to my position and feels like I am pushing my overall risk higher, and possibly a bit of a waste if I have low risk & return products elsewhere. I am least keen on this one at the moment.

Option 4 is over to you guys for ideas... Thinking possibly taking profits from the stocks and shares but leave a smaller investment pot still there, or regular sells if in the money, etc.

Appreciate any - and all - thoughts on this if anyone has been through this previously. I appreciate mortgages just now are quite cheap so those with more experience might be able to offer a few pearls of wisdom on how to make the most of my position.

[CarDoodle]

brickwall said:

There’s a few other factors at play too:
- How close to ‘capping out’ on your income multiple for the mortgage are you?
- Would maxing out the mortgage tip you into a new LTV band and trigger a higher interest rate?

Both of these will influence how much you release from investments to deleverage.

Yep they would have been useful in the OP!

I don’t think it’s anything too racy - multiple is sub-3x with LTV sub-50% at the top end, and then lower depending on the options to chip this down.

From what I can see there isn’t any benefit to reducing these further from a rate perspective as both seem to be within the banks lower limits. Happy to be corrected as product wise I am still very much in the learning phase.

[xeny]

Interest rates are low, and I suspect likely to stay low for many years. As such, have you evaluated minimising pension payments and funnelling any surplus through your pension with a view to using your pension commencement lump sum to pay off the mortgage with money you've not payed tax on?

[Tresco]

What you can’t put a price on is the enjoyment you will get from living in a larger house.

Also of course any house price inflation means your ‘tax free gain’ will be larger the more you spend

I’d leave your savings alone and take the larger mortgage, you can always overpay with savings if your situation changes.

[NickCQ]

CarDoodle said:

multiple is sub-3x with LTV sub-50% at the top end, and then lower depending on the options to chip this down.

That's a nice place to be already (assuming you don't see negative income shocks in the future). Given how cheap the debt is, I would be tempted to keep at c. 50% LTV and invest the remainder. Golden rules are minimise taxes (pension/ISA) and fees (low cost index trackers)!

Now of course if the value of the house goes down technically you should be ready to sell investments to de-leverage the mortgage.

[NickCQ]

Stuart70 said:

I would struggle to see investments as positive, compared with having a comfortable family home, but that is not an entirely rational position.

I think OP has decided on the budget for the house, the only question is how to fund it.

[CarDoodle]

Thanks all - it has been useful to think this through when posting & read the responses. Doesn’t seem like I’m too far away from the general thinking with balancing savings/liquidity & mortgage/debt given low rates available.

I think there has maybe been a post deleted - but yes I agree there is value in moving and having a suitably sized family home. Just don’t tell my other half that you can’t put a price on it :-D I’ve got a budget for the house in mind but the figures coming out of the calculators are so wide ranging I’m basing this on a specific property I’m interested in. If it doesn’t work out then I may need more (or less) from the bank.

Do brokers have their place for these fairly straight forward mortgages? I’ve been through a chat with the local one through the estate agent but they seemed focused on getting the largest loan amount possible rather than some of the bits of more interest to me (details on overpayments, terms, fees etc.) Didn’t feel like an overly useful conversation adding almost nothing to my thinking, but as I say it was just a brief chat so I may be doing this one a disservice. Maybe a specialist broker not connected to my estate agent may be the way to go (e.g. Sarnie?) but not sure if it’s just a waste of their time for fairly basic requirements.

NickCQ said:

That's a nice place to be already (assuming you don't see negative income shocks in the future). Given how cheap the debt is, I would be tempted to keep at c. 50% LTV and invest the remainder. Golden rules are minimise taxes (pension/ISA) and fees (low cost index trackers)!

Now of course if the value of the house goes down technically you should be ready to sell investments to de-leverage the mortgage.

You have picked up on one of my fears which is income shocks - at the moment the company I work for is connected to fossil fuels so I could see there being a change in company needed in 7-15yrs time potentially. This is part of what is driving me to avoid large multiples and put in overpayments while I can just in case a bit of a drop is needed to go to another company or industry.

Of course that may not materialise, there are plenty of other companies out there and there may be positive shocks along the way too so as ever it is a balancing act!