Sell shares to overpay mortgage?

[Steven Barrett]

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

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.

 

[Sarenco]

Borrowing to invest and investing while carrying debt are economically the same thing.

It generally makes a lot of sense to invest through a tax-advantaged pension vehicle while carrying a mortgage.

Investing after-tax money in taxable investments while carrying a mortgage? Not so much. Our tax rates are so high that it totally changes the risk/reward dynamic in favour of paying down the mortgage.

 

[cremeegg]

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

If I could get that €100k at 2% fixed for 10 years, yes without hesitation.

 

[Brendan Burgess]

If I could get that €100k at 2% fixed for 10 years, yes without hesitation.

I think you should hesitate. You need to think about it.

The potential gains just do not justify the risks involved.

Most of the time, after ten years, you will be ahead and you can say "I told you so!"

But there will be enough times where you have a big debt well in excess of your investment.

Brendan

 

[DublinHead54]

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

Understanding market risk can be a complex subject and everybodys financial scenario is different. but you're blanket approach is an over simplification and can lead to incorrect advice in my opinion.

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?

Nobody is borrowing at 2.5% to invest in shares, they are independent events. Or please send me a link to the bank that will let me have 100k against my house to invest in the stock market.

 

[DublinHead54]

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.

My point was that a blanket 'don't invest whilst having a mortgage' statement is not correct as it doesn't work for everyone. You've agreed with that in your first sentence.

Your subsequent points on returns are subjective and a guess. It could be -10% it could be a 40% return, that's the risk.

My suggestion is that it doesn't have to be so binary. Even in your example you're presenting it as pay off the mortgage or invest in stock market. My suggestion is both can be done and that's the balance, in addition everybody can get exposure to the stock market through tax efficient AVCs which totally changes the risk reward scenario.

 

[Brendan Burgess]

Understanding market risk can be a complex subject and everybodys financial scenario is different.

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.

Does your opinion extend to that people shouldn't make pension AVCs whilst carrying a mortgage?

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.

Would you offer that same advice to a 20 yr old and a 60 yr old?

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

 

[DublinHead54]

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 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've oversimplified in attempt to make a scenario black and white when it's not.

There is still merit to invest in the stock market to benefit from risk adjusted returns alongside reducing any debt you had.

At the end of the day, the cost of carrying debt is so low there's not much benefit of overpaying a mortgage.

 

[Jim2007]

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 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.

 

[Gordon Gekko]

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.

 

[Brendan Burgess]

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.

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?

 

[Cardano93]

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.

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

 

[DublinHead54]

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?

Brendan your point is that nobody should invest in shares whilst carrying a mortgage, correct?

My argument is that this is not the only option for the following reasons. .

1. People have different financial situations determined by size of mortgage, income, age and a host of different variables.
2. Carrying debt today in the low interest rate environment is cheap.
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.
6. Risk - historical performance is not a guarantee of future performance but stock market over the last 10 years has returned well.
7. It's common practice to have a portfolio of assets with different risk profiles.

I'm not disagreeing that reducing debt is a good strategyI. I'm saying it's not a sequential process and people can follow a balanced approach based on their own financial circumstances.

To your question above we'd need to know a lot more about Steven and Brendan's financi situation can you ask them to fill out a money makeover?

 

[DublinHead54]

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.

Why does everybody think you can only either invest in shares or pay down debt?!

It's called a portfolio for a reason.

 

[Brendan Burgess]

It's common practice to have a portfolio of assets with different risk profiles.

It's called a portfolio for a reason.

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

 

[Brendan Burgess]

1. People have different financial situations determined by size of mortgage, income, age and a host of different variables.

This doesn't change anything. The fact that people have different situations does not change the principle that one should not borrow to invest in shares.

Brokers who want to get commission from your investments will often tell you that everyone is different. They are, but the fundamental principles remain the same.

 

[Brendan Burgess]

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.

Sorry, but this makes no sense at all.

Fixed rates mean nothing of the sort.

If you have a fixed rate mortgage of €200k and you repay €100k, your repayments will halve.

4. Costs associated with break fees and switching to get best mortgage rates are not considered in your example.

We are setting out a general principle here. The OP should pay down his mortgage. It is generally correct to use cash to clear your fixed rate, even if there is a break fee. But even if the maths are wrong at the moment, then the principle remains the same and he clears the mortgage when the fixed rate ends.

The cost of switching to another lender are not relevant to this decision. He should of course, consider this separately.

 

[Brendan Burgess]

5. Tax benefits of AVCs to get stock market exposure.

I am not sure why this is repeated many times. I have already explained that in some cases it makes sense to borrow to invest in a pension. In other cases, it doesn't.

This thread is about a person who has money directly in shares.

Other relevant information 1) Maxing AVCs,

He should sell them and pay down his mortgage.

Brendan

 

[Gordon Gekko]

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

Well it won’t, because of tax.

And debt is also recurring; you’ve seen those mortgage calculations where it says “borrow X, total repayments Y”, yeah?

Parking single stock punts like Tesla which could go either way, let’s just look at 2022 in isolation:

Let’s say I’ve a surplus €50k, my AVCs are maxed out, I have an emergency fund, and I have a mortgage which isn’t a tracker. I just don’t see why I would invest in equities rather than putting the €50k against the mortgage. I already have meaningful equity exposure via the pension. If things go well on the equity front, I might make 3% after taxes and costs. Or I can take a guaranteed return of 2.5% via the mortgage.

Then when the mortgage is cleared, I can divert all surplus cash plus the mortgage repayments into an equity portfolio.

 

[DublinHead54]

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

A mortgage is a debt secured against an asset, they aren't independent. The debt from a mortgage is based on personal affordability to make monthly repayments over a long time horizon. There are options to pay that debt down faster, but you aren't adding to the debt / liability that you undertook from the outside by investing your free cash flow in the stock market.

When you take out a mortgage it clearly shows the total cost of that debt over the lifetime, so you know when you borrow 500k, your debt is 500k + interest. Can you explain how you are then increasing your debt by investing additional free cash flow into the stock market?

You are now introducing a different concept of Risk Tolerance, which I assume you must agree is unique to an individuals circumstances?

In the scenario of a mortgage, nobody is adding debt to their portfolio to increase returns.