Sell shares to overpay mortgage?

[Cardano93]

Whilst using historical analysis is useful its not always that important when making forward looking financial decisions, and suffers from selection bias. Mortgage rates now are significantly lower than 4.36% reducing the hurdle rate, in addition there is an influx of low cost investment options that were not available previously, so the landscape today is different to 20 years previously.

Can I query your 4% number as looking at historical S&P annual returns the average is closer to 7% from 2000 to now.

Tax treatment / CGT and ETF deemed disposal is incredibly punitive for Irish retail investor. I favour maximising stock market exposure through AVCs before paying down a mortgage at the current costs. From remaining cash flow I try to maximise the CGT allowance through share investment and paying down mortgage.

Ultimately it is almost a zero sum game. If you use free cash flow to pay down a mortgage 3 years ahead of the contracted terms (i.e. 27 years from now), you will increase your monthly free cash flow (mortgage payment) in 27 years time. You will then have to decide how to put that money to work for a shorter period of time. The alternate option is to put the current free cash flow to work in the stock market or other investment vehicles for the entire 30 years period whilst not overpaying your mortgage. At the end of the 30 years you end up mortgage free with an investment worth +/- x%. Or you can do a mixture of both 50% of free cash flow goes to mortgage etc.

You end up with the same result of mortgage freedom the decision to make is how you want to get there. Given that a house is largely a dead asset i.e. you can't profit from it whilst living in it, there is no real benefit to paying off the mortgage slightly earlier than the contracted terms in comparison to the potential returns in the stock market.

Obviously this changes dependent on length of mortgage, age etc and is why an individuals own circumstances are important and that blanket advice should not be applied.

Excellent post

 

[nest egg]

One thing to note is you have all your eggs in one basket with that particular share, far from ideal and not something I would recommend

Totally agree, I shouldn't have bought them in the first place, or at minimum I should have liquidated them when buying the house, I'll chalk it down to experience.

 

[Sarenco]

May I plagiarise that?

It's brilliant.

Brendan

I'm afraid I can't claim authorship - the quote is usually attributed to Leonardo da Vinci.

 

[Cardano93]

So do you think it would be smart to borrow at Irish mortgage rates with a view to investing in equities?

I don’t.

Yes I do actually. (Not on currently overpriced growth stocks btw). Given how low fixed mortgage rates are now I think it is a no brainer. Personally I could clear my mortgage in full now but I choose not to do it in order not to sacrifice better returns. As I said before, all down to personal risk tolerance. My mortgage is at 2.1% fixed (<50% LTV) and I feel it is very easy to beat that rate (including taxes, fees etc) especially over a longer term. Sure even a reliable REIT is paying 5.5%-6% yield at the moment and after tax (when compounded and DRIPping) it will easily achieve a better return than paying down mortgage. A little bit of research will show there are loads of value stocks available with very low P/E and some also pay reliable dividends.

I also agree 100% with earlier posts from you and others regarding Pension and AVC's etc. - also a no brainer.

 

[DublinHead54]

Simplicity is the ultimate sophistication

but not always the smartest

 

[Sarenco]

Can I query your 4% number as looking at historical S&P annual returns the average is closer to 7% from 2000 to now.

I used the net total return of the index, expressed in EUR, over a slightly different time period.

Even if the annualised return on the index had been 7%, an Irish investor would have done well to make an annualised return of 4%, after accounting for all expenses and taxes.

That's still less than the average mortgage rate in Ireland of 4.36% over the period.

If anything, I'm understating the position. The weighted average mortgage rate was actually quite a bit higher than 4.36% because rates were higher earlier in the period, when the principal outstanding on the mortgage was higher.

Whatever way you look at it the risk of investing in the S&P500, rather than paying down the mortgage, was not rewarded over the period.

 

[Gordon Gekko]

So if I offered you an investment with a cast-iron guaranteed return of 4%, you wouldn’t be interested?

Because I’d jump at it.

 

[DublinHead54]

I used the net total return of the index, expressed in EUR, over a slightly different time period.

Even if the annualised return on the index had been 7%, an Irish investor would have done well to make an annualised return of 4%, after accounting for all expenses and taxes.

That's still less than the average mortgage rate in Ireland of 4.36% over the period.

If anything, I'm understating the position. The weighted average mortgage rate was actually quite a bit higher than 4.36% because rates were higher earlier in the period, when the principal outstanding on the mortgage was higher.

Whatever way you look at it the risk of investing in the S&P500, rather than paying down the mortgage, was not rewarded over the period.

Sarenco, yes in the scenario you picked I'll not disagree, much like you could not disagree that if investing in Amazon 20 years ago would not have returned more than paying off the mortgage. Or if I invested in the S&P for the last 3 years, it would have outpaced any guaranteed return on a mortgage rate significantly.

But we weren't talking about a specific investment scenario.

 

[Gordon Gekko]

What about today?

You’ve €10,000…

Two choices:

a) Invest in shares

b) A guaranteed 4.25%

 

[Gordon Gekko]

Sorry you are being selective with dates and returns there. The S&P has gross return of 371% since 2000 which equates to a yearly average of 7.41%. €50k invested for 20 years would yield €156k after tax (€208k gross) vs a saving of €117k if paid off mortgage at rate 4.36%.

I'm not even gonna compare to investments in Apple, Microsoft, Amazon or Google.

What about tax?

You’re comparing gross with net?

 

[flyingfolly]

I was in this situation 2 months ago.

We had 170k saved up (120k in shares + 40k in savings + 10k in crypto) and 170k left on the mortgage. We thought about what would be the best thing to do, keep the mortgage at 2.85% or pay it off by selling all shares etc. In the end we sold it all and just cleared the mortgage due to the stress of having shares go up/down and the uncertainty of it all.

I'm still between minds as to whether is was the best option because the shares have since gone up another 10% or so, but its all just hindsight. If the shares go down 30% next year then I'll feel great about the decision. There are pros/cons to both sides but two big ones for me are:

1. Any days I feel really stressed I just think to myself, well I could just quit work and be fine. We have no mortage so work stress doesn't really matter any more
2. I can take on more risky investments now. I'm starting to re-invest money again now as we have 20k saved up again as an emergency fund, but now we have no debts, its easier to try some small risky investments with a long term view (we're in our 30's).

When we looked at it, we were happy to get the guranteed annual return of 5.7% by paying off the mortgage along with the peace of mind which was really a big one.

 

[Sarenco]

Sorry you are being selective with dates and returns there. The S&P has gross return of 371% since 2000 which equates to a yearly average of 7.41%.

Not really - I was quite specific about the timeframe used.

You’re right though - the annualised gross total return on the S&P500 from the start of 2000 to the end of last month, in dollar terms, was about 7.5%.

That would translate to a return of around 4.25% to an Irish investor, after all taxes and expenses (I’m assuming the investment is through an Irish domiciled ETF for simplicity) are deducted. Again, that’s in dollar terms.

That is still materially less than the weighted average mortgage rate in Ireland over the same period.

 

[DublinHead54]

I was in this situation 2 months ago.

We had 170k saved up (120k in shares + 40k in savings + 10k in crypto) and 170k left on the mortgage. We thought about what would be the best thing to do, keep the mortgage at 2.85% or pay it off by selling all shares etc. In the end we sold it all and just cleared the mortgage due to the stress of having shares go up/down and the uncertainty of it all.

I'm still between minds as to whether is was the best option because the shares have since gone up another 10% or so, but its all just hindsight. If the shares go down 30% next year then I'll feel great about the decision. There are pros/cons to both sides but two big ones for me are:

1. Any days I feel really stressed I just think to myself, well I could just quit work and be fine. We have no mortage so work stress doesn't really matter any more
2. I can take on more risky investments now. I'm starting to re-invest money again now as we have 20k saved up again as an emergency fund, but now we have no debts, its easier to try some small risky investments with a long term view (we're in our 30's).

When we looked at it, we were happy to get the guranteed annual return of 5.7% by paying off the mortgage along with the peace of mind which was really a big one.

Congratulations. Question, when you sold the shares did you make much of a return IME was that 120k based on a 60k investment?

There is the view on this thread that you should never have invested in shares and just paid off the mortgage. Would be interesting to understand if you hadn't invested in shares would you still have just cleared your mortgage?

 

[PGF2016]

We thought about what would be the best thing to do, keep the mortgage at 2.85% or pay it off by selling all shares etc.

The best thing to do financially might not be the best thing to do for you, your family and your life. Sounds like you got it right this time. Congrats.

 

[Sarenco]

No I'm referring to shares rather than ETF

Here's your original request -

Do the same exercise using S&P 500 index or a mixture of tech and value stocks that were around at that time and you will see the opportunity cost.

I carried out that exercise and showed that paying down the mortgage would have worked out better over the period than investing in an index fund that tracks the S&P500.

Of course you could point to a relatively small number of stocks that produced a return over the period that would have exceeded the weighted average Irish mortgage rate over the period.

But unless you have a crystal ball...

 

[flyingfolly]

Excellent point, interested to hear answer. That said, I assume given he is in his 30’s the initial sum wouldn’t have been invested for a very long period.

Correct. I made an extra 50k on the initial investment by putting money into GameStop and Tesla (should have held onto those shares longer as I sold two years ago!). So I made about 80% return in two years.

 

[DublinHead54]

Correct. I made an extra 50k on the initial investment by putting money into GameStop and Tesla (should have held onto those shares longer as I sold two years ago!). So I made about 80% return in two years.

Thanks ff, so there is the evidence to support that investing in shares can beat the guaranteed return of paying down a mortgage. It shows that there is room to have riskier assets in a portfolio vs just following the approach of paying down debt. The case is only stronger for this given spot mortgage rates now are as much as half the average of the last 20 years as pointed out by @Sarenco, whilst the S&P 500 has posted (unadjusted) double digit returns over the last 5 years.

I certainly would not have been in as strong a personal financial position if I had not invested in the Stock market (mostly ETFs) outside of a pension in my younger days.

@Cardano93 made a good point regarding inflation, and @Brendan Burgess referenced those in their 20s that are unlikely to have a mortgage. Well it is for them the future is bleak if they don't utilize equity markets. Ireland needs to fundamentally overhaul taxation of investments, and align to the likes of UK and USA were wealth creation through investing is much more accessible.

 

[nest egg]

Thanks ff, so there is the evidence to support that investing in shares can beat the guaranteed return of paying down a mortgage. It shows that there is room to have riskier assets in a portfolio vs just following the approach of paying down debt. The case is only stronger for this given spot mortgage rates now are as much as half the average of the last 20 years as pointed out by @Sarenco, whilst the S&P 500 has posted (unadjusted) double digit returns over the last 5 years.

I certainly would not have been in as strong a personal financial position if I had not invested in the Stock market (mostly ETFs) outside of a pension in my younger days.

@Cardano93 made a good point regarding inflation, and @Brendan Burgess referenced those in their 20s that are unlikely to have a mortgage. Well it is for them the future is bleak if they don't utilize equity markets. Ireland needs to fundamentally overhaul taxation of investments, and align to the likes of UK and USA were wealth creation through investing is much more accessible.

Niall Ferguson's book, The Ascent of Money (highly recommended), makes a similar point. The opportunities available to people these days to invest in diversified portfolios at low costs have never been greater. Societies which fail to equip their citizens for this reality risk creating a bigger gap between the haves and have nots in the future.

 

[RedOnion]

Thanks ff, so there is the evidence to support that investing in shares can beat the guaranteed return of paying down a mortgage.

With respect, we're verging on confusing investing with gambling here.
@flyingfolly has previously posted about making 50k buying and selling Game Stop in the space of a week back in January. It was a high risk strategy, from which they came out on the right side.

 

[flyingfolly]

With respect, we're verging on confusing investing with gambling here.
@flyingfolly has previously posted about making 50k buying and selling Game Stop in the space of a week back in January. It was a high risk strategy, from which they came out on the right side.

I was just about to post this. I'm not sure my situation is a good justification for investing while having a mortgage. I pretty much gambled 15k using my mortgage debt (savings, but could be used to repay mortgage debt), so eh...not exactly the best idea. It worked out, but it might have not done.