# Mortgage v Investing

Just a little note before the article- remember that none of this is advice, do your own research- pay a qualified financial adviser if required.

Firstly- what do I understand what each term means?

#### Mortgage

If you aren’t renting, this is likely to be the highest cost you will be facing, every single month. It’s not like its going away quickly either- with some mortgage terms going over 35 years now- and the average topping 30 years for the first time buyer. In general most people have a capital repayment mortgage, so when they get to the end of this term, they have £0 owed on the mortgage.

#### Investing

In the simplest terms, I am talking about putting money into index funds. I’ve written about these before, but they tend to offer the best returns with the least amount of risk (though, nothing is risk free). If possible, this should be done within an S&S ISA to avoid capital gains taxes etc.

#### So, why Mortgage v Investing?

Well, let’s talk though an example. In this, we will make the following assumptions:

- House Price: £250,000
- Deposit: £50,000
- Mortgage amount: £200,000
- Mortgage rate 2%
- Term: 20 years

So, let’s go with the normal scenario for most people- they will go to their bank/mortgage advisor, and get a capital repayment mortgage for a initial fixed term of 2/5 years. After this period, let’s assume they fix again and again, each time for 2% fixed- just to make the figures slightly easier.

- Monthly repayment: £1,012
- Total repayment: £242,859
- Interest paid: £42,859

Now, what happens if instead, you only pay the interest on your mortgage?

- Monthly repayment: £334
- Interest paid: £80,062

Hold on, almost double the interest paid, surely this isn’t as good as paying your mortgage off as you go? Well, that all depends on what you do with the extra £678 each month that is the difference between the capital repayment and the interest only. Let’s say that you put this in an index fund for 20 years (the term we are using), with a return of 5%:

Total balance: £276,256.38

So, after you have paid off your mortgage of £200,000- you are left with £76,256.38! If you change the return from 5% to 6%, you are looking at £108,927.83

#### The downsides

Now, let’s talk about the downsides of this idea, as, since surely it sounds like such a good idea, why isn’t everybody doing it? Well- it’s risky. How risky? Well, that totally depends on what index fund (or any other investment) that you made. If you put it into some poni/bitcoin scam scheme, then, its likely to will end up with less/nothing at all.

#### Hold on- didn’t these mortgages used to exist?

They did- in a way, they were called Endowment Mortgages. They used assumptions like 7-12% growth rates, which meant as the market slowed in the 1990’s, they were going to miss these targets. There was huge mis-selling when these mortgages were arranged- since the terms were long (the same length as mortgages- at least 15 years), it took a long time before they came to be redeemed.

#### So, if they aren’t popular anymore, why am I talking about this?

Times have moved on- you won’t find a bank offering this type of mortgage anymore, and in fact- interest only mortgages can be hard to get as well. The biggest danger that you/the bank faces, if you take an interest only mortgage, is what happens if you just spend the extra money? You said you were going to invest, but actually, you spent it on a new car, kitchen, holidays etc. We aren’t talking- long term- about small amounts of money either, £200,000 even after inflation (let’s say 2%), is still £133,500!.

So, why does this work now? One reason- interest rates. Never have they been so low, for so long. The base rate set by the Bank of England has been below 0.5% since 2008:

This won’t be the case forever though, or will it? Nobody really knows, but the fact that banks are setting 5/10 years mortgages at 2/2.5%, means they are betting that these conditions continue for at least that time period (or they are willing to lose millions/billions of pounds). The rate has pretty much never been this low, for such a long time:

Just because it hasn’t happened before, doesn’t mean that it won’t happen in the future however- so do your own research. Take your own risks- don’t just follow somebody else.

Questions/Comments? As ever, let me know below & I’ll try and answer them as well.

You can’t get an interest only mortgage for the same interest rate as a capital repayment mortgage however, they’re normally running at a fair premium. Even then they’re pretty rare for primary premises as I understand it? Especially for first time buyers.

Hi Z- thanks for your comment. You are correct, interest only mortgages are at a premium compared to capital repayment. I do think that my point still stands, especially if you have already got your LTV to a lower level after 2/5years of owning the property. A quick look here:

https://www.money.co.uk/mortgages/interest-only-mortgages.htm

Shows that there is still quite a bit of competition in the market for rates, however, LTV’s of 60/70% are required.

Great post.

But where do you get this massively long dated interest only mortgage?

I would love one but the reality of remortgaging a 2 / 3 / 5 year deal is that you gamble on what interest rates are available to you in the future.

For me – invest ahead of paying off the mortgage- the tax and growth benefits are a no brainer

Ahah- I’ve been caught out, well- ish. Indeed- you can’t get any long interest only mortgage- any more than you can on a capital repayment. This is the risk of investing over the repayments, you aren’t sure what either the stock market- nor the interest/inflation rates are going to be in the future. You only have to hope that the interest rate & stock market (or whatever investment) keeps up at the same rate.

There are actually some decent 10 year fixed rates available at the moment (repaymemt) at just over 2%.

Maybe worth considering if you want the longterm security of that

I wrote about this in April .. much to my surprise I concluded that paying off the mortgage (unless I had a large pile of spare cash) was the best option – it is the big picture and never just about one element (ie the mortgage), but about all the other opportunity costs (in my case, taking higher sums of money out of my Pension fund to pay the mortgage.

https://www.firemusings.org/invest-in-the-bottoming-market-or-pay-the-mortgage-off/

You are comparing investing into your SIPP v paying off mortgage- rather than using your ISA allowance instead? Even so, I still don’t think the figures add up, even with 5% growth (minus tax), compared to an interest rate of 1%- you are still going to be better off, financially, by investing over mortgage repayments. This of course doesn’t touch on the “brain feeling” we get when we pay off debts, which can be well worth the financial cost.