Should You Pay Off Your Mortgage or Invest? (A 50-year historical backtest)
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- เผยแพร่เมื่อ 12 พ.ค. 2024
- A look into the past to assess how often investing has beaten paying off your mortgage.
Graphs from the video
go.novawm.com/MortgageGraphs
Financial Planning
I am a Chartered Wealth Manager and Partner in a financial planning practice based in the UK. If you would like to find out more about our services, please follow this link: go.novawm.com/getintouch
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00:00 The Problem with Averages
02:24 Tom & His Question
04:07 Historical Market Data
05:24 How the Test Works
07:13 ISA Results
09:24 Different Mortgage Sizes
09:47 Pension Results
12:28 Pension +1
13:34 Different Time Periods
14:27 60% Stocks 40% Bonds
16:31 Key Considerations
19:26 Why this was not for Tom
It's great to see a wide range of opinions in the comments.
Please remember that what feels right for you may not be right for someone else. There is no single right answer for everyone.
The unfortunate truth is, all of these investment strategies are reliant , or edge ahead, over repaying the mortgage based on current regulation. All it would take for some of these models to fail would be a change in the regulatory framework in the UK. Now that's probably a risk factor you cannot predict!
Not sure if this is in your wheelhouse ... but what if I retire abroad? Is it possible to take my 25% tax free money, and then move tax jurisdiction to say Montenegro with a flat tax rate and then draw the rest of my money at 9% ... or move the pension to a QROPS alternative and take advantage of their rules? If I can retire abroad to a better tax system, how does that change my situation, would I lose access to the NHS, would I still get the state pension? ... because yes, having saved tax free into my pension with the understanding they get the tax later on draw down ... I'd like to do the dirty on the government and leave them with nothing. I feel you have a whole video on the implications of retiring abroad. 😁
@@mrscreamer379 It's not my area of expertise but I know that it depends on which country you retire too. Some recognise UK pensions in their entirety and you still get 25% TFC. Other don't allow TFC but you can draw down the pension at marginal income tax rates - which are often lower than the UK.
When comparing the pension to the ISA am I correct in understanding by using the 25% tax free you cannot then use it in the future. So if you get say £10k from state pension and £30k from your pension you lose the benefit of 25% of the £30k beings tax free say £1.9k per year, say £38k over a 20 year retirement as a basic rate tax payer?
Irrespective of this I believe the pension looks favourable over the ISA but as you elude to the overall strategy suits wealthier people who can ride out the crashes
@@user-tm2gb7cj8k That is correct, if a scenario ended up having £400,000 in the pension but you have to use al of your tax free cash to pay off the mortgage, the remainder will be taxable.
So, a result that leaves you with £50k left in your ISA would be better than a result that leaves you with £50k in a pension. Depending on your marginal tax bands, of course.
Phenomenal analysis! So many TH-camrs skim the surface and repeat one another’s simplistic ideas. Finally someone who “gets” data and can do quality analysis! Thank you.
Yes!
I’ve paid off two mortgages very early (15 and 10 years on 25 year loans) in my lifetime - both with overpayment since day 1. My outlook on life and work changes completely when I’m mortgage free. 🎉
Dito last payment in may. Have 2 properties and paid both off in a similar period. I'm now preparing for early retirement (57 planned). Just waiting to fill both our Premium Bonds and still paying into 5 pensions (2 DB's, 2 DC's and a SIPP) between me and the better half. So well on way to be debt free and able to enjoy life early without anyone having a hold over me
That’s perfectly legitimate, if you decide the mental health and other benefits of paying off a mortgage outweigh the financial benefits of investing in stocks - but that’s a personal decision only you can make. This video just illustrates the method that makes the most money.
im 75k away help! its been so hard! ive been on this intense journey for 3-4 years now! i feel ive had no life!
@@mynameisben123 I have seen people take your approach and do well. I have seen people put their mortgage over payments into Stocks and shares and fail miserably so i see it as a gamble and risk where as simply paying your mortgage first is a sure thing.
@@user-md6se6in1z sorry to hear that you're in this position. I too am considering buying my first place, but to afford it by myself would mean cutting back a lot and potentially feeling like I can't go anywhere or do anything, except just stay at home and pay for a house for 25+ years. Are you trying to overpay your mortgage or just keep up with payments? It sucks feeling like you have to miss out on life just to have a roof over your head and yet this is all we hear from previous generations. Can you stretch the length of your term to reduce monthly repayments? Are you able to earn more money in your current job or a new one? Is downsizing an option so that you have a smaller mortgage?
I appreciate the time and attention to detail you put into this. Thank you!
Great content. I love the data and analysis. So much more granular and powerful than 99% of financial content out there.
I'm 27, I'm a newly qualified Financial Planner, I personally put much more into overpaying my mortgage than I do into investing. I know that I would very likely be better off allocating more to investments given historical return models, but I also know I'm naturally conservative as a person. For me, the peace of mind of being 40-45 with my mortgage paid off, vs having a much healthier private pension but my mortgage still hanging over me, is a no brainer. I still invest in my retirement plan and for me it's the right balance. It's always helpful to look at these kind of models though, great video James!
This results is less liquidity and less diversification. Is that not a worry for you?
Well, not sure if this will make any difference to you, but I am 45, and I _really_ regret paying my mortgage off early! I’d be way better off now if I’d invested, and because the money is illiquid and tied up in my property I don’t even feel more financially secure.
Thanks for the comment, and congratulations on qualifying!
In your situation, where you're a long way off pension access age, then this specific strategy would not work.
I follow a different more flexible version of the strategy in the video. I have an IO mortgage and invest all of the cash flow I save compared with a repayment mortgage.
Instead of investing in a pension, I invest into ISAs and GIAs for greater flexibility. As you can see in the video, your chances of success are lower with an ISA or a GIA, but, as I get closer to pension access age I can use them to make much larger pension contributions.
This gives me more flexibility and could be just as tax-efficient/effective if I do make those pension contributions in the future.
It also helps protect against changing pension rules.
Edit: To add some context as to why this is suitable for me but may not be for others:
I am someone who is very comfortable with risk, has a long investment horizon, and has adequate insurance in place. I also save into a pension for the employer match from my company and to get below certain tax thresholds as required.
I have a fairly low-interest rate (2.4%), and I may take a different view if my interest rate goes up to 5 or 6%. That would not be an entirely data-driven decision, but one that just feels right at the time when considering my wider financial position - and emotional state!
If you lose your job you can’t use the pension to keep up the mortgage payments and you may be repossessed if you have made overpayments you can fall back on them
@@postlude1 I still invest, I just currently invest more in paying off my mortgage (I review this yearly and would change it if interest rates changed significantly. If you’re 45, you’re likely looking back regretting not investing in the stock market more in between the ages of 30-45, when market returns were excellent and interest rates were very low. And that’s reasonable, and maybe you should have invested more. But there’s no guarantee I will experience those same economic conditions in the next 15 years of my life. Based on my person tolerance for risk, and historical data from the last 100 years, not just the last 15, I believe my current strategy is right for me.
What a brilliant video. So well put together and thought out - every time I thought of a 'what if' at the start of the video, you ended up covering it off later in the video. Very comprehensive and great information, thanks - you've gained a new subscriber!
What a well rounded video. I hope people didn’t stop watching half way through.
These are the videos I come for! As someone with my own model for back testing - I love these.
Very good analysis indeed! I particularly like your comment in the last part about zooming-out to really look at the total risks the investor is willing to expose himself/herself to, namely job security, health condition, personal stress during the periods of market fall, especially when they are prolonged periods of time.
Amazing content. No.1 financial TH-cam channel!
Would be nice to see some content for newer investors on the UK medium salary.
James you are brilliant - thorough, super clear, realistic and engaging. Thanks for another great video.
Excellent video, excellent channel. I just discovered it. Thanks for your work James and for sharing your knowledge with us all.
Best video I've seen on the subject! Thank you! It would be interesting to see the numbers for 50% paying off mortgage, 50% investing in stocks.
I watched way too much of this as an American.
This is an amazing piece of content! Wonderful, thank you!
Excellent video again James. I personally use a repayment mortgage but I save extra in my pension & LISA to have the option to pay off the mortgage early in the future.
The best bit for me was understanding the risk in other parts of one’s life. I have chosen to be aggressive with my career & investing (100% stocks & lev BTL). Perhaps I need to consider a slightly more conservative approach in one of them. Thanks again, these videos make a huge difference to our collective decision making process.
My first mortgage was taken out in 1987 and was an endowment type. These relied on an investment vehicle to pay off the mortgage when it matured in 25 years time at the end of the mortgage period. Many of us remember the scandal of endowment miss selling when the FCA had to step in and sanction the industry. My endowment tanked and paid out about half the required amount when it matured, thank you Canada Life. Luckily I have already paid off the mortgage some 18 years earlier and was not relying on the endowment. So fantastic concept but relies on managing the investments effectively.
the problem with endowments is that the interest rates dropped. people got less return on investment but also paid a lot less for there mortgage. had they paid the savings they made into more investment or the mortgage they would have been ok
I'm a finance director and would fancy myself as a Treasury expert and I think this video is phenomenal. Well done. Superb analysis.
Love the content James! Its implicitly touched on throughout your videos but would love to see a video on the optimal path to building wealth for people currently in their 20's / 30's, particularly with a focus on retiring early amd not necessarily waiting for your pension to kick in
This is one of the best videos I've ever watched on financial planning
Great idea and analysis. Thats some above and beyond financial advice!
Perfectly timed video and very thorough. Thanks!
Soo good. Whenever I try to run my own scenarios I get so overwhelmed with the variable scenarios @-@ this is quite a nice summary to cut through all the bank and gov strategies they don’t tell us about.
The hypothetical analysis you did with your client in the last part is a key differentiator in your content and is the value add that financial advisers don’t often demonstrate. The numbers say one thing, but if someone hasn’t considered their human responses to a crisis, the data can obfuscate the real risk. Great video.
I've been grapling with a similar question myself. This is one of the most useful answers I could have asked for!
What a great video, many of us will need to watch it more than once as there is so much unique information in there. Personally I’d like to see a similar video using historical datasets to compare the continued investment of a pension TFC lump sum (withdrawing it gradually to pay the mortgage each year) versus using that TFC to pay off a repayment mortgage. By keeping it invested you pay mortgage interest but gain investment performance. I imagine the results owuld be similar, i.e. not as much benefit keeping it invested as we would perhaps imagine.
Paid my mortgage off last year 12 years early . I’m secure in knowing I’ve always got a roof over my head . What I paid in mortgage payments now goes into my pension.
Very wise. Good move
But you've left it late for the pension.
@@davidjewood It depends. I assume you are one of those who has a defined benefit pension, but if you don't then this isn't a good move.
Very similar to you, paid off my 25 year term after 14 years. Invested in both over payments to mortgage heavily and some nominal SIPP payments. I now direct all spare cash into a global mix of equities, hedged global bond, japan and UK stocks.
I knew an Alan Gordon.... Essex.. probably lots of Alan Gordons
One of the best videos on TH-cam! Proper financial education.
Great video. There are some people in the comments saying they will pay of their mortgage and others calling that out as not being right. However I will also be paying off my mortgage as a priority.
At the end of the day it comes down to personal preference and no amount of internet advice that is generalised should impact that. The first step is to educate yourself, make sure you know what decisions you need to make and when.
Then do some self reflection and understand your personal circumstances but also what type of person you are. Then know and accept that if you choose to pay off your mortgage, most likely you’re not making the most financially sound decision but if it’s right for you for other reasons and you’re doing it with both eyes open.
Then overall you need to step back and give yourself a massive pat on the back, because at the end of the day you have created a situation in your life where you can choose to make these choices, as opposed to most who don’t have the spare cash to do such things.
To be clear, I focus on my mortgage after maxing out my investment ISA but again that’s not for everyone.
This is a phenomenal video. James this is so insightful and balanced. Thanks so much.
Such a good video really going into what volatility really looks like in a 100% stock portfolio. Given me lots to think about in terms of my own strategy!
@JamesShack - excellent video sir. I can only imagine the amount of work it took to sift through this data, collate it into charts and meaningful decision-grade data, let alone editing it into a video. Being aware of all these options and how they could be configured for a desired outcome really shows the value you must add to your clients as an FA.
Thank you for thinking about the effort!
Yes, this was a monumental task; I think it took me about 60 hours in total with some very late nights.
I need to get a video editor!
@@JamesShack It is interesting to see how trends change. Back in the 1980s all the lenders were pushing endowment mortgages, which weren't dissimilar to the stock market idea except the funds were "with profits". while the idea of changing / fixing your mortgage every couple of years was unheard of.
Love the design of your kitchen!!
Awesome video. 👌 watched this a couple times now to help me try and decide what to do going forward with my options
Great video. I am all about diversification. I will overpay my mortgage and I plan to pay it off a few years early, but I don't want to only focus on that. For me the most important thing is being able to be flexible so that if something happens down the road, not all of my money is tied up in my pension or my house.
James - thank you for this video. I already understood many of the principles but you’ve brought it together with such clarity and using solid data and graphs. Clearly explaining the methods you’ve used to produce them so if anyone has an issue then they can recreate or alter the method - it’s truly great and you don’t see this often (TH-cam is often filled with unbanked ‘facts’. You’ve also articulated that this is so much more than just stats as it’s about personal emotional state as you go through life. Will be revisiting some of my own planning in light of your video - it may not change but some great food for thought. Thank you for making and sharing such a well rounded video 👍
The word "diligent" is coming to mind! Awesome content, thank you for educating us all!
Great and fascinating analysis. Im definitely happy to keep on paying my mortgage with the security and equity that gives md
I don't often comment on TH-cam but this is absolutely top class - excellent analysis, clearly presented.
I’m glad you enjoyed it!
In the first example with Tom, taxes would make a huge difference in countries where interest payments on mortgages are tax deductible (22% in Norway), while unrealized gains on investments are tax deferred. Also you can easily invest in a global all stocks ETF with very low annual fees (for example as low as 3 basis points, but for sake of calculation one could increase this to 5 - 10 bp). If you add these assumptions I am sure the calculations at 9:30 (in the video) would look much more favorable.
In any case, great content, with concise and clear delivery.
Overpaying my mortgage for many years so as to clear it sooner was the route I went down alongside investing. Yes I could have done better by not doing that but I wanted the guarantee of being mortgage free. This then lead me to increase my pension contributions via salary sacrifice rather than pay more to service debt due to mortgage rates increasing. Knowing our home is all ours is a good feeling where as my pension doesn't feel like mine yet as I can't access it.
Sound strategy and the one I employed. I can also invest aggressively now with the additional cash.
The lack of liquidity point some are raising just doesn't apply to the majority of people that are fortunate enough to pay off their mortgage early as they usually earn more and have great emergency funds. Also stock markets don't go up in a linear fashion so not sure how liquid it truly is as who would want to pull it out after a 10%+ drop?
James, I'm 28 and had a completely financially ignorant upbringing (I guess I can be happy at the luxury of not having to worry about money, but also now I'm realising a shame that I didn't know more about finance).
I just wanted to thank you for your videos, I have spent countless hours over the past few years educating myself on finance and future planning. Your videos are always my go-to, and have hugely helped me understand personal finance, including starting to invest and buying a house.
I'm sure you get loads of these messages, but I just wanted to express my personal thanks for everything you do completely for free. All my friends and family now watch your videos, please keep doing what you're doing.
Thank you so much for taking the time to comment!
I’m glad you’re finding the content useful and I will certainly keep it up!
Thanks again for spreading the word about the channel.
This is fantastic! I have asked myself this very question quite a bit and discussed this with my wife too. We came to a very similar conclusion, since we don't have nerves of steel when it comes to these things and life is too stressful to be able to afford this on top. Great analysis and reasoning. Well done! 👍
tried the pension as a mortgage vehicle 4 years ago - bank would not accept it (i would have access to pension by the end of the mortgage). Great content and shows how using average returns, average rates etc over long periods don't work when planning. Presumably this is exactly the same when drawing down defined contribution pension lumps (i.e. the lumps aren't to pay off a mortgage but to give an income
What brilliant take on a dilemma I think many of us are faced with, thank you for your time and effort❤
I know a longer term mortgage would give the portfolio more time to compound, but i still would have loved to see the chart with a 25 or 30 year term mortgage😊
We took the decision to pay ours off 14 years early with a lump sum and then aggressively over paying. It clears in April and we couldn't be happier. The certainty of no mortgage is there and we now have 'spare' capital to invest/spend as we see fit. I get the maths and the predictions, but to get rid of a mortgage early is a tremendous feeling!!!
Congratulations!
Everyone must find their own approach, and for most people, paying off their mortgage is the right option.
It's interesting to see the data, though!
so you're paying off 2-6% mortgage aggressively instead of investing and generating 10% returns? it sounds like you're not fully taking advantage of opportunity cost.
a bird in the hand....
I’m not sure what that feeling is like, I bought my house with a small loan and, and cleared that in 8 months, will you be investing in stocks and shares isa or buying another house and letting your as a HMO?
You are welcome to your opinion@@Ugi5
What an excellent video! Not only does it use good data with a range of scenarios, but it also includes the human factors which in my experience always ' outperform' the market, i.e. you are more likely to scupper your own financial chances than the market will.
Personally I think having a combination of interest only, with occasional lump sum repayments would leave some spare cash each month to start building some investments. This would give the certainty of being mortgage-free as well as having a growing investment portfolio.
Really great explanation on how to view surface analysis and understand all the variables. Specially the toll it might take on you going through the down periods, contrary to a safer route with potentially less gains.
Great content as always James! It would be interesting to see a back test with 100% equity portfolio with 12 month review period at which point either mortgage over payment is made if stocks have beaten inflation or equity portfolio is rolled over to next review point
Very interesting to watch from a US point of view, mostly because in my head I needed to keep translating the UK investment and retirement terms to American equivalents. Also, the mortgage options can differ, especially with the ability to fix rates for longer terms in the US. In the end, an excellent analysis and I completely agree with the conclusion that it is important to consider not only your risk tolerance but also how you will behave. I like to imagine that I have a high risk tolerance, but when I had some spare cash I would find myself paying down my 'sure thing' mortgage rather than adding to my investment pile.
Fantastic food for thought, I do consider myself quite financially savvy but haven't yet considered some of the things you've mentioned. Thank you
I watched 3 of these videos and they are were sensible and well thought out, rare... subscribe!
THEEEE best personal's finance video on the face of youtube, hands down. This is pure nuggets of gold🙏💲
Excellent video James. Mortgage paid off and now contribute 40% of wages directly into Salary Sacrifice pension. This evidence is very relatable to my low risk appetite.
Incredible content, like no other. Thank you!
I'm in my twenties, lucky enough to have a mortgage and I look at all the data but my emotions are getting the better of me. I agree with lots of other commenters that I like the sound of the security of owning my home outright. Although the maths checks out in a lot of historical scenarios, I'd rather continue to pay the mortgage and make some contributions to my SIPP (not an employee). I bought the house with the current high mortgage rates but look at some who have been hit very hard after getting used to the low rates. The ISA model doesn't seem to have enough of a reward - and the pension would be too risky if mortgage rates spiked and I'd be unable to access the cash before I'm 58.
Not to mention the additional equity may help if we decide to upsize in the future (no plans for kids but I might want a big garden).
All in all, a great video James. Very thought provoking!
Owning your home outright gives you financial security against any risk (apart from repairs, bills and council tax) if you are risk adverse this is the best strategy as once the mortgage is paid off and remember the more you pay the lower the monthly amount as you get older, you can then invest aggressively as you get older but with the secure house paid off
@@apb3251for the majority of situations that leave those people vulnerable to being pension reliant, which never keeps up with inflation, why survive when you can thrive. For the most effectiveness, diversification in investments for 1-2 decades and then pay off debt would be more optimal.
What gives security is having cash on hand. If something unexpected happens and you've sunken all your money in overpaying the mortgage you have very limited options.
This is why I have a six months of outgoings in emergency fund and put more than half of my net pay in an index tracker.
I think the whole analysis also only really applies if your mortgage payment is still quite considerable to you.
The mortgage costs less than 20% of our take home pay so I don't really think or worry about it. The money that doesn't go to my mortgage should be invested optimally. Overpaying on 2% is not that.
@@luitzenhietkamp you can get mortgages that allow 10% overpayment each year with no penalty. Each overpayment (monthly or annually) reduces the capital repayment meaning your likely have more cash in hand each month. Don’t forget that on e.g. £500k mortgage borrowed your actual repayment will be £700k over the term due to interest (£200k on interest payments). So any investment you make has to cover the difference in paying interest on the mortgage otherwise you are worse off not replaying the mortgage. In the example James gives the person can reduce their monthly repayment by £200-300 per month by just one year 10% over payment giving them £2k -£3.6k per year to invest extra on top of their other free cash. If the stock market crashes you have significant less value for years ahead, if the house market prices you have a home that maybe worth less but you still have a place to live. It is also an asset (like stocks) that increase with time and can be sold. Also don’t forget that unless the stocks are in an ISA or Pension (which limits you to £80k a year investment tax free) you pay Capital Gains Tax on them even after retirement and if the return exceeds the annual permitted £12500 per year you pay income tax as well.
Great video and well prepared content. Thanks James
In my opinion, this is definitely a sophisticated investor idea. If you have other income from Buy to let etc... then there isn't the issue of losing your job etc... and therefore having the stress of no income at all.
The great thing about a property ( bought well) is that the property will rise with inflation so the debt will also fall with inflation in terms of Loan to Value, so interest only would be the best way forward. But as I said if you are a sophisticated investor then interest only on your buy-to-lets for example allows you to reinvest in more property or diversify into equities. This would apply to your Home too!
This video was fascinating. It’s an investment strategy that hadn’t even crossed my mind and i’ll (likely) never he in a financial position to get an interest only mortgage according to your criteria but it was very interesting nonetheless hearing another alternative strategy to ‘making’ it.
Great video all around!
As a Canadian, it's refreshing to see some content that discusses this from a non-American viewpoint. While our pensions, mortgages, etc don't work quite the same way as the UK, there's a good amount of overlap that in many ways makes us more similar than to the US.
I'll have to do some math to see just how much the outcome changes when taking into account some Canadian specific items (RRSPs, TFSAs, Smith maneuver, etc.) but this is a phenomenal starting point.
The peace of mind and flexibility inherent in have a fully paid off house is massive - especially if you have a family - if the loss of your home would be an absolute disaster then paying off the mortgage is a good move unless the gains are very much more likely and also greater in scale.
Pension funds fail, stock markets crash, jobs can get lost, pension rules change, isa rules change …
Regimes change also, communism would effectively own anyone's asset at will. Diversification is always a requirement for the most effectiveness
I feel like I don't quite understand the allure of owning your house, above all other vehicles of prosperity. Sure you'll have paid off your home when you are 'reasonably' young, should the worst happen. But what's the point in that if you have no means of buying food, water, heat, a means of transportation, the means to pursue a higher quality of life?
Thank you very much for your generous share of your knowledge.
Great vid, even for someone outside of UK. Thank you very much.
Maybe it’s only an American thing, but two typical features of mortgages here are (1) fixed rates for 30 years and (2) ability to refinance at a lower rate if rates fall (and in fact to extend the mortgage at that time for another 30 years!). This creates a phenomenal real option, meaning if you begin a mortgage in a high-rate environment, you can step down to a lower rate when rates fall. It also means if you begin in a low-rate environment (as did many current homeowners), you enjoy a low fixed rate even when interest rates and returns increase. (Also, I believe underwriting is usually based on current income without regard to approaching retirement, but I could be wrong on that.) I suspect both of these facts would meaningfully change the excellent analysis you have done here. Thank you for some great insights!
Damn why UK mortgages don’t work like that! Fixed interest rate for 30 yrs and that if you did it at the low rates that would be amazing
Yeh it doesn't work like that here unfortunately. If it did, everyone would have fixed when rates were next to nothing before covid. You can only fix for a few years, certainly not more than ten and ten works be a lot pricier than a two yr fix
excellent video! it is so true that it's not easy to "follow the numbers", in fact it is very hard and few people can do it.
Not sure that I followed all of that salary sacrifice maths. But, got the general gist. Informative. Thanks.
This is a brilliant piece of analysis! 👏🏻👍🏻
Really good video with the human slant on it. I am using a similar approach via pension and you raised some points that I will reconsider. I have no dependants and decent equity in my house so my backup plan is to downsize if unable to work or work longer than planned / derisk with some bonds if returns drop. In the long term I am looking at the increasing availability of Interest Only In Retirement mortgages and curious to see where rates go with these. I'd rather have less equity in the house and more value in the pension funds from an inheritance point of view but recognise that keeping a mortgage would not be for everyone.
I don't intend to pay off my mortgage early, but invest into my pension and ISA and use both to draw down on in retirement, and I will continue to invest in my ISA after I retire, although on a less risky portfolio.
The way I see it is I'm 53 with about 76k left on my mortgage and not enough in my pension yet. I will still be working anyway when my mortgage comes to an end, so don't really see the point of overpaying for no reason. unless interest rates go sky high that is. Would much rather invest as much as is practical while still having enough left to have a life, plus I also have a big emergency fund so got that covered as well. I'm sure there's probably better options out there, but I feel comfortable with this strategy.
Very good video. Unfortunately, I'm at the start of my journey and getting older.
Wish I knew about this stuff when I was younger and wish I could afford your services haha!
Really fantastic analysis and presentation. Thank you!
Great explanation James, very interesting. Years ago I was persuaded by James McIntosh and his short view videos on the FT that the 60:40 portfolio could deliver all the returns you need and help you sleep better. I haven't lost that faith despite the losses of 2022.
Thanks for the comment. Yes, 2022 was an exceptional year for bonds and the 60/40 portfolio.
The exception that proves the rule ( I hope).
Not so relevant for me as I've already paid off my mortgage and have no debt, but that doesn't detract in anyway from this video. Very good indeed and it's clear a lot of background work took place to create this. Good job, man!
This was a very informative video and it’s given me a few things to think about. I very much appreciate the real-world recognition at the end. It’s easy to look at long time-period, uptrend graphs and lament that you weren’t fully invested. However, how easy it also is to forget the feelings that come over you when a market is falling and the media’s losing it :).
Wow well done on the epic channel and useful information.
Thank you for this video! I work in Finance and think this is a superb explanation of mortgages, pensions, and investing, in layman's terms and using data skillfully. By coincidence, I am in almost the exact same scenario as "Tom" so found this very useful. Thanks again
Glad it was helpful!
First time watcher. Wow I loved all the data! You covered so many scenarios.
It crossed my mind that giving Tom needed £200k at a specific date a reasonable scenario would be to transition his portfolio balance the closer he got.
Or an alternative scenario would be to take out £200k when he hit the target rather than just waiting for the drop dead date. He could then pay off the mortgage and put his repayments into investments.
So many options
What a great vLog! Rarely do I make it to the end in one go. Not today.
Brilliant and comprehensive James, for most people psychologically tricky not to pay mortgauge first instinctively. Hey could you model the pros and cons of commuting part of db pension for cash to invest...could you beat the DB? I know how this works just cant do the maths.
great video! I would make it more flexible (with the ISA, not the pension) as you are effectively re-mortgaging every 2 years so every remortgage is a potential point in time when you take out all the cash from the ISA and repay all or part of the mortgage. Basically leave the last 5-10 years of the mortgage as a buffer but aim at closing it earlier than the initial term, when you are in a reasonably good position
A ISA also gives you the flexibility to use it ti make larger pension contributions in the future, when you’re closer to pension access age.
As you can see in the video, just using an ISA is not a successful .
But if you use the funds in your ISA to make pension contributions and then draw from the pension to pay off your mortgage, it could be just as effective and more flexible.
@@JamesShack yes especially with the new 60k threshold and the ability to pay for the previous couple of years, you could do the transfer from isa to pension 2 years before retiring
I'm eagre to know what you think of the data!
Do you think this type of strategy is for you? If so, why?
I am too old for this now, but yes, I would be happy to bear that risk if setting off on the journey again. At the end of 25 hears, the proportion of outstanding Mortgage is likely to be tiny compared to your salary at that point too. (My salary was £25k when I had 93k mortgage, my salary now is £120k…so if I had invested and gone Interest Only….I would have been hundreds of thousands better off. But even if it had been a bad year as in your worst example, the actual Mortgage is still small compared to a years salary.)
I tend to focus on cashflow and compounding as a strategy. Two year fixed or variable rate mortgage with lumpsum or monthly overpayment possibilities to lower outgoings. The smaller outgoings means more cashflow for investment. You lose less in interest to the bank as a positive, sure, but gaining more cash each month to invest is even better. You also then gain the equity in your home to leverage against as well for anything large. Like starting a business or buying more property (I wouldn't apply to stocks like your example, IMO best to segregate a portfolio is some form). As long as that leveraging is (at least) offset by the new investment, you're using debt to gain advantage and potential to daisy chain. This is ignoring the ladder effect of housing too. Your home may gain significant equity compared to other areas and can sell and move as circumstances change. Such as the work from home model.
I'd be interested to see a similar backtest for overpayment instead of IO, I think thats a more common scenario people have.
I know you can't cover every single option but it would be interesting to see how a 33% overpaying mortgage, 33% into pension salary sacrifice and 33% into ISAs scenario would play out.
Read up on endowment mortgages James. Admittedly they didn't include pensions but they did include MIRAS tax relief.
Reminds me of the endowment market of the 1990s... that didn't always end well. But using the pension as a vehicle, and spreading repayment over a few years to reduce tax on pension withdrawal, seems sensible.
Yes but those who took out endowments in the 70s and early 80s did do well. Swings and roundabouts.
Very enlighting video. Thanks so much.
I would still pick investing over repaying the mortgage, though. Seems like short term fixed interest rates mortgages are the norm in the UK, whereas here in the Netherlands often they are fixed for much longer. Mine is fixed for 20 years at just over 3%. This makes the risk for me being worse off in the long run quiite small.
Thank you , took some valuable lessons from this.
Wow what an utterly brilliant analysis
HI
Thanks for the video , I use a interest only and pension strategy 26 years ago . I still have a mortgage of £150k and a L2V of 17% . I am now (3 years ago) using a repayment mortgage as well as the pension and chose not to use a ISA to add some security . Reality for me is after leaving school at 16 having my first child at 25 and supporting a stay at home partner (a person choose that most people cant have ). I hope to have a pension that will be close to the lifetime allowance and will use the 25% cash free to pay off the remainder . There is risks and I may yet be ‘unlucky’ but I am still happy with my choice . Life is a set of risks and the best we can do, is to be consciously aware of our decisions . This video should help someone with that process of decision making , thanks again Andy
A lot of great information here thanks! Pros and cons and strategies aside, for some there is no dollar value you can put on the feel good factor of being mortgage free.
The best investment is the one that gives you the best sleep. I paid of my mortgage years ago ZERO regrets.
We had Endowment mortgages in the 80s and 90s where at maturity the amount you got back was supposed to be greater than your loan. So in theory you paid your mortgage off and had some left over. Most people found their policies had grown as forecasted and there were shortfalls.
I love this video very much, esp when you brought us through the roller coaster of the black swan events. Thank you
Great analysis of the data, for a question I think many people are asking themselves at the moment. Sounds like Endowment Mortgages. I have chosen to invest the money I would have used to over-pay my mortgage into my pension via salary sacrifice.
Hi James,
This is a great video, thanks for taking the time to post it.
I hadn't considered this approach very seriously before and as I'm self-employed under a limited company I'd be interested to see what this looks like when you consider the extra corporation tax saving on those additional pension contributions!
In this scenario, Tom is getting 42% tax relief when salary sacrificing into a pension.
If you are an LTD company owner, you're getting just over 50% tax relief if the alternative is paying a dividend in the higher rate tax band.
@@JamesShack Wow! That's a big tax saving and the company is getting corporation tax relief on the contributions. Seems like a no brainer to me. Thanks for replying James.
I love these technical videos James; they really should be on our national curriculum 👍
I was really interested to see the impact of a balanced rather than growth focused portfolio on the results; really shows how you can sacrifice some potential growth for the added resilience against a crash. That added security (for me) is well worth it. Even if there are no crashes, and you could have (in retrospect) grown a bigger pot, it still wouldn’t be a problem. After all, you wouldn’t complain about what a waste of money your life insurance policy was because you didn’t die early 😊
But it's not really a technical analysis. All James did was lay out a convoluted strategy that no client would ever accept. It only sounds "technical" because he's piecing together a "nerdy" strategy that has nothing to do with how people behave in the real world.
Great sensible advice and very well described
Thanks mate, been asking myself this question lately.
It would be interesting to see an analysis where one would first prioritise investing in the global stock market for let's say the first 8 years and then switch to prioritising paying off the mortgage for the remaining 7 years. Since stock returns tend to go up over time, earlier investments yield better returns than later investments, on average.
Great analysis and visualizations, thanks. From Canada so some of the considerations (like the pension contributions) aren't as relevant, but still very interesting.
James that is an excellent video - could do with some advise myself
Another brilliant and balance video 👍🏼