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HYP with limited monthly contribution

General discussions about equity high-yield income strategies
newguy
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Re: HYP with limited monthly contribution

#230227

Postby newguy » June 17th, 2019, 6:51 pm

Please can I thank everybody for their help. It is greatly appreciated.

I clearly wasn't seeing things clearly and what most of you suggest actually makes perfect sense. I've just phoned my mortgage company and increased the monthly contribution by £250. My plan now is to pay this debt off as quickly as possible. In a few years, I will be able to start investing in a number of Investment Trusts or EFTs as I hit the 10%.

I'm considering cashing in my small cap shares portfolio and moving them into IT/EFTs. I'm going to look at the various options people suggestions as they appear to be quite popular around these parts. The porfolio is currently in a XO Shares ISA and I would be able to use to buy the ITs. Given the size of my current portfolio and how it is made up, it's rather high risk and not exactly diversified. Plusmy stock picking skills have not quite been at the Paul Scott level!

Thank you all.
Newguy

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Re: HYP with limited monthly contribution

#230236

Postby SDN123 » June 17th, 2019, 7:24 pm

Itsallaguess wrote:
I think what you're describing is what we'd normally see as a potential 'opportunity cost' of paying down a relatively low interest-rate debt, set against the potential for that part-repayment to be invested in something that might, with a fair wind, return more than the 2.5% return.



Fair enough. I don’t want to hijack this thread and I think the relevant real-world points have been made. In a more theoretical sense I believe that there is no such thing as a risk free investment (even gilts fail if the government goes bust - unlikely but not impossible). I agree that’s not relevant in a practical sense for this decision but i also thinks it’s always worth keeping in mind at some level.

SDN

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Re: HYP with limited monthly contribution

#230695

Postby Gengulphus » June 19th, 2019, 10:36 am

newguy wrote:Please can I thank everybody for their help. It is greatly appreciated.

I clearly wasn't seeing things clearly and what most of you suggest actually makes perfect sense. I've just phoned my mortgage company and increased the monthly contribution by £250. My plan now is to pay this debt off as quickly as possible. In a few years, I will be able to start investing in a number of Investment Trusts or EFTs as I hit the 10%.

I'm considering cashing in my small cap shares portfolio and moving them into IT/EFTs. I'm going to look at the various options people suggestions as they appear to be quite popular around these parts. The porfolio is currently in a XO Shares ISA and I would be able to use to buy the ITs. Given the size of my current portfolio and how it is made up, it's rather high risk and not exactly diversified. Plusmy stock picking skills have not quite been at the Paul Scott level!

That seems a bit of an inconsistent thing to consider to me. Considering cashing in the small cap shares portfolio makes sense to me, but assuming that you do decide to do it (*), then once it's done why choose to use the cash freed up to buy ITs/ETFs (**) rather than further pay off the mortgage, when you've just made the opposite decision about the £250/month?

I do realise that the cashed-in value of the small caps shares portfolio might be more than the extra you can pay towards the mortgage this year before you hit the 10% limit - but if so, I would have thought that paying that amount and only using what's left afterwards for ITs/ETFs would be a more consistent approach.

And by the way, if you haven't already, do make certain you know the exact basis on which the 10% is calculated. I can see at least three ways it could be done: pay at most 10% of the original amount of the mortgage in each year, pay at most 10% of the start-of-year balance of the mortgage in each year, and pay at most 10% of the end-of-year balance of the mortgage in each year. They do lead to quite noticeably different answers, and if the mortgage company charge penalties for paying more than 10% (rather than just blocking such payments) getting them wrong and inadvertently overpaying could be expensive...

(*) Note that I'm only saying that considering doing it makes sense to me - whether that result of that considering should be that you decide to sell or that you decide not to sell depends on your attitude to the risk involved in continuing to hold them, and that's something I'll have to leave it to you to decide!

(*) I assume "EFTs" is a typo for "ETFs" and not some type of investment I haven't heard of...

Gengulphus

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Re: HYP with limited monthly contribution

#230836

Postby newguy » June 19th, 2019, 6:07 pm

Gengulphus wrote:
newguy wrote:Please can I thank everybody for their help. It is greatly appreciated.

I clearly wasn't seeing things clearly and what most of you suggest actually makes perfect sense. I've just phoned my mortgage company and increased the monthly contribution by £250. My plan now is to pay this debt off as quickly as possible. In a few years, I will be able to start investing in a number of Investment Trusts or EFTs as I hit the 10%.

I'm considering cashing in my small cap shares portfolio and moving them into IT/EFTs. I'm going to look at the various options people suggestions as they appear to be quite popular around these parts. The porfolio is currently in a XO Shares ISA and I would be able to use to buy the ITs. Given the size of my current portfolio and how it is made up, it's rather high risk and not exactly diversified. Plusmy stock picking skills have not quite been at the Paul Scott level!

That seems a bit of an inconsistent thing to consider to me. Considering cashing in the small cap shares portfolio makes sense to me, but assuming that you do decide to do it (*), then once it's done why choose to use the cash freed up to buy ITs/ETFs (**) rather than further pay off the mortgage, when you've just made the opposite decision about the £250/month?

I do realise that the cashed-in value of the small caps shares portfolio might be more than the extra you can pay towards the mortgage this year before you hit the 10% limit - but if so, I would have thought that paying that amount and only using what's left afterwards for ITs/ETFs would be a more consistent approach.

And by the way, if you haven't already, do make certain you know the exact basis on which the 10% is calculated. I can see at least three ways it could be done: pay at most 10% of the original amount of the mortgage in each year, pay at most 10% of the start-of-year balance of the mortgage in each year, and pay at most 10% of the end-of-year balance of the mortgage in each year. They do lead to quite noticeably different answers, and if the mortgage company charge penalties for paying more than 10% (rather than just blocking such payments) getting them wrong and inadvertently overpaying could be expensive...

(*) Note that I'm only saying that considering doing it makes sense to me - whether that result of that considering should be that you decide to sell or that you decide not to sell depends on your attitude to the risk involved in continuing to hold them, and that's something I'll have to leave it to you to decide!

(*) I assume "EFTs" is a typo for "ETFs" and not some type of investment I haven't heard of...

Gengulphus


Thanks Gengulphus

The way my mortgage 10% repayment cap works is that I get a letter at the start of the year showing the outstanding balance. I am then able to pay back 10% of the outstanding balance each year. So, each year the 10% amount reduces.

This year I have already payed off a large chunk of the 10% outstanding balance and in fact I was only able to increase my monthly payments by £115 per month so that I don't go over the 10%. I then set up a standing order to pay the other£150 into premium bonds for the time being.

As I am now paying an extra £715 per month towards my mortgage, in 2020 I will only be able to contribute an additional £4000 before I hit the 10% for that year. What I was thinking about doing was keeping 3 months worth of salary in the premium bonds and pay an extra £4000 towards my mortgage in January 2020 and continue with the higher monthly payments - hitting the 10% limit for 2020.

That would mean that if I wanted to, I would be able to sell the small caps shares and invest in a IT or ETFs (sorry my mistake). I do subscribe to the Small Company Sharewatch but my choices have not been particularly successful over the years. Hence why it maybe sensible to cancel my subscription and invest in a IT or ETF and forgot about it.

Harvey

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Re: HYP with limited monthly contribution

#230839

Postby tjh290633 » June 19th, 2019, 6:18 pm

newguy wrote:The way my mortgage 10% repayment cap works is that I get a letter at the start of the year showing the outstanding balance. I am then able to pay back 10% of the outstanding balance each year. So, each year the 10% amount reduces.

This year I have already payed off a large chunk of the 10% outstanding balance and in fact I was only able to increase my monthly payments by £115 per month so that I don't go over the 10%. I then set up a standing order to pay the other£150 into premium bonds for the time being.

As I am now paying an extra £715 per month towards my mortgage, in 2020 I will only be able to contribute an additional £4000 before I hit the 10% for that year. What I was thinking about doing was keeping 3 months worth of salary in the premium bonds and pay an extra £4000 towards my mortgage in January 2020 and continue with the higher monthly payments - hitting the 10% limit for 2020.

That would mean that if I wanted to, I would be able to sell the small caps shares and invest in a IT or ETFs (sorry my mistake). I do subscribe to the Small Company Sharewatch but my choices have not been particularly successful over the years. Hence why it maybe sensible to cancel my subscription and invest in a IT or ETF and forgot about it.

Harvey

It strikes me that your best plan would be to build a fund alongside your mortgage, with the object of paying it off in full when you have enough available. This could be an ISA in a suitable IT. Because you can only pay off 10% a year, the surplus could be used this way to hasten the day.

TJH

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Re: HYP with limited monthly contribution

#230843

Postby dealtn » June 19th, 2019, 6:35 pm

tjh290633 wrote:
It strikes me that your best plan would be to build a fund alongside your mortgage, with the object of paying it off in full when you have enough available. This could be an ISA in a suitable IT. Because you can only pay off 10% a year, the surplus could be used this way to hasten the day.

TJH


You would need to check what early repayment charge would be applied as it's a fixed rate mortgage. That's why there is a 10% overpayment restriction in place in the first instance.

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Re: HYP with limited monthly contribution

#230848

Postby newguy » June 19th, 2019, 7:08 pm

Thanks Guys, once the 10 year fix has finished (in I think about 8 years from now), I would be able to pay off the remaining mortgage if I had the funds. There will come a time when I will have to reduce the monthly overpayment and yes that could be put into other investments and then used to pay the mortgage off completely.

Looking at the figures its possible that I could pay off a 25 year in 10 years. I would be 48 at that point and then could start to seriously invest for my pension. My employer currently pays 10% a year into my pension. It is not nearly enough yet but at least it's something.

Newguy

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Re: HYP with limited monthly contribution

#231208

Postby micrographia » June 21st, 2019, 2:02 pm

Hi Newguy.

I was in a similar position at about the age of 30, about 20 years ago. Big new mortgage, relatively small amount in an ISA'd FTSE tracker, emergency cash in a mortgage offset account. The old Fool boards helped me decide that I had 2 goals to prioritise for retirement. I wanted a decent passive income from equities to supplement any pension income and I didn't want to be paying rent. So I divided my disposable income into 2; half went into mortgage overpayments, half into the share ISA. Then I just got on with it.

When brave enough I sold the tracker and started a HYP. My financial circumstances have varied wildly in the last couple of decades but having stuck to the plan the mortgage was cleared early and I have an increasingly good income from an increasingly sprawling HYP.

All of which is a long winded way of saying that I'd give equal priority to mortgage overpayments and your choice of retirement investments :D . As you certainly know, both benefit massively from being started as early as possible. There's a lot to be said for keeping it simple.

Regards, EEM.

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Re: HYP with limited monthly contribution

#231278

Postby newguy » June 21st, 2019, 6:47 pm

Thanks for your thoughts EEM. Basically I'm two years into a 25 year mortgage and I've got a spare £850 per month to play with, which could either be for paying down the mortgage or investing or a combination of those two.

I think the sensible approach for me is to avoid a HYP. I don't really have the time to manage it. My plan is to use ever penny to pay down my mortgage (up to the 10% limit). In a few years I will have a bit to play with and I think I will go down the capital growth IT route.

I had a look at F&C, Witan and Scottish Mortgage Investment trusts and I do wonder if they are currently too expensive. They have done really rather well over the last few years. I realise the chances of me being able to time the market correctly are virtually nil. With October deadline for Brexit coming along I will keep a watching eye on those ITs. I think the market especially these growth IT are probably not going to do so well over the next few years but I do get lots of investments decisions wrong!

Newguy

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Re: HYP with limited monthly contribution

#231334

Postby Wasron » June 22nd, 2019, 12:10 am

What I am trying to achieve
1. To be able to afford to retire. In fact to be able to enjoy my retirement. Lots of foreign trips and not having to worry about money.
2. To also provide more of a safety night for life's ups and downs. Yes I've currently got nearly £16K of cash/premium bonds but who knows what life is going to through up.
3. Reduce my risk level. (perhaps!)
4. Increase income
5. I want to be able to access funds if required.
6. If I am honest I would like to reduce the management time required to run the new HYP (whatever that is!). Previously with the Dividend Share letter I simply added one of the recommendations ever so often and job was done. Is an investment trust or EFT more suitable. Perhaps
7. I think I want to do this in as tax efficient manner as possible.
8. This new pot is about income but over the period I expect the pot to grow.


Newguy, one thing you don’t mention in your list is when you hope to retire. You have a 25 year mortgage but as you’re overpaying that term doesn’t really mean much.

I would work out when you want to retire, then work backwards to see what you need to overpay each month to coincide with that. For me, that would determine how much to overpay and how much to invest.

I would then invest the rest in whatever you feel comfortable with. Keep it simple, so that if you do want to dip into the funds for a foreign trip or two it doesn’t cause too much angst deciding what to sell or trading costs.

I’m a similar age to yourself, but with a wife and kids. My plan is to retire at 55, I arranged my mortgage to finish at that point and given the rate I have I don’t overpay. I prefer building up my ISAs with any spare cash, as it gives me the flexibility to put a bit more into the family holidays each year, or hasten the day I can say goodbye to the daily commute.

And if you’re serious about reducing your risk level then selling the small caps is probably a good idea.

Good luck with whatever you decide

Wasron

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Re: HYP with limited monthly contribution

#231378

Postby newguy » June 22nd, 2019, 11:06 am

Thanks Wasron

When I went to see a financial consultant about my first pension, I must have been around 20 and he asked me what age I wanted to retire and my answer was 55. 20 odd years later with a pension pot of only £171K, I think the changes of being able to retire at 55 are remote!

A very quick google search suggests for a good retirement, I'm going to need a pension pot of between £700K and £1.2million. Perhaps you can still have a good retirement with a lot less.

Realistically, I would like to retire at 60 but perhaps 65 is more realistic. Perhaps I really do need to consider what is my goal is here. I think I probably really need to do more research about how much I am going to need to retire comfortably. Thanks for giving me things to think about

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Re: HYP with limited monthly contribution

#231383

Postby Gengulphus » June 22nd, 2019, 11:42 am

newguy wrote:A very quick google search suggests for a good retirement, I'm going to need a pension pot of between £700K and £1.2million. Perhaps you can still have a good retirement with a lot less.

That's a length-of-a-piece-of-string issue! What do you need to make your retirement count as "good" in your eyes?

People vary enormously about such things. E.g. for some, a large garden, a good car and plenty of holidays abroad are important parts of it; for others, a large garden would be a burden, any old car will do (or even no car at all), and they only want an occasional holiday in this country. Those things make big differences to the amount of capital needed, not just to generate cash income, but also to fund the house (larger gardens tend to be associated with larger houses) and car. The phrase "pension pot" is normally (and entirely correctly) used to refer to just the capital that is used to generate cash income, of course, but the real issue is to get enough capital in total to fund the whole lot...

Gengulphus

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Re: HYP with limited monthly contribution

#231416

Postby newguy » June 22nd, 2019, 2:20 pm

Gengulphus wrote:
newguy wrote:A very quick google search suggests for a good retirement, I'm going to need a pension pot of between £700K and £1.2million. Perhaps you can still have a good retirement with a lot less.

That's a length-of-a-piece-of-string issue! What do you need to make your retirement count as "good" in your eyes?

People vary enormously about such things. E.g. for some, a large garden, a good car and plenty of holidays abroad are important parts of it; for others, a large garden would be a burden, any old car will do (or even no car at all), and they only want an occasional holiday in this country. Those things make big differences to the amount of capital needed, not just to generate cash income, but also to fund the house (larger gardens tend to be associated with larger houses) and car. The phrase "pension pot" is normally (and entirely correctly) used to refer to just the capital that is used to generate cash income, of course, but the real issue is to get enough capital in total to fund the whole lot...

Gengulphus

Thanks Gengulphus. My current house is far to big for me. I hate gardening and would be happy with a small detached property with a tiny garden, that required very little work. My current car is 20 years old and I've got no plans to change. I've always bought cars with cash and never bought fancy germany car on PCP deals. When I go on holiday i tend to do city breaks staying in cheap / clean hotels. I've never been interested in spending a fortune on 5 star luxury

I don't like spending money! So unless I completely chance when I retire maybe the pot won't need to be as big as think it needs to be!


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