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Remortgage and invest to add to inflation hedge

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
Arniedude
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Re: Remortgage and invest to add to inflation hedge

#127448

Postby Arniedude » March 23rd, 2018, 10:23 am

I like the idea but the tax drag on the investment returns (particularly if taken as income as a high marginal (e.g. 40 or 45%) rate) is something to think about. Particularly if there is a heavier attack on "unearned" income, which does seem to be a growing topic in the media. Obviously there is investment non-performance risk as well.

Still, taking long dated cheap leverage into a diversified investment strategy (I think diversification is important to try to limit the drawdowns if being done on a leveraged basis) feels like a positive return thing to do if you have means and temperament to ride out the 10 year cycle.

BusyBumbleBee
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Re: Remortgage and invest to add to inflation hedge

#127491

Postby BusyBumbleBee » March 23rd, 2018, 12:09 pm

My view on my house and grounds is that it/they is/are for me and my family to live in and enjoy. It is not something I would put at any kind of risk for example by mortgaging it - but then it is very old, sits in 16 acres and a lot of love and care has been lavished on it over the years.

GeoffF100
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Re: Remortgage and invest to add to inflation hedge

#127500

Postby GeoffF100 » March 23rd, 2018, 12:24 pm

You cannot get anywhere near 2.9% APR after tax on cash. Inflation has gone up as a result of the fall in the pound, but is forecast to fall. Future interest rates are highly unpredictable.

Itsallaguess
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Re: Remortgage and invest to add to inflation hedge

#127525

Postby Itsallaguess » March 23rd, 2018, 1:36 pm

1nv35t wrote:
Anyone using/considering such re-mortgaging as additional diversity?


I very well remember the day I paid my mortgage off, and it was one of the best feelings I've ever had.

As well as knowing that the roof above our heads was paid for, one of the really surprising side-benefits for me was how my working-life became much less stressful.

By that, I don't mean that the work I was asked to do had changed at all, and if anything I'm probably busier at work now than I've ever been, but when one of the largest reasons that meant I had to continue working was removed from my outgoings, it meant that continuing to work was just a little bit more of an active choice, rather than being what felt like an absolute necessity.

For me, those benefits are gold-mine stuff, and the thought of re-introducing a large mortgage back into my life would be something I would simply never consider, even if I felt there was a good chance of a long-term financial benefit.

Some things simply cannot be measured in financial terms.....

Cheers,

Itsallaguess

Chrysalis
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Re: Remortgage and invest to add to inflation hedge

#127528

Postby Chrysalis » March 23rd, 2018, 1:46 pm

@itsallaguess i feel exactly the same. Its not rational perhaps, if one's objective is to maximise riches, but I would never now go back to owing anything to anybody. Least of all have a charge on my home.

Lootman
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Re: Remortgage and invest to add to inflation hedge

#127531

Postby Lootman » March 23rd, 2018, 1:49 pm

1nv35t wrote:Anyone using/considering such re-mortgaging as additional diversity?

Not for the reason that you propose. Like others here I feel very good about having no mortgage (it was paid off in 1998). But there are a few situations where I would take on a mortgage for a property I own free and clear:

1) I needed the money locked up in the house but didn't want to sell it.

2) I was going to move and rent the property out. It's useful to be able to get the interest paid on the mortgage to offset the rent I receive for tax purposes.

3) I have too high a percentage of my net worth in my primary home

4) I am worried about a confiscatory Labour government taxing homes or otherwise devaluing them, and I wish to drastically the amount of equity I have at risk, and hold it in a more liquid and mobile form.

GeoffF100
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Re: Remortgage and invest to add to inflation hedge

#127586

Postby GeoffF100 » March 23rd, 2018, 3:57 pm

1nv35t wrote:Drop that loan into a 10 year index linked gilt and there's no tax on the inflation element, but they're priced to underperform inflation by 1.6%/year all else being equal. So if inflation runs at 2% BoE target levels, 0.4% return, plus 2.5%/year cost of servicing the mortgage, -2% approx year loss.

It is actually better than that. Gilts are linked to RPI inflation, which is typically about 1% more than CPI inflation, so the BOE target corresponds to about 3% RPI inflation, so the expected return is more like 1.4%. You can get an 11 year linker with a coupon of 0.125%. There is not much income tax on that.

Property is usually considered to be a hedge against inflation, but in the short term, inflation will trigger increases in interest rates, which will hit property prices.

GeoffF100
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Re: Remortgage and invest to add to inflation hedge

#127687

Postby GeoffF100 » March 23rd, 2018, 8:59 pm

The US market has not had the massive inflation we had in the 1970s. Index linked gilts would have helped there, if they had been available.

In principle you could achieve your objective with derivatives:

http://www.theactuary.com/archive/old-a ... ion-swaps/

However, you would pay CGT outside a tax free environment.

dspp
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Re: Remortgage and invest to add to inflation hedge

#127696

Postby dspp » March 23rd, 2018, 10:51 pm

I think there are two aspects to this, beyond the simple maths that have been directly discussed so far.

1. What is the real risk of Corbyn coming in. That in turn is really an assessment of the Brexit outcome. Sorry to bring it back to that, but it is the biggest sovereign risk reality affecting UK.

2. And then, given the possibility of the above, what is the real opportunity for you (in whatever are your individual circumstances) to dodge the policy bullets that might get fired at you.

My personal view on these things is that the more you can make yourself look from the outside as if you fit within the profile of 80% of the population the less likely you are to be punitively picked on. If you can't fit into that profile then you need to be able to dodge the bullets at some point, that includes not being present in the country in any substantive way at that particular moment.

To those people whose family background , or personal experiences, are UK only then this may sound alarmist. If on the other hand you've watched or experienced what happens from time to time in almost everywhere else it will probably seem like a statement of the blindingly obvious. Most of the world fits in the second group, but most of the people we mix with fits in the first group.

Do you feel lucky ?

regards, dspp

tjh290633
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Re: Remortgage and invest to add to inflation hedge

#127878

Postby tjh290633 » March 24th, 2018, 10:47 pm

1nv35t wrote:Marxist policies will be a interesting change, especially if barely even opposed (200 seat majority).

I think that you need a reality check. I am reminded of the old Eastern Bloc joke - "They pretend to pay us and we pretend to work". Meanwhile "na levo" private enterprise went on apace. Another old Russian proverb: "If you have a problem that money can't solve, try some more money".

We all had our own foreign exchange arrangements, where you could get local currency at several times the official rate. If somebody did something for you, payment could be made by taking them to the appropriate Berioska shop, where covetable goods could be bought with a western credit card. Such goods were not available with local currency.

Many people experienced Marxist policies and voted with their feet. We had the threat of them back in the 1980s, and now we have a similar threat from the influence of Momentum. We know what the outcome would be, and anybody who supports them needs their head examined.

TJH

johnhemming
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Re: Remortgage and invest to add to inflation hedge

#127895

Postby johnhemming » March 25th, 2018, 8:32 am

1nv35t wrote:£2000 of assets has you in the richest 50%.

This has median assets at 104K per adult
https://www.ifs.org.uk/publications/8239

TUK020
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Re: Remortgage and invest to add to inflation hedge

#127896

Postby TUK020 » March 25th, 2018, 8:52 am

Demographics and planning rules.
There is a growing cohort of voters who enter the workforce with significant student debt, have no hope of buying their own property, and will wind up paying a significant portion of their take home money on basic accommodation. They resent comparing their lot to a generation with property wealth, disposable income because no rent, no university debt, and defined benefit pensions.
Restricting property availability to artificially prop up house prices will create a large and growing number of people with a strong desire to vote for radical change.
Enter Corbyn, Macdonald et al.

But of course the green belt is precious - an opportunity for us to subsidise more monoculture farming (and keep house prices high).
With a large house in Surrey, I am a winner (on paper) out of our current rigged market in property, but I do think this system contains the seeds of its own destruction.

tu020

DrBunsenHoneydew
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Re: Remortgage and invest to add to inflation hedge

#127915

Postby DrBunsenHoneydew » March 25th, 2018, 12:08 pm

johnhemming wrote:
1nv35t wrote:£2000 of assets has you in the richest 50%.

This has median assets at 104K per adult
https://www.ifs.org.uk/publications/8239

The £104k includes housing ownership and pension funds. The £2000 is 'savings'.

Raptor
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Re: Remortgage and invest to add to inflation hedge

#127920

Postby Raptor » March 25th, 2018, 12:35 pm

Moderator Message:
This forum is about Investment Strategies. This thread and others on here have moved way off that topic. If you wish to continue please post on PD or other relevant forum. Please report posts that are off topic for this forum. Posts maybe edited, deleted or moved. Raptor.

tjh290633
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Re: Remortgage and invest to add to inflation hedge

#127922

Postby tjh290633 » March 25th, 2018, 12:39 pm

1nv35t wrote:With respect to the concept of the thread, having half of home value immediately available to spend at the click of a button is a means to provide a (albeit relatively short - 2 maybe 3 year) buffer if policies such as 1 or 2 adults living in a home with more than a single bedroom is considered as under-utilisation (Corbyn's use it or lose it type mindset). i.e. 10%/year wealth tax such that a 1M home incurs a 100K/year tax liability (house prices dive to the extent they fall into state ownership - 1M home rate fixed at 100K/year, price drops to 100K or less value type nationalisation). As a home owner myself I could live with that, as the prospects of it being lost in late life care costs anyway are probable for a large number anyway (£60K to £70K/year costs for even basic care are becoming quite common. More for more intensive care needs). At least with liquidated half of the value that could have been shared around the family whilst still living rather than being totally lost.

That is the only part of your post which is relevant to this thread. You seem to be overly sensitive and blind to the history of socialist governments, both in the UK and elsewhere.

The whole point of property ownership is to have a roof over your head. Getting on the property ladder allows you to progress up that ladder. Because everything is relative, a rise or fall in house prices means that you have an asset which can be used to trade up or trade down the ladder. The real problem lies in inflated house prices, caused by lack of supply and increased demand, which makes it difficult for potential buyers to get onto the ladder and for existing owners to trade their way up or down, because of the high interest changes on mortgages, and the punitive rates of stamp duty.

Going back to the 1960s, for example, it was possible to buy a 4-bedroomed house in pleasant parts of Lancashire for just over £3,000. I had an employee who transferred from a job in Outer London, where his house was sold for about £7,000 as far as I recall. He was able to buy a very nice new build house in the Northwest for rather less than that, at a time when stamp duty was 1% and estate agents were offering flat fees of perhaps £50 plus advertising costs.

Managerial salaries were in the mid-£2,000s range, and manual shop-floor workers were getting up to about £1,000. To move down to London or the Home Counties required a step up the region of £5,000 for a comparable property, which would have cost £3,000 in Lancashire. London weightings pushed pay higher as well, so such a move was feasible.

This is why having residential property in the form of bricks and mortar was and still is so desirable. In my view the fad for "equity release" is misconceived. In some cases there is a real need for it, but doing it just to get extra spending money does not make sense. Downsizing is a far better move, and achieves the same effect without extra borrowing.

TJH

dspp
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Re: Remortgage and invest to add to inflation hedge

#127931

Postby dspp » March 25th, 2018, 1:41 pm

Let us assume someone remortgages 50% of their £1m house. Let us assume that they manage to get a long duration fix of (say) 3% on that £0.5m, for say 5-years from now. This is basically the original poster's scenario.

Then let us assume Comrade Corbyn et al comes in, say 2-years from now, and pursues a suite of policies such that inflation climbs, interest rates rise, sterling devalues; and all three do so much more significantly than a BAU case.

In such a case one would expect the real terms value of £1m housing to reduce, but the nominal money-of-the-day cash value would still likely increase. I am assuming that relatively punitive taxation would be levied on (significantly) above-average housing, and on incomes. Further assume that a suite of other measures are brought in to deal with capital flight, offshore income, etc. as a result of past lessons having been learn (wisely or not).

All this I can see as a possible and logical consequence of such a scenario.

What is much more interesting to understand is how the original poster is intending to benefit from having remortgaged now. My personal opinion is that the suite of measures is sufficiently effective that in practice the only way to sidestep the impact is to a) pre-emptively take the £0.5m outside the UK and convert it into other currencies; and b) to themselves leave the UK and become non-resident in the UK for the period of the calamities that the original poster is anticipating. If the original poster does this then presumably they are anticipating returning to the UK to survey the wreckage in (say) 2+5+1 (the one being a safety margin) = 8 years time. They would then bring back the £0.5m equivalent, pay out the (by-now-devalued) mortgage, and be considerably better off.

However they risk the possibility that one of the suite of measures is a forced buy-out of all unoccupied housing at government-imposed prices. There are other risks to any other left-behind assets.

Basically for each measure I can see a counter measure, and a counter-counter-measure. This is exactly how it goes in those countries I have been fortunate enough to live in (!) where exactly such periods have come to pass.

I would be grateful if someone could set out in practical terms how they would manage this hypothetical remortgage situation so as to get a risk-free outcome.

This is of course not entirely hypothetical. There are Fools around here who have already indicated exactly how they are managing this, and it is roughly the way I describe - but they have rather more than 'just' £1m to play with, and the quantum does matter.

regards, dspp

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Re: Remortgage and invest to add to inflation hedge

#127933

Postby johnhemming » March 25th, 2018, 1:55 pm

DrBunsenHoneydew wrote:The £104k includes housing ownership and pension funds. The £2000 is 'savings'.

It would be good to have a source for this as the assumptions behind any of these stats are essential to understanding what the stats actually mean. Without the assumptions the figures are pretty meaningless.

On the OP issue there is the question of "don't bet the farm". I would recommend downsizing rather than equity release.


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