Borrow more on your property or pay off your debts?

Peter had never considered borrowing to invest until it came time to remortgage his London apartment. After a five-year fix, the combination of rising house prices and a generous deposit from Mom and Dad’s Bank meant he was sitting on a lot of equity – and could access some tempting deals. at low interest rates. It made him think. Could he borrow more than he needed and get a better return on that money by investing it in something else? I’m sure risk averse readers will squirm, but Peter, 31, FT Money reader, is certainly not alone in considering such a move.

Just over half of borrowers who refinanced in 2020 have withdrawn additional equity from their home, according to the data UK Finance banking organization – slightly above the long-term average.

Home improvement was a popular reason to borrow more – just think of all those lockdowns construction projects – but lenders have also reported a growing number of people withdrawing “relatively large sums of money” to buy a second home, be it vacation property or buy to rent.

The proportion of these increased in the second half of the year, reflecting the stamp holiday. With average house prices now rising at the fastest rate since 2007 I have explored the pros and cons of borrowing on the Money Clinic Podcast, And one Instagram Live with readers this week. An audience poll found that a third of viewers were tempted to borrow more. Most dreamed of using the money to become a tenant owner; in fact, Peter’s strategy was to remortgage his house in London to finance rental property in the north of England.

However, some of my Instagram followers confessed that they had already re-indebted under the guise of financing home renovations and then invested the money in stocks and Isa stocks. This is not only a very risky move, but technically it counts as mortgage fraud. Nonetheless, the combination of low interest rates and rising asset values ​​leads many otherwise sane people to view their homes as a brick piggy bank.

If you’ve started investing in blocked stocks, getting a decent return has been deceptively easy, despite the recent inflation nervousness. This, I fear, has given many young investors “fund managers”; the main symptom being overconfidence in their ability to beat the market forever.

Jason butler, FT columnist and podcast expert, urges potential borrowers to think about risk first. “Borrowing is one way to shorten your path to wealth, but it is fraught with pitfalls and dangers,” he says. The three main risks are that your debt becomes more expensive; the asset you bought is losing value; good debt info here or your situation changes and you can no longer repay your debts. The first two are particularly difficult for young borrowers like Peter to imagine. Seduced by the low interest rate environment, they don’t remember the mortgage crash or double-digit mortgage rates of the 1990s.

No one is planning a return to those days anytime soon, but Peter has been tempted to extend his mortgage term from 25 to 40 years to flatten his expanded monthly repayments. Based on a £ 300,000 loan, the interest charge over the term of the mortgage would drop from £ 60,000 to £ 100,000 – and this assuming rates stay at 1.5% forever ( and they won’t).

Next, we come to asset values. Those who have borrowed to invest in real estate over the past two decades have been rewarded with skyrocketing prices – but can it continue? The end of the stamp duty holiday in June means house prices are already falling. Mortgage brokers say lenders are pulling the hook. “People look at the prices on Rightmove and think crikey, my neighbor, sold her house for £ 450,000, now I can afford to do a loft extension,” says Alex Winn, mortgage expert at Habito, a broker.

In reality, lenders are wary of price overruns. “Right now we are seeing a lot of down valuations.” If you remortgage, the amount of additional equity you may be able to free up depends on lender affordability tests. Winn says some borrowers are unprepared for the level of issues they will face. If you plan to finance a buy-to-lease, many lenders will expect you to identify a specific property, show evidence of the proposed rent, and explain how you finance the rest of the transaction.

Hiring a managing agent – which could cost you 10 to 15 percent of the rent – is something long-distance owners need to consider. And that assumes that your property has a tenant on site who pays the rent – something that many landlords missed during the pandemic. Could you afford to manage a second mortgage without rent? Habito says that re-amortization to refinance other high-interest debt is an issue increasingly requested by customers (most lenders won’t lend more than 20% of your property’s value for this).

I know a few people who lost their jobs during the pandemic and assumed they would be able to remortgage and break into their brick-covered piggy banks. Without income, no lender would touch them

A handful would consider loans to finance a business start-up, but unsurprisingly anyone who tells their lender they want to borrow is investing in stocks and stocks will be given short-term. However, anyone with a mortgage who also saves in an Isa or a pension is technically both a borrower and an investor. How should we balance our priorities here? Finding the correct answer to this question will depend on your personal situation, but here are some things to chew on.

Increasing your monthly mortgage payments – assuming your lender allows it – could shorten the life of your loan for years and generate significant interest savings. However, prioritizing additional mortgage payments over a company pension could cost you more in the long run, as you will run out of “free money” from your employer’s equal pension contributions, not to mention tax breaks. .

As a higher rate taxpayer, I am concerned that the days of 40% relief. 100 of my retirement savings are counted. Since I have a lot of equity in my home and my remaining mortgage is low, I have chosen to prioritize “overpaying” my pension, rather than clearing my mortgage. Even if you’re saving in an Isa, the cumulative effects of growing long-term investments – not to mention a really accessible pot of cash – might be something you value more than paying off your mortgage early. As you seek to strike the right balance based on your own situation and risk profile, I leave you with one final thought.

If you’re the “do everything to lower the mortgage” type, make sure you have an emergency fund as well. I know a few people who lost their jobs during the pandemic and assumed they would be able to remortgage and break into their brick-covered piggy banks. Without income, no lender would touch them. Borrowing to invest is certainly a risky business – but putting all of your available cash into an illiquid asset is quite another.

Claer Barrett is the mainstream editor of the FT: [email protected]; Twitter @Claerb; Instagram @Claerb