Hello and welcome back to Mortgage Advisor on FIRE. This week I discuss repayment versus interest-only mortgages. Also, eggs, trust, and relationships, and a fun weekend of art.
Quote of the Week
“You can’t unscramble an egg.”
I’ve been thinking a lot about this idiom, and a related one which you’ll have probably heard at some point, “to make an omelette you have to break a few eggs.”
It’s weird how multiple things can happen at roughly the same time that make you think about phrases like this. I’m listening to an audiobook by Jon Ronson called So You’ve Been Publicly Shamed and it all comes back to the same point: “You can’t unscramble an egg.”
What does this actually mean?
Well, imagine you are in a relationship with someone. It doesn’t matter if it’s romantic, platonic, or professional. The only thing that matters is that this relationship has been built over time with trust being slowly strengthened on both sides. Then, the other party does something that is so ill-judged it beggars belief. They make a public comment that erodes all the trust that’s been built up. The relationship has not just gone back to square one. It’s been damaged so badly that it might never be the same again. You can’t unscramble that egg.
I’ve seen people talk about bullying and compare it to scrunching up a piece of paper. You can try over and over again to fold the paper out and iron out all the creases, but that piece of paper is never going to look fresh out of the notebook again. It’s exactly the same when trust has been broken in a relationship. An apology can help, but no relationship is ever going to be the same following such a break in trust.
This point comes back to something that I’ve spoken about before, as has Darren Scothern in his blog on autism; Words Have Power. So, whether you are a friend thinking of making a “joke” at the expense of someone you hang out with, or a loved one passing judgement over someone’s appearance, or a company voicing an opinion on a business partner, you really should think long and hard about your choice of words and how they will be interpreted by the wider world. Once those comments are out in the world, even if you apologise, even if you later try to explain your comments or provide context or a rationale, there’s no turning the clock back.
Intent has a lot to do with what I’m saying. People make mistakes, and if it’s clear that something is an honest mistake with no ill intent, and efforts are taken to rectify that mistake immediately, then sometimes it can actually strengthen a relationship. For example, a business you work with makes a mistake on an order. You make them aware of the mistake, and before you have a chance to think about it any further, they have already started putting it right. Transparency, honesty, openness, whatever you want to call it, can count for so much here. No one is perfect, but when people or companies go that extra mile to rectify a mistake it shows what their priority is; the relationship, rather than their own selfish position. So many people, and companies, treat relationships as a zero-sum game, where a person has to win at the expense of everyone and everything else, rather than treating a relationship as a two-way street where taking action to benefit all sides is the goal.
Wealth and Large Numbers
I don’t think people grasp just how much wealth, the truly wealthy actually have. A few things prompted this thought; a recent Reddit discussion, and a couple of conversations with people about wages. Take politicians as an example. An MP in the UK has a basic salary of around £86,000, with extras paid for expenses or additional duties. £86,000 is, by most definitions, a decent amount of money to earn and would comfortably put the earner in the top 10% of UK wages. The top 1% earn over £182,000 per year. Still, a huge sum to most people, but what about the absolute top earners?
Denise Coates, the CEO of Bet365, recently earned more than £260 million in a single financial year. Assuming a standard 35-hour working week, that’s roughly £140,000 per hour.
Don’t misunderstand my point; I’m not defending MP wages, although I think MPs should be well paid, I also think they should be much more accountable for what they do, but that’s a debate for another time. My point is that when people look at those earning £100,000+ and criticise them for being “rich” or “wealthy” and not doing enough for the community, we should remember that someone earning £100,000 has much more in common with a minimum wage worker than they do with people like Denise Coates.
We could take this point even further. There are thought to be 177 UK billionaires with a combined wealth of over £600 billion. How much more than a million is a billion? Well, one common example is the difference between one million seconds and one billion seconds; roughly 12 days and 30 years respectively. To put it another way, one million days would take us back to around 800 B.C., whereas one billion days take us back over 2.7 million years.
The human brain can’t always comprehend just how big some numbers are, let alone just how wealthy some people are. I think we need to remember this when judging those people who are earning very respectable sums, like £100,000p/a whilst at the same time giving an easy ride to those who literally have more money than they can ever hope to spend.
Weekly Update
Nothing much to report from the working week as I was working throughout. On Saturday Oana and I had a day out visiting local artists in their studios as part of the Open Up Sheffield event. We had a good chat with John Wilkinson and Kieran Flynn, and although they have very different styles, I liked their work a lot.
Kieran’s work is abstract, which is about the limit of my technical knowledge when it comes to art. When it comes to paintings there are two questions I ask myself, What would it look like on my wall? How does it make me feel? My favourite piece by Kieran Flynn would be Ablaze:
Anyone who knows me well, knows I’m a sci-fi/astronomy geek. Looking at this painting, I feel like I’m looking at a star set against a nebula. I don’t know if that’s what was intended with the work, but like with any art the person viewing it can bring their own meaning to it. Oana also liked his style, saying that she likes the way he matches colours. When we spoke to Kieran he was working on a piece where he’d be asked to incorporate a horse, and it looked like a cool work in progress, with the animal silhouetted against a warm, reddish background. If we can free up some wall space, somehow, we would definitely look to buy from Kieran. If you want to buy from him, or just explore his work in more detail, click the link below:
https://kieranflynnartist.bigcartel.com/products
After we explored the studios around our side of the city, we ventured into the city centre and had some lunch at Lucky Fox, a fried chicken place. It only occurred to me on Friday night why it’s called Lucky Fox and when I realised, I felt quite stupid. What are foxes known for? Breaking into chicken coops and eating what they find.
Anyway, I don’t know what the deal was in Sheffield city centre today but everywhere we went people were preaching about Jesus through megaphones. Whilst we were eating at Lucky Fox some random guy game and dropped a leaflet on our table about Jesus. I don’t believe in any god, but I respect an individual’s right to private worship and belief, but I draw the line at screaming about hellfire and brimstone whilst I’m trying to have a nice, relaxing time out with my girlfriend.
I don’t talk much about football in this blog, and to be honest I’m hardly interested in the game anymore. I think a lot of this is down to my recovery from gambling addiction, and my disgust at how gambling companies have wormed their way into every facet of the game. I still follow Sheffield Wednesday and I just need to highlight how spectacularly the club has imploded in the last couple of months. At one point, not too long ago, I believe we were five points clear at the top of League One having played two games less than our rivals. Then, the wheels came off, and now we sit third with one game left to play having missed out on automatic promotion. It’s almost impressive just how quickly it all went wrong.
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2023 Goals
Click here to see my 2023 progress (opens a new tab).
What Am I Doing?
TV: Masterchef (BBC)
Audiobook: So You’ve Been Publicly Shamed by Jon Ronson.
Financial Update
Assets
Premium Bonds: £1,350.00 (no change).
Stocks and Shares ISA: £86,627.65 (-£919.25).
Fuck It Fund: £375.00 (no change).
Pensions: £57,374.67 (-£941.05).
Residential Property Value: £226,085.00 (no change).
BTL Property Value: £145,893.00 (no change).
Total Assets: £517,705.32 (-£1,860.30).
Debts
Credit Card: £0.00 (no change).
Loans: £9,600.00 (no change).
Residential Mortgage: £178,204.93 (no change).
BTL Mortgage: £105,001.75 (no change).
Total Debts: £292,906.68 (no change).
Total Wealth: £224,898.64 (-£1,860.30).
Investment Income in 2023: £1,555.75 (target £8,500).
Nothing too exciting has happened in my finances this week. Almost all my monthly income happens between the 1st and 22nd of the month, which means the last week or so of each month is fairly quiet. On the 1st, my mortgage balance comes down, and then the various income streams I have hit my accounts until payday.
Assuming there are no major hiccups, I should only have a maximum of 35-40 months until I’m ready to FIRE, and even fewer months if we’re talking about Lean FIRE. May is a massive month for my investment income, with a dividend of over £1,600 expected. When combined with the monthly rental income, and other dividend payments from my income funds, I’m looking at being around £3,700 by the end of next month.
I’m starting to think about how to handle my residential mortgage later this year, as the deal on the bulk of the debt is coming up for renewal. The majority of my mortgage debt is on a rate of 0.81%, so I’ll be looking at a fairly big increase in my interest rate. One big decision I need to make is whether to switch to interest only. When my pension statement comes out in a few months, I should have a projected fund value large enough, in combination with my ISA, to satisfy the requirements to put the debt on interest only. Being on interest only means that my contractual monthly payments will not reduce the debt, but this means I’ll have more money to throw into investments.
There is a lot of fear out there about interest-only mortgages. However, for those who can budget effectively and invest in a disciplined manner over the long term, I believe these mortgages are fantastic. I’ve done the working out before in a much earlier blog post, but I’ll repeat the core message here, and it’s best explained with an example. There are a few concepts you need to understand to fully grasp the argument for interest only. The first concept is inflation, and the second is compounding gains.
If you have a mortgage of £200,000 and a property worth £250,000, your loan-to-value is 80%. If you have this mortgage on a repayment basis, with a 25-year term, and a rate of 5%, you are looking at payments of £1,170pcm, and a total amount payable of £350,882.
So, inflation and compounding gains… Now, there are a lot of different sources saying a lot of slightly different things about rates of inflation, and the rate at which house prices increase year on year. It doesn’t really matter what figures I use here, so long as I use the same for each example. So, I’m going to assume a standard 3% rate of inflation and assume that house prices increase in a smooth fashion by 5% each year.
On a repayment mortgage, after the 25-year term is up, you should have reduced the balance to zero. Your property should be worth £870,000; a huge increase. However, due to inflation, it would have the same value as approximately £419,000 in 2023.
If you look at that same mortgage but on an interest-only basis, well, this is where the magic happens. If you have £200,000 of debt, on interest-only you will still have £200,000 debt at the end of the mortgage term; 25 years in this example. Assuming inflation runs at a standard 3% a year, the value of that £200,000 debt will only be £95,500 in today’s money. So, you’ve not actually paid any of the debt, but the debt has “reduced” anyway due to inflation. Also, the monthly payments on this mortgage would only be £834; £336 lower than on repayment. If that money was invested in a low-cost index fund each month, at the end of 25 years, with a growth rate of 6%, you’d have an investment pot worth over £230,000. Granted, inflation means that this pot would not have the same relative value as of now, but it’s still a net gain in your favour. The total amount you’ll have paid back on the mortgage is £450,182; £200,000 debt and £250,182 interest.
To summarise;
Repayment Mortgage
Total Amount Payable: £350,882
Investment Pot: £0.00
Interest-Only Mortgage
Total Amount Payable: £450,182
Investment Pot: £232,846
Assuming you use the investment pot to pay off the debt in one lump sum at the end of the mortgage term, you have just over £32,000 left over. The interest element of the interest-only mortgage has been paid over the term of the mortgage. The money invested is the money that you would have used to pay back the mortgage debt on the repayment mortgage. In both examples, you have a monthly budget of £1,170, but you are creating wealth in the interest-only example.
I understand why some people would be uncomfortable with this approach. The chances are, that in any 25-year period, you will see several small dips in the market and possibly a major crash. Timing the market is near enough an impossible task, so you have to take the risk that when the debt is due, your investment pot is sufficient to pay back the debt. If you were approaching the final few weeks before the debt is due, and there’s a sudden crash of 20% in the market, you’d be in trouble. What I’m demonstrating is an investing approach; a strategy, not a step-by-step guide for repaying your mortgage.
I can’t stress the point enough, though, that these examples assume nice, smooth, standard rates of growth. The stock market is anything but nice, smooth, and standard in the short term. Over the long term, however, the data is quite compelling. There’s a reason why the stock market has been described as, “a device for transferring wealth from the impatient to the patient” (Warren Buffet). If you can stay focused, and ride out the peaks and troughs of the market, the accumulation of wealth is not just simple, but inevitable. The risk here comes from your mortgage having a defined, set, date for repayment, which may not nicely match up with the ups and downs of the market.
What I’ve described here should not be taken as advice. I don’t know your circumstances, and before making any major financial decision, you should seek independent advice from an expert or professional.
That’s all for this week, thanks for reading.
Disclaimer
The views and opinions in this blog are my own, and do not represent the views or opinions of my employer, nor should they be considered advice.
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