Pay off Mortgage or invest the money elsewhere

[Organ Morgan.]

Adding some fact to this throwaway statement (not untypical for you).

This year I had £500 in my Funding Circle Account, i added another £500 over the course of the year.

Returns so far this tax year - £80.45.

Fees £7.79

Bad debt £8.61

That's mostly on £500.

Last year I made £56 on £500 - £0 bad debt.

Year before £36 on about £350.

In 3 years, only 4 companies have defaulted (all this year). The one's director has just repaid the loan, two of the others are repaying monthly, and the fourth is likely to default with me seeing nothing. But, they only owe me about a fiver anyway.

So, 4 companies out of circa 200 I have lent to over the years - and I don't lend any company more than £20. Could be risky to some, but for me the gains make the very small risks worthwhile. Plus, you're helping SMEs...

Some people run to the cash machine if there is a hint of problems - there's caution, there's risk, there's sensible risk and then there's paranoia. Technically speaking, you are "gambling" putting money into Barclays or HSBC. Yes, the Government back up the first £75,000, but how long would it take to get that back? No-one really knows do they?

Impressive inflation-busting returns you've made. I imagine you must be tempted to deploy more funds to lend higher amounts.

In the monetary world defining the words speculating, gambling and investing is a tricky business along with pinpointing the difference between unearned income and investment income. Some terms are fluffier and more acceptable than others but the motivation is always the same, and that's to make a profit.

The same can be said for placing money in an interest-bearing savings account. That's money lending. Making money off of money remains a big no-no for Muslims. It was once considered immoral by Christians too.

If the state ever has to make good on their up to £75k guarantee on all bank accounts they'd have no problem. But what they repay would have considerably less purchasing power.

[Dublinblue]

My brother in law is in the process of being made redundant - with the money he is due to get - he could pay off his mortgage and have a little bit left over - or he could invest it an ISA or maybe a deposit for a buy to let property.

Which one would you go for and why ?

One consideration is this: if your BiL buys an ISA & then needs money in future, he'll have his investment to spend. If he pays off his mortgage & then needs money, he'll have to go looking for a loan against his house (at whatever rates the banks feel like offering). Keeping his mortgage gives him flexibility. If the mortgage & ISA interest rates are similar, then I'd go for the ISA. Having said that, there are other investment options as described by other posters.

[PerryJason]

My brother in law is in the process of being made redundant - with the money he is due to get - he could pay off his mortgage and have a little bit left over - or he could invest it an ISA or maybe a deposit for a buy to let property.

Which one would you go for and why ?

Give some to charity?

[blue matt]

I would pay the mortgage of, Of course you will still need to get a job to pay bills, but any lower paid job would do that with no mortgage to pay, then look for a job you really like, as pay will not really be that important as you will be mortgage free

[kingbillyboy]

pay the mortgage, no question. everythink else will fall into place.

[Kris]

Impressive inflation-busting returns you've made. I imagine you must be tempted to deploy more funds to lend higher amounts.

In the monetary world defining the words speculating, gambling and investing is a tricky business along with pinpointing the difference between unearned income and investment income. Some terms are fluffier and more acceptable than others but the motivation is always the same, and that's to make a profit.

The same can be said for placing money in an interest-bearing savings account. That's money lending. Making money off of money remains a big no-no for Muslims. It was once considered immoral by Christians too.

If the state ever has to make good on their up to £75k guarantee on all bank accounts they'd have no problem. But what they repay would have considerably less purchasing power.

I'm extremely tempted to put more in - the only problem is the funds could be tied up for a while if I ever need them.

Generally, I appreciate P2P lending is riskier than going to a bank, but the returns more than make up for it. If people are able to tie up fund for a number of years (I can't - hence my crappy 0.4% interest ISA) - then P2P lending is something to be investigated.

[Kris]

One consideration is this: if your BiL buys an ISA & then needs money in future, he'll have his investment to spend. If he pays off his mortgage & then needs money, he'll have to go looking for a loan against his house (at whatever rates the banks feel like offering). Keeping his mortgage gives him flexibility. If the mortgage & ISA interest rates are similar, then I'd go for the ISA. Having said that, there are other investment options as described by other posters.

Agree with this. People that can afford to buy a house outright often get advised to get a mortgage instead.

[Colonel Cærdiffi]

Agree with this. People that can afford to buy a house outright often get advised to get a mortgage instead.

Can you explain that a bit more? Buying a house outright for £250,000 will only cost you £250,000 but having a mortgage could see you paying many, many times that figure over the course of decades.

[Barry Dragon]

Not heard of Zopa, do they guarantee a minimum return ?, I must admit I thought all P2P loans were not guaranteed

I gues though - with shares you can hang on to them in the hope they go back up some day, if you loan money and the loaner goes bust - your money is gone forever. There is no easy answer - just and educated guess

Not always, companies go bust. Lost all your money then.

Though like a share portfolio your money is spread across many companies, p2p lending is lent across many lenders. Only £10 per individual lender with zopa. So of one does completely default then you only lose £10, though most don't default completely as the debt can be sold to debt collection companies so you will get at least a third back.

There is also the fact people know they are borrowing from another person not a bank, so they are less likely to default.

Risk yes, but only as much as shares.

[blue matt]

Not always, companies go bust. Lost all your money then.

Though like a share portfolio your money is spread across many companies, p2p lending is lent across many lenders. Only £10 per individual lender with zopa. So of one does completely default then you only lose £10, though most don't default completely as the debt can be sold to debt collection companies so you will get at least a third back.

There is also the fact people know they are borrowing from another person not a bank, so they are less likely to default.

Risk yes, but only as much as shares.

just had a quick read of zopa

interesting stuff and not a bad return, i guess most loans are 5 years ? ? ? so you will not see a return till then ? ? ? or do they replay a % monthly / annually ? ? ?

[Kris]

Can you explain that a bit more? Buying a house outright for £250,000 will only cost you £250,000 but having a mortgage could see you paying many, many times that figure over the course of decades.

I could be wrong, but the way I see it is this:-

You've been looking to buy a house and come into an inheritance of £250,000. The house you want costs £200,000. By paying the £200,000 you are left with £50,000 cash. Not an inconsiderable sum, but you have tied up a large amount of money into the house. True, you can sell your house if you fall on hard times, but who wants to do that? And, who knows, your house may lose value in the short term.

If you put down a hefty deposit (say £40,000), your LTV will be 80%. You'll get a very good deal for that. A 20 year (2-year) discounted variable mortgage for a house with LTV of 80% at Furness costs 1.3% interest . After two years, if interest rates are edging up, then maybe you'd consider borrowing less money and putting in more of your own money. Either way, you'd be looking for a new deal because the Furness deal goes to 5.29% after two years.

If interest rates remain the same, you could even consider borrowing more money at the low rate. You'd have £210,000 in the bank earning a small amount of interest, or £210,000 in a Fund earning anything up to about 15%, or £210k in some other investment that returns a lot more money. In the meantime, your 20-year mortgage will cost about 22k over 20 years. So, about £91 a month.

If the house gains value at current market rates, then in 20 years the chances are the house will be worth more than £222,000 (a 10% rise over 20 years? That's very likely to happen). Yes, you have to consider inflation etc, but in 20 years you will be worth (value of house + return on £210,000 investment ). If you buy the house you will be worth (value of house + return on £50,000 investment).

If you fall on hard times, you will have enough money in the bank (providing you haven't squandered it on holidays) to pay your mortgage until you find a new job etc.

You could argue that the person would be putting the money they would be paying for the mortgage into an investment fund. However, many of us don't have that level of self discipline and would probably squander our extra wages on holidays and cars.

[Kris]

just had a quick read of zopa

interesting stuff and not a bad return, i guess most loans are 5 years ? ? ? so you will not see a return till then ? ? ? or do they replay a % monthly / annually ? ? ?

I don't know about Zopa, but Funding Circle have the companies pay you monthly.

So, every day, my account goes up as companies pay me what they owe for that month plus their interest payment.

When the account hits £20 - I can lend money to a new company. Alternatively, I can buy someone else's loan that they want to sell.

[Colonel Cærdiffi]

I could be wrong, but the way I see it is this:-

You've been looking to buy a house and come into an inheritance of £250,000. The house you want costs £200,000. By paying the £200,000 you are left with £50,000 cash. Not an inconsiderable sum, but you have tied up a large amount of money into the house. True, you can sell your house if you fall on hard times, but who wants to do that? And, who knows, your house may lose value in the short term.

If you put down a hefty deposit (say £40,000), your LTV will be 80%. You'll get a very good deal for that. A 20 year (2-year) discounted variable mortgage for a house with LTV of 80% at Furness costs 1.3% interest . After two years, if interest rates are edging up, then maybe you'd consider borrowing less money and putting in more of your own money. Either way, you'd be looking for a new deal because the Furness deal goes to 5.29% after two years.

If interest rates remain the same, you could even consider borrowing more money at the low rate. You'd have £210,000 in the bank earning a small amount of interest, or £210,000 in a Fund earning anything up to about 15%, or £210k in some other investment that returns a lot more money. In the meantime, your 20-year mortgage will cost about 22k over 20 years. So, about £91 a month.

If the house gains value at current market rates, then in 20 years the chances are the house will be worth more than £222,000 (a 10% rise over 20 years? That's very likely to happen). Yes, you have to consider inflation etc, but in 20 years you will be worth (value of house + return on £210,000 investment ). If you buy the house you will be worth (value of house + return on £50,000 investment).

If you fall on hard times, you will have enough money in the bank (providing you haven't squandered it on holidays) to pay your mortgage until you find a new job etc.

You could argue that the person would be putting the money they would be paying for the mortgage into an investment fund. However, many of us don't have that level of self discipline and would probably squander our extra wages on holidays and cars.

Thanks for that

[Cyclops]

Equity release, anyone?

[poc]

Agree with this. People that can afford to buy a house outright often get advised to get a mortgage instead.

i wonder why

[William Treseder]

Some interesting and informative replies to this thread, but surely the fundamental aim for anyone as they get older is to be debt free.
For me, paying off your mortgage if you can is a no brainier. To own the roof over head outright is a wonderful feeling, and allows you to approach your autumn yrs with peace of mind and options galore.

[blue matt]

I don't know about Zopa, but Funding Circle have the companies pay you monthly.

So, every day, my account goes up as companies pay me what they owe for that month plus their interest payment.

When the account hits £20 - I can lend money to a new company. Alternatively, I can buy someone else's loan that they want to sell.

thanks for the reply, i sometimes have a bit of cash floating around, this must be better than spending it on another crap gadget on ebay and it ending up in the drawer for 6 months and then off'ed to the charity shop

can i ask, why only 20 quid each ? ? ?

[Barry Dragon]

just had a quick read of zopa

interesting stuff and not a bad return, i guess most loans are 5 years ? ? ? so you will not see a return till then ? ? ? or do they replay a % monthly / annually ? ? ?

You get repaid in little chunks, loans are 2-5 years mostly. So each month you get a capital repayment and interest amount.

As with funding circle the repayments are put back into another loan when it reaches £10/20. It's £10/20 to spread the risk out amongst as many people as possible. So you have some loans for A+ credit score at 3%, 7% all the way up to 25% for people with E credit score. Averages out at 10%. Though the advertised rate is 7% to take into account potential defaults.

You can sell your loan for a 1% charge if you need to get the money out, but the loan has to be purchased by someone so it's not an instant withdrawal.

[kingbillyboy]

You get repaid in little chunks, loans are 2-5 years mostly. So each month you get a capital repayment and interest amount.

As with funding circle the repayments are put back into another loan when it reaches £10/20. It's £10/20 to spread the risk out amongst as many people as possible. So you have some loans for A+ credit score at 3%, 7% all the way up to 25% for people with E credit score. Averages out at 10%. Though the advertised rate is 7% to take into account potential defaults.

You can sell your loan for a 1% charge if you need to get the money out, but the loan has to be purchased by someone so it's not an instant withdrawal.

so what you are saying basically is that if i want to make a lot of money quikly then i would be better off robbing the asian shop on the corner?