Author Topic: Mortgage rates, is it worth more aggressive overpayments?  (Read 8103 times)

Affable Bear

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Re: Mortgage rates, is it worth more aggressive overpayments?
« Reply #50 on: December 21, 2022, 06:38:09 AM »
Thanks everyone! It's been a very useful discussion, I think a lot of people have the exact same nuanced battle in their heads on the way to FIRE especially when inflation and interest rates change significantly.

As we are still pretty early in our FIRE journey we do need to continue to build our small stache up, we need to stay on course with investing over the next 10 years but after that I think it might be time to blast it. I intend to FIRE when I am around 45-47 or at least switch to a part time/fun gig for pocket money, I have decided I wont work a day over 50, even if I have to live like a pauper!

It has been interesting to see everybodys point of view!


SPM87

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Re: Mortgage rates, is it worth more aggressive overpayments?
« Reply #51 on: January 27, 2023, 03:59:44 AM »
I thought I would throw another option I would consider to my FIRE plans and this discussion

What about you build up your stash, then just interest only the mortgage when stash is big enough to FIRE until the term is up and then pay it off at the end of the term? that is IF you have not bothered to just sell up beforehand? How likely is it you will not sell before the term is up? when your 70/80 hard to believe you want stairs in your house for example!

I know they dont like to do much interest only mortgages but when your stash is larger than the mortgage, it is easy provable you can pay off anytime?

Albatross

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Re: Mortgage rates, is it worth more aggressive overpayments?
« Reply #52 on: February 15, 2023, 09:02:45 PM »
What about you build up your stash, then just interest only the mortgage when stash is big enough to FIRE until the term is up and then pay it off at the end of the term? that is IF you have not bothered to just sell up beforehand? How likely is it you will not sell before the term is up? when your 70/80 hard to believe you want stairs in your house for example!

I had thught about this idea before but wouldn't it be risky if the equities portion of your stash tanks the day, week or month before you pay off the lump sum?

vand

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Re: Mortgage rates, is it worth more aggressive overpayments?
« Reply #53 on: February 16, 2023, 03:15:17 AM »
As someone who's done the round trip on the residential mortgage - aggressively paying it off fully then taking on a new one - from my point of view these days I'm pretty firmly in the camp that most people who can safely do so should hold some mortgage debt, provided they have all the other aspects of their financial life already lined up and ticking along nicely.   

How much this is of course highly variable from one person to the next and depends on the usual factors - your income/saving rate, your existing asset base, your current amount of equity, and of course your risk appetite. Nonetheless it is amusing and even baffling to me that some people will be happy to hold a lifetime's worth of investments in a 100% equity portfolio in an expensive market while insist on zero housing debt. Personally I would rather hold a less volatile portfolio with some modest financial gearing while being able to sustain a high saving rate from our incomes. That, to me, is the sweet spot.

PhilB

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Re: Mortgage rates, is it worth more aggressive overpayments?
« Reply #54 on: February 16, 2023, 03:48:16 AM »
The question is, how do you achieve that 'less volatile portfolio'?  In days gone by, that would be via bonds, but bond prices over the last few years have been crazy such that effectively borrowing money to buy bonds did not look anything like a sensible bet.  Real estate might do the trick or possibly commodities if that's what you are into, or some kind of hedged portfolio if you can avoid nasty step functions.

vand

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Re: Mortgage rates, is it worth more aggressive overpayments?
« Reply #55 on: February 18, 2023, 01:32:44 PM »
The question is, how do you achieve that 'less volatile portfolio'?  In days gone by, that would be via bonds, but bond prices over the last few years have been crazy such that effectively borrowing money to buy bonds did not look anything like a sensible bet.  Real estate might do the trick or possibly commodities if that's what you are into, or some kind of hedged portfolio if you can avoid nasty step functions.

I would hope there is not too much disagreement with the statement that nothing works all the time when it comes to investing... that's what makes it difficult.  2022 seems to be the exception rather than the rule when it come to the diversifying benefits of bonds, and now that bond prices have reset to more reasonable levels the strategy stands a much better chance of "working" as one would hope - the worst thing anyone can do is to abandon their strategy after one bad year.


I don't know if the 60/40 or Permanent Portfolio or All-Weather portfolio is going to provide the best sharpe ratio going forward, but a well diversified portfolio has proven its worth many times over in tricky times and I suspect that it will do so again. 

So my answer would be: what is a less volatile portfolio? The same as whatever you considered before. One bad year does not invalidate the strategy, and in fact was probably required in order for it to continue to work going forward...

PhilB

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Re: Mortgage rates, is it worth more aggressive overpayments?
« Reply #56 on: February 19, 2023, 05:33:41 AM »
2022 seems to be the exception rather than the rule when it come to the diversifying benefits of bonds

I would probably come to the same conclusion as you regarding what is sensible going forward, but from a very different direction.  I would say the exception was the long period before 2022 where bonds were crazily overpriced and very much a downside-only bet.  This was the period in which I don't believe the traditional wisdom about 60:40 portfolios applied, as bonds were nudging zero yield and had nowhere to go but down.  The people I thought crazy were the ones doggedly sticking to the mantra that 'bonds go up when stocks go down' in a situation where bonds could only go up if people were valuing them on a greater fool basis.

2022 has brought us back somewhere closer* to 'normal' bond valuations - in which case all the underlying arguments in favour of a healthy portion of bonds in a portfolio become valid again.

* Disclaimer - I haven't followed bond prices closely, I'm basing 'normal' on a quick Google of the 30 year UK gilt yield.  I'm lucky enough to not have to worry about volatility in my stocks anyway as we will eventually have DB and state pensions that cover our core spending and I'm using cash to bridge the gap until they start.  The 'normalisation' of the bond market doesn't impact that strategy at this stage.

vand

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Re: Mortgage rates, is it worth more aggressive overpayments?
« Reply #57 on: February 25, 2023, 03:24:51 AM »
2022 seems to be the exception rather than the rule when it come to the diversifying benefits of bonds

I would probably come to the same conclusion as you regarding what is sensible going forward, but from a very different direction.  I would say the exception was the long period before 2022 where bonds were crazily overpriced and very much a downside-only bet.  This was the period in which I don't believe the traditional wisdom about 60:40 portfolios applied, as bonds were nudging zero yield and had nowhere to go but down.  The people I thought crazy were the ones doggedly sticking to the mantra that 'bonds go up when stocks go down' in a situation where bonds could only go up if people were valuing them on a greater fool basis.

2022 has brought us back somewhere closer* to 'normal' bond valuations - in which case all the underlying arguments in favour of a healthy portion of bonds in a portfolio become valid again.

* Disclaimer - I haven't followed bond prices closely, I'm basing 'normal' on a quick Google of the 30 year UK gilt yield.  I'm lucky enough to not have to worry about volatility in my stocks anyway as we will eventually have DB and state pensions that cover our core spending and I'm using cash to bridge the gap until they start.  The 'normalisation' of the bond market doesn't impact that strategy at this stage.

I would definitely agree with that. The ZIRP era was uncharted territory - markets became more managed than ever - and we are seeing some of the unwinding and fallout from that era playing out now.  When the base of the pyramid became the bubble its almost inevitable that all other asset became inflated and correlations moved closer.

I have put forward the case in other threads that 2009-2021 is likely to be THE greatest bull market we are all likely to see in our lifetimes, not from the point of view of total return but from the view of risk adjusted return where the S&P's trailing 10yr sharpe ratio far surpassed anything we have seen previously. Very few investors can appreciate just how amazing this period was from the point of view of being so relatively unrisky, and will likely never again experience a period where gains are delivered without their mettle being tested.

We are reverting to a more normal period now, where investing basics will matter more. This has all sorts of implications that will take years for most investors to fully grasp. Understanding your personal risk tolerance and factoring it into your asset allocation will matter much more going forward, and valuations will matter more.