Retire at 35 with £500k and monthly spending of £2k by leveraging your pension

[helloyou]

Hello all,

I've been playing around to find out the best way to plan for my retirement, and I've found out by leveraging pension, we can retire way faster.

So it's possible to retire with a portoflio of £500k and spend £2k/month with the following assumptions:
- 4% stock gain / year
- Monthly spending reduce to £1600 from 57 and to £1300 from 68.
- 15 qualifying year of state pension
- You are 35 or over. (if you are younger you need a bigger pot)

You can play around here to check the numbers:
https://docs.google.com/spreadsheets/d/1qbkeMjowb8ab19kgtV9iFPuy3IwXDGJrFD4hynH1s7w/edit?usp=sharing

What do you think? That could be a much easier target number for a decent lifestyle and retire earlier than originally imaginated. The pension being completely tax free significantly accelerate the speed to retirement.

[Manchester]

The chart is really cool, thanks for creating that, it seems very useful. 

The numbers seem good to me and I think a British person (especially someone living outside of the South East) could retire on a stache of £500k.

Why do you foresee your expenses dropping with age?  Is this a presumption or part of a bigger plan?  If you're paying off a mortgage this would make sense.  I'm sure there are other reasons it could drop too. 

Finally, when you FIRE, most of your stache will be outside of your pension (to last 21/22 years).  I think it's quite unrealistic to save (as an example) £350k into ISAs by the time you hit 35, which means there's a good chance a portion of those investments won't be tax-sheltered.  If the £2k figure is inclusive of tax then this point becomes invalid.  But perhaps it's worth considering.

[helloyou]

The chart is really cool, thanks for creating that, it seems very useful. 

The numbers seem good to me and I think a British person (especially someone living outside of the South East) could retire on a stache of £500k.

Why do you foresee your expenses dropping with age?  Is this a presumption or part of a bigger plan?  If you're paying off a mortgage this would make sense.  I'm sure there are other reasons it could drop too. 

Finally, when you FIRE, most of your stache will be outside of your pension (to last 21/22 years).  I think it's quite unrealistic to save (as an example) £350k into ISAs by the time you hit 35, which means there's a good chance a portion of those investments won't be tax-sheltered.  If the £2k figure is inclusive of tax then this point becomes invalid.  But perhaps it's worth considering.

I was just thinking that as we get older, we tend to be less active. So we spend less money. When younger, we want to travel, go out, meet friends. But in later age we are more sedentary. It's also something I've read a lot about pensioner, they usually spend way less than expected.

It doesn't have to be a mortgage paid off. Just doing less.

Of course, medical bill could go up, as well as insurance. But I was thinking that with insurance and potentially gov support (NHS is free now) it wouldn't increase significantly like in the US.

And yeah it's unrealistic to save £350k in ISA by 35, however it's possible to have the right balance with pension to maximise the total pot. It gives an overview of how much non pension investment you need before your pension age... which is the key to consider ourself free!

[vand]

It doesn't work like that. You can't just assume a 4% growth rate and live happily ever after, because withdrawal rates are also a function of portfolio volatility and the distribution of returns as much as it is a function of overall portfolio growth.

A portfolio that grows at a consistent 4% pa will be able to support a much higher withdrawal rate than one that manages to average 4% a year but is up 20% on year, down 15% another etc. Frankly, you should not even attempt to retire until you have this concept very firmly nailed. Look up "sequence of returns risk" for more.

[helloyou]

It doesn't work like that. You can't just assume a 4% growth rate and live happily ever after, because withdrawal rates are also a function of portfolio volatility and the distribution of returns as much as it is a function of overall portfolio growth.

A portfolio that grows at a consistent 4% pa will be able to support a much higher withdrawal rate than one that manages to average 4% a year but is up 20% on year, down 15% another etc. Frankly, you should not even attempt to retire until you have this concept very firmly nailed. Look up "sequence of returns risk" for more.

I think its better to have a simple model instead of trying to modelise many scenarios. If you need margin of safety then use the 3% grow rate and lower spending.

During downturn, we can always go back to earn a bit of money or spend less. However pause everything in order to be ready for the worse scenario is just over-preparing

[Jacinle]

The chart is really cool, thanks for creating that, it seems very useful. 

The numbers seem good to me and I think a British person (especially someone living outside of the South East) could retire on a stache of £500k.

Why do you foresee your expenses dropping with age?  Is this a presumption or part of a bigger plan?  If you're paying off a mortgage this would make sense.  I'm sure there are other reasons it could drop too. 

Finally, when you FIRE, most of your stache will be outside of your pension (to last 21/22 years).  I think it's quite unrealistic to save (as an example) £350k into ISAs by the time you hit 35, which means there's a good chance a portion of those investments won't be tax-sheltered.  If the £2k figure is inclusive of tax then this point becomes invalid.  But perhaps it's worth considering.

If retired, can we use personal allowance to offset that?

Assuming use the ISA for CGT, and the non-tax shelter one is for income

Annual : 24k
Personal allowance : 12.5k
Dividend allowance: 2k
Taxable : 9.5k tax
Tax: At  basic rate at 7.5%, 712.5  (2.97% of 24k?)

Not sure if my calculation is correct

[vand]

It doesn't work like that. You can't just assume a 4% growth rate and live happily ever after, because withdrawal rates are also a function of portfolio volatility and the distribution of returns as much as it is a function of overall portfolio growth.

A portfolio that grows at a consistent 4% pa will be able to support a much higher withdrawal rate than one that manages to average 4% a year but is up 20% on year, down 15% another etc. Frankly, you should not even attempt to retire until you have this concept very firmly nailed. Look up "sequence of returns risk" for more.

I think its better to have a simple model instead of trying to modelise many scenarios. If you need margin of safety then use the 3% grow rate and lower spending.

During downturn, we can always go back to earn a bit of money or spend less. However pause everything in order to be ready for the worse scenario is just over-preparing

You can use whatever assumption and spending rules you like... it's your finances, your model. I'm just pointing out the folly of assuming constant and predictable returns.

My personal hunch is that as someone who quibbles over 75p you aren't really ready to "retire" no matter what your spreadsheets say.

Not very long ago you were "over my dead body" when propositioned about putting your money into a pension. Frankly, your thinking is all over the place.

[helloyou]

You can use whatever assumption and spending rules you like... it's your finances, your model. I'm just pointing out the folly of assuming constant and predictable returns.

My personal hunch is that as someone who quibbles over 75p you aren't really ready to "retire" no matter what your spreadsheets say.

Not very long ago you were "over my dead body" when propositioned about putting your money into a pension. Frankly, your thinking is all over the place.

I think quibbling over small amount is actually makes me more ready to retire lol. I spend very little, and very certainly less than this £2k/month I've put in there.

I've been estimating how I can achieve safer to retirement target with my current portfolio. I didn't realise I already have enough money in my non retirement account to live comfortably (£2K/month) to pension age (57). So I decided to top up my pension to the max this year because it accelerate greately my portfolio amount. So yeah, a good change of mind, I just needed to do some math the value of it.

But really, I feel fairly confident I wouldn't have problem even if I were to retire now because I have additional margin of safety:
- I've put spending to £2k/month but most likely my lifestyle wouldn't be over £1.5k/month. And if time are tough I can even be at £1k/month (like some of my friends).
- My forecast also work even if the average compounding rate is 2% (although I have to reduce to £1.5K/month from 57 and portfolio is over at 86)

So I don't see why it wouldn't work, even if my portfolio were to shrink by 50% during a tough recession, because I could half my spending if necessary as well as do small gig.


You've been criticizing, but what would you use to estimate the point where you can retire? No model would be perfect anyway so I'm happy so far with what I have.

[shelivesthedream]

The chart is really cool, thanks for creating that, it seems very useful. 

The numbers seem good to me and I think a British person (especially someone living outside of the South East) could retire on a stache of £500k.

Why do you foresee your expenses dropping with age?  Is this a presumption or part of a bigger plan?  If you're paying off a mortgage this would make sense.  I'm sure there are other reasons it could drop too. 

Finally, when you FIRE, most of your stache will be outside of your pension (to last 21/22 years).  I think it's quite unrealistic to save (as an example) £350k into ISAs by the time you hit 35, which means there's a good chance a portion of those investments won't be tax-sheltered.  If the £2k figure is inclusive of tax then this point becomes invalid.  But perhaps it's worth considering.

I was just thinking that as we get older, we tend to be less active. So we spend less money. When younger, we want to travel, go out, meet friends. But in later age we are more sedentary. It's also something I've read a lot about pensioner, they usually spend way less than expected.

I'm not assuming that my expenses will drop significantly as I age, apart from accounting for children leaving home. My grandmother no longer goes on holidays and the like but she now has to pay for things that she can't do herself. She can't cook any more so buys prepared food. She can't drive so has to use taxis. She's now got a carer who comes in every day. She's 93! I have had two very long-lived grandmothers! I am expecting a dip between, say, 50 and 65-70, but then an increase again as I am unable to do things I do now to save money (e.g. walk everywhere, grow vegetables in the garden) and have to hire out even normal everyday things (e.g. possibly cleaning, cooking...)

But maybe that's because I don't live a jetset lifestyle now so there's not much to "not do" when I'm old!

I am always concerned when I hear young people planning to live on zippity zip when they are old just because they cross off all the "young person" expenses but don't add any " old person" ones in.

[Manchester]

The chart is really cool, thanks for creating that, it seems very useful. 

The numbers seem good to me and I think a British person (especially someone living outside of the South East) could retire on a stache of £500k.

Why do you foresee your expenses dropping with age?  Is this a presumption or part of a bigger plan?  If you're paying off a mortgage this would make sense.  I'm sure there are other reasons it could drop too. 

Finally, when you FIRE, most of your stache will be outside of your pension (to last 21/22 years).  I think it's quite unrealistic to save (as an example) £350k into ISAs by the time you hit 35, which means there's a good chance a portion of those investments won't be tax-sheltered.  If the £2k figure is inclusive of tax then this point becomes invalid.  But perhaps it's worth considering.

If retired, can we use personal allowance to offset that?

Assuming use the ISA for CGT, and the non-tax shelter one is for income

Annual : 24k
Personal allowance : 12.5k
Dividend allowance: 2k
Taxable : 9.5k tax
Tax: At  basic rate at 7.5%, 712.5  (2.97% of 24k?)

Not sure if my calculation is correct

Yes, that's correct.  Remember that you don't need to declare dividends produced from an ISA though. 

Presuming you could withdraw £9.5k from your ISA, your self-assessment tax return would only have to have an income of £14.5k declared, which requires 0% tax.  For example, if you only withdraw £5k pa from your ISA, you pay 7.5% tax on the £4.5k you need to make the difference.

[helloyou]

I'm not assuming that my expenses will drop significantly as I age, apart from accounting for children leaving home. My grandmother no longer goes on holidays and the like but she now has to pay for things that she can't do herself. She can't cook any more so buys prepared food. She can't drive so has to use taxis. She's now got a carer who comes in every day. She's 93! I have had two very long-lived grandmothers! I am expecting a dip between, say, 50 and 65-70, but then an increase again as I am unable to do things I do now to save money (e.g. walk everywhere, grow vegetables in the garden) and have to hire out even normal everyday things (e.g. possibly cleaning, cooking...)

But maybe that's because I don't live a jetset lifestyle now so there's not much to "not do" when I'm old!

I am always concerned when I hear young people planning to live on zippity zip when they are old just because they cross off all the "young person" expenses but don't add any " old person" ones in.

yes that's a good point. Part of me thinks it's a very far far away timeline to plan for these. And another part of me think that when I'll turn 85+ and need career to eat or do anything, I'd rely on the governement suppor for this part of my life.

I know it's best to have cash to take care of myself, however I don't see the government letting old people die because they don't have money...

[Motiv]

You mention your monthly spending is £1500 per month, maybe I'm more frugal than I thought but that seems like quite a bit to me. I currently spend £650 a month (all in) and I live a very healthy and fulfilled life.

Do you live in a big city or something? because that seems like a lot. I'm not being critical, I'm just interested.

[helloyou]

You mention your monthly spending is £1500 per month, maybe I'm more frugal than I thought but that seems like quite a bit to me. I currently spend £650 a month (all in) and I live a very healthy and fulfilled life.

Do you live in a big city or something? because that seems like a lot. I'm not being critical, I'm just interested.

Yes I live in London. And just renting a room there is usually more than £650/month!!

So for about £1500/month, it's actually quite frugal for the location.

Of course, I can also move out to a cheaper place. But I like the flexibility of choice. My goal is to have enough to live on £2k/month so that I have a decent safety net!

[Motiv]

You mention your monthly spending is £1500 per month, maybe I'm more frugal than I thought but that seems like quite a bit to me. I currently spend £650 a month (all in) and I live a very healthy and fulfilled life.

Do you live in a big city or something? because that seems like a lot. I'm not being critical, I'm just interested.

Yes I live in London. And just renting a room there is usually more than £650/month!!

So for about £1500/month, it's actually quite frugal for the location.

Of course, I can also move out to a cheaper place. But I like the flexibility of choice. My goal is to have enough to live on £2k/month so that I have a decent safety net!

That’s what I thought you were going to say. London prices are crazy. More than £650 just for a room... Whoa!

Just goes to show what a difference 100 miles makes. I have a house in Norwich and the mortgage is £180 a month.

Sounds like a plan, good luck with that.

[helloyou]

You mention your monthly spending is £1500 per month, maybe I'm more frugal than I thought but that seems like quite a bit to me. I currently spend £650 a month (all in) and I live a very healthy and fulfilled life.

Do you live in a big city or something? because that seems like a lot. I'm not being critical, I'm just interested.

Yes I live in London. And just renting a room there is usually more than £650/month!!

So for about £1500/month, it's actually quite frugal for the location.

Of course, I can also move out to a cheaper place. But I like the flexibility of choice. My goal is to have enough to live on £2k/month so that I have a decent safety net!

That’s what I thought you were going to say. London prices are crazy. More than £650 just for a room... Whoa!

Just goes to show what a difference 100 miles makes. I have a house in Norwich and the mortgage is £180 a month.

Sounds like a plan, good luck with that.

May I ask you when you bought your house? £180/month is way below today's price in any UK area.

Had a quick check on rightmove for 1 bed flat rental in norwich and it's about £700/month.

And for a 1 bed house sale, even cheap ones are selling around £160k, which end up into £500/month mortgage payment on a 75% LTV (£40k deposit) and 25 years terms.

So it looks like you are the one paying a very low housing cost compared to the average price in the uk

[SpreadsheetMan]

You mention your monthly spending is £1500 per month, maybe I'm more frugal than I thought but that seems like quite a bit to me. I currently spend £650 a month (all in) and I live a very healthy and fulfilled life.

Do you live in a big city or something? because that seems like a lot. I'm not being critical, I'm just interested.

Yes I live in London. And just renting a room there is usually more than £650/month!!

So for about £1500/month, it's actually quite frugal for the location.

Of course, I can also move out to a cheaper place. But I like the flexibility of choice. My goal is to have enough to live on £2k/month so that I have a decent safety net!

That’s what I thought you were going to say. London prices are crazy. More than £650 just for a room... Whoa!

Just goes to show what a difference 100 miles makes. I have a house in Norwich and the mortgage is £180 a month.

Sounds like a plan, good luck with that.

Hush! Don’t let anyone else in to the Norwich secret.

It’s a good job that the transport links are appalling or the city would be overrun with Londoners.

[vand]

FIREing without a paid off home or one you are paying off is the path much less travelled.

The problem is that you can expect your housing costs to rise with inflation every year, while by owning your home you have fixed that cost and will eventually pay it off with inflated money.

And imo... being retired and having to put up with roommates is rather a oxymoron.

If it were me I would seriously consider buying a home with , say, 60% loan with your cash pile rather than whack it into a pension. Then you have the option to get your own flat mate to subsidise the mortgage cost. Mortgage rates are so low right now that I’m sure you could get the numbers to work out cheaper than your current situation.

It’s also arguably even more tax efficient as you don’t pay any tax on your main residence and income from a roommate is tax free up to £7500pa

[Motiv]

You mention your monthly spending is £1500 per month, maybe I'm more frugal than I thought but that seems like quite a bit to me. I currently spend £650 a month (all in) and I live a very healthy and fulfilled life.

Do you live in a big city or something? because that seems like a lot. I'm not being critical, I'm just interested.

Yes I live in London. And just renting a room there is usually more than £650/month!!

So for about £1500/month, it's actually quite frugal for the location.

Of course, I can also move out to a cheaper place. But I like the flexibility of choice. My goal is to have enough to live on £2k/month so that I have a decent safety net!

That’s what I thought you were going to say. London prices are crazy. More than £650 just for a room... Whoa!

Just goes to show what a difference 100 miles makes. I have a house in Norwich and the mortgage is £180 a month.

Sounds like a plan, good luck with that.

May I ask you when you bought your house? £180/month is way below today's price in any UK area.

Had a quick check on rightmove for 1 bed flat rental in norwich and it's about £700/month.

And for a 1 bed house sale, even cheap ones are selling around £160k, which end up into £500/month mortgage payment on a 75% LTV (£40k deposit) and 25 years terms.

So it looks like you are the one paying a very low housing cost compared to the average price in the uk

Yeah sure. I bought a 1 bed house in Norwich (sounds weird, I know.. basically a flat with a mezzanine floor) in 2011, when I was 21. I got it for 120k, put down 70k deposit and maxed out the term with the plan to pay 10% over-payments per year and keep the payments low. I did that for a couple of years. Got a really good rate, at the time (1.89%).

Then saw a 2 bed house in the country and I lucked out with price. I had some first time buyers who wanted mine, and I stood my ground on the price, 145k (which was high on the 1 bed). *They actually sold it for a loss when they moved on a few years later, and they spent a lot on doing it up The 2 bed was part owned by the developer, and this meant they had to get an independent valuation done. They wanted 190k, but the independent valuer/appraiser said 180k, and they couldn't budge the price.

So took out a 2nd mortgage, I've been redoing the whole house with real oak floors and staircase, nice tiles and I got rid of the old carpets. Its been completely re done inside. Currently getting the final bits done to rent it out. It should coincide with the end of the mortgage term.

Then I'm hoping to save my pennies and wait for the housing market to collapse, if/when that happens, I hope to pick up a little flat to rent out. I figure by that point I should of got the hang of this landlord thing. But we'll see what happens..

[helloyou]

You mention your monthly spending is £1500 per month, maybe I'm more frugal than I thought but that seems like quite a bit to me. I currently spend £650 a month (all in) and I live a very healthy and fulfilled life.

Do you live in a big city or something? because that seems like a lot. I'm not being critical, I'm just interested.

Yes I live in London. And just renting a room there is usually more than £650/month!!

So for about £1500/month, it's actually quite frugal for the location.

Of course, I can also move out to a cheaper place. But I like the flexibility of choice. My goal is to have enough to live on £2k/month so that I have a decent safety net!

That’s what I thought you were going to say. London prices are crazy. More than £650 just for a room... Whoa!

Just goes to show what a difference 100 miles makes. I have a house in Norwich and the mortgage is £180 a month.

Sounds like a plan, good luck with that.

May I ask you when you bought your house? £180/month is way below today's price in any UK area.

Had a quick check on rightmove for 1 bed flat rental in norwich and it's about £700/month.

And for a 1 bed house sale, even cheap ones are selling around £160k, which end up into £500/month mortgage payment on a 75% LTV (£40k deposit) and 25 years terms.

So it looks like you are the one paying a very low housing cost compared to the average price in the uk

Yeah sure. I bought a 1 bed house in Norwich (sounds weird, I know.. basically a flat with a mezzanine floor) in 2011, when I was 21. I got it for 120k, put down 70k deposit and maxed out the term with the plan to pay 10% over-payments per year and keep the payments low. I did that for a couple of years. Got a really good rate, at the time (1.89%).

Then saw a 2 bed house in the country and I lucked out with price. I had some first time buyers who wanted mine, and I stood my ground on the price, 145k (which was high on the 1 bed). *They actually sold it for a loss when they moved on a few years later, and they spent a lot on doing it up The 2 bed was part owned by the developer, and this meant they had to get an independent valuation done. They wanted 190k, but the independent valuer/appraiser said 180k, and they couldn't budge the price.

So took out a 2nd mortgage, I've been redoing the whole house with real oak floors and staircase, nice tiles and I got rid of the old carpets. Its been completely re done inside. Currently getting the final bits done to rent it out. It should coincide with the end of the mortgage term.

Then I'm hoping to save my pennies and wait for the housing market to collapse, if/when that happens, I hope to pick up a little flat to rent out. I figure by that point I should of got the hang of this landlord thing. But we'll see what happens..

Yeah very good job. You got it at the bottom of the market, and when the central bank put interest rate to 0% to push all asset up. I wish I had bought at that time.

Property price in london doubled in that period of time

[helloyou]

FIREing without a paid off home or one you are paying off is the path much less travelled.

The problem is that you can expect your housing costs to rise with inflation every year, while by owning your home you have fixed that cost and will eventually pay it off with inflated money.

And imo... being retired and having to put up with roommates is rather a oxymoron.

If it were me I would seriously consider buying a home with , say, 60% loan with your cash pile rather than whack it into a pension. Then you have the option to get your own flat mate to subsidise the mortgage cost. Mortgage rates are so low right now that I’m sure you could get the numbers to work out cheaper than your current situation.

It’s also arguably even more tax efficient as you don’t pay any tax on your main residence and income from a roommate is tax free up to £7500pa

By the way, I'm not flatsharing and live in london. I managed to get a very cheap rent for a 1 bed flat... mostly by luck though. So in that sense although I'm renting I'm saving more than being home owner.

I've considered buying, but being in London means the average flat is around £500k. So a 40% deposit is £200k which is enormous. And it doesn't make sense to put that much money on an asset that is already very inflated (properties in london)

Low mortgage rate are a paradise in disguise. It benefited the one who already have asset because it pumped everything up, but the ones without property, buying now just mean even more expensive property and bigger debt.

And while it's true that inflation push price up every year, it's important to buy the decently priced asset, such as stock at the moment instead of a flat in london.

People who bought in London the last few years mostly didn't make any money.  And it may continue for a little while

[vand]

FIREing without a paid off home or one you are paying off is the path much less travelled.

The problem is that you can expect your housing costs to rise with inflation every year, while by owning your home you have fixed that cost and will eventually pay it off with inflated money.

And imo... being retired and having to put up with roommates is rather a oxymoron.

If it were me I would seriously consider buying a home with , say, 60% loan with your cash pile rather than whack it into a pension. Then you have the option to get your own flat mate to subsidise the mortgage cost. Mortgage rates are so low right now that I’m sure you could get the numbers to work out cheaper than your current situation.

It’s also arguably even more tax efficient as you don’t pay any tax on your main residence and income from a roommate is tax free up to £7500pa

By the way, I'm not flatsharing and live in london. I managed to get a very cheap rent for a 1 bed flat... mostly by luck though. So in that sense although I'm renting I'm saving more than being home owner.

I've considered buying, but being in London means the average flat is around £500k. So a 40% deposit is £200k which is enormous. And it doesn't make sense to put that much money on an asset that is already very inflated (properties in london)

Low mortgage rate are a paradise in disguise. It benefited the one who already have asset because it pumped everything up, but the ones without property, buying now just mean even more expensive property and bigger debt.

And while it's true that inflation push price up every year, it's important to buy the decently priced asset, such as stock at the moment instead of a flat in london.

People who bought in London the last few years mostly didn't make any money.  And it may continue for a little while

Sounds like you have a good deal on your rent. But just make sure you are comparing like with like, no point in looking at £500k flats because that is not the standard of housing that you are currently renting.

London prices are bloody expensive and Id probably do the same in your situation.. just have a plan B if and when that situation changes.

[helloyou]

Yes and I appreciate freedom.

I've been looking a while for decent property price in london. Even if I were to just get a 1 bed flat like the one I have, it'd be 300-350k and more.

Just doesn't make sense to use my cash this way, with risk of property price going down, when I can just stick the money into stock and know it'll grow at 5-7% / year over long term.

[vand]

Yes and I appreciate freedom.

I've been looking a while for decent property price in london. Even if I were to just get a 1 bed flat like the one I have, it'd be 300-350k and more.

Just doesn't make sense to use my cash this way, with risk of property price going down, when I can just stick the money into stock and know it'll grow at 5-7% / year over long term.

Yeah but you can leverage. Put down 25% on a 350k flat and borrow 75% at 1.4% fixed for 5 years.

You pay £307pm on mortgage interest on 3/4 of the flat you don't own, as opposed to £650pm on the full amount of the flat you don't own in your current situation.

Although its all rather academic if you don't have a job as you won't get a mortgage without one.

I'm not suggesting that real estate is a a fabulous investment but there are very good reasons for owning your home over the long run instead of being a forever renter. It hedges you against continual depreciation of the currency as you pay off the mortgage over time with increasingly devalued currency, so inflation works to your benefit to erode your mortgage debt.
Stocks are a lousy inflation hedge and tend to get crushed when inflation threatens to run out of control. If you rely on a stock portfolio to pay your rent then you can be in a double whammy of your assets going down and the cost of the roof over your head going up.

[helloyou]

Yeah but you can leverage. Put down 25% on a 350k flat and borrow 75% at 1.4% fixed for 5 years.

You pay £307pm on mortgage interest on 3/4 of the flat you don't own, as opposed to £650pm on the full amount of the flat you don't own in your current situation.

Although its all rather academic if you don't have a job as you won't get a mortgage without one.

I'm not suggesting that real estate is a a fabulous investment but there are very good reasons for owning your home over the long run instead of being a forever renter. It hedges you against continual depreciation of the currency as you pay off the mortgage over time with increasingly devalued currency, so inflation works to your benefit to erode your mortgage debt.
Stocks are a lousy inflation hedge and tend to get crushed when inflation threatens to run out of control. If you rely on a stock portfolio to pay your rent then you can be in a double whammy of your assets going down and the cost of the roof over your head going up.

Believe it or not, I've already done the calculation and tried hard to find a way to leverage mortgage, but it just doesn't worth it.

First of all, you won't find any mortgage at so low interest rate, here's a comparator using your figure:
https://www.moneysupermarket.com/mortgages/rates-table/home-purchase/?propertyValue=350000&mortgageAmount=263000&remainingTerm=25&repaymentMethod=InterestOnly&mortgageTerm=FiveYears&sortState=MonthlyRepaymentAmount&from=Help-me-choose

So on a 25 years mortgage with 5 years fixed rate and 75% LTV (to get the best rate), I can either get:
1. A capital repayment mortgage at 1.99%/year:
- £5234/year in interest + £1549 in fee.
- So a total cost in fee and interest of £27,718 or £5,543/year
- A capital repayment of £8,122/year and a total of £40k over 5 years
- I'd still have to pay council tax (£100/month), service charge (£150/month), potential repair (£100/month) and bills (£100/month), so £450/month more on top of that.

So it would cost me £10,943/year to get a capital repayment mortgage and a bit more than £120k in capital allocated. (due to repayment mortgage)


2. An interest-only mortgage with the same options, the interest is at 4.7%...
So the mortgage fee becomes £11,330/year + £994 in fee, so a total cost of £57,644 over 5 years.... and I still have to add the bills...

In this case, it would cost me £16,928/year which is obviously not an option to take.


3. Rental:
Now, let compare that to my situation, I have my own flat in London, living as a guardian for £300/month all bills included (I have an amazing deal here), so it cost me £3,600/month.... So there is no way the mortgage would be cheaper than what I pay at the moment.

Actually, even if my rental was at £650 or even £800 it would still be lower than having a mortgage, and still not worth it. Rental cost has to go over £1k/month to be worth getting a mortgage


I actually have very little cash and most of it is invested. If I could get 1.5% interest rate for 30 years then it would be a no brainer of course, however in the UK there isn't such product, and there is as well re-mortgage fee which are quite high.

So if inflation were to come at the wrong time, then housing wouldn't be an inflation hedge as remortgage would cost way way more and would be a risk for me to lose everything.

[vand]

Mortgage rates seem to have moved up slightly since the late summer. Nonetheless, MSE mortgage tool currently tells me that the best 5yr fixed @ 75% LTV is 1.62% with Barclays on a repayment basis.

OK, I conceed that if you really are renting a £300k flat for £650pm (a 2.6% yield) then:

a) your landlord is a muggins
b) you're better off staying there as long as he will continue letting to you

I did the same myself for a few years when I was renting a houseshare in a massive Victorian house in Clapham for £250/pm. Landlord couldn't have been making more than about 3% gross yield, and this was a while ago when rates were more like 4-5%.

However if you ever have to pay something more in line with the market (let's say a 4.5% yield in London) then I'd be interested in your figures.

Remember too that after 25yrs your housing bill drops to £0 and you've paid it all off. That doesn't happen with renting, obviously.

[Kwill]

The rental situation sounds great for now, but I wouldn't base long-term retirement spending assumptions on the rent staying the same if it's that far off the market price in your area. Any extra savings from rent can help to build up your cash and investments for later, which is good. Eventually your landlord may decide to raise the rent, or maybe your landlord's heirs will want to sell or raise the rent when the landlord passes away.

[sea_saw]

It's a guardianship scheme right? So a commercial property or something like that which can't be let out on a normal residential lease? Are you there on your own or with other guardians? Quite a few of my friends have done something similar but yeah, it just takes one awful fellow guardian to make a situation a nightmare, and even when you get a really cushy place you can't plan on being there more than a couple of years, they can move you on or move other people in and out freely.

In that situation I'd definitely want to have a plan for my next move up my sleeve for when situations eventually change. Luckily it sounds like you've got the financial means for lots of different options.

[helloyou]

Yes it's indeed a guardianship place. My last guardianship place lasted 5 years, and during the first year I was getting ready to move at anytime but was getting comfortable after a couple of years... I moved by myself after 5 years to this better one.

The current one is close to zone 1, I have my own 35 sqm2 flat, own bathroom and kitchen sink (separate). Then there is a large kitchen shared only for cooking (I only use the oven and fridge). It's been great so far and I've been there 1 year already. The only concern is that it's next the main road so it's a bit noisy...


I do have the fund to buy, and I can also get a mortgage as a self-employed (Mortgage look at total income on the yearly basis instead of employment contract), so getting one wouldn't be a problem.

I just don't feel it's worth it with the cash that has to be locked into the mortgage, there is an opportunity cost in the £120-150k mark to have the mortgage deposit and ownership cost for a £350k flat, which assuming a slow 4% gain is about £5-6k/year.

Of course, buying property can have capital appreciation as well, and it would have made sense to buy in 2012. But in 8 years property price in London doubled, so now, it's a bit overpriced and unless I can lock a 20+ year fixed rate below 2% it's a risk I'm not willing to take.


I'm envious of some of my European friends who can get a 25 years mortgage at 1.5% fixed... why doesn't the BoE allow that? I'd have bought the most expensive property I could lol

[vand]

I personally wouldn’t expect any capital appreciation in London and similarly overvalued places that spring to mind like St Albans and Cambridge. The yields just don’t justify it.

However, I think it’s going to take a couple of years before the life returns to London, and if I were in helloyou’s shoes I would seriously consider a change of scenery, upping sticks and buying a nice house somewhere like Newcastle where £130k can get you a perfectly nice 2 or 3 bed home and yields are more like 7% or even higher, live there for a couple of years and maybe get a flat mate to virtually pay for the monthly mortgage costs. Turn it into a full rental when you want to return to London and you may get enough rental income to pay a good chunk of your rent down South. Basically, own up North, rent down South.

[helloyou]

Indeed. Its all about getting the right deal, for the best bang for the buck!

At the moment in london its not worth it! And i still live there... but who knows what will present 2021 and later!

[vand]

I think of my proposal to "buy up North, rent down South" as a form of geographical arbitrage.

[Manchester]

I know it's not scientific.  But I bought my house in Feb 2016 for £200k with a 10% deposit.  My mortgage now is around the same as my rent beforehand.  My property is now valued at over £300k.  and I have over £120k of equity.  For what was effectively a £20k investment that's one hell of a return in less than 5 years. 

Renting has benefits, but if you have cash for a deposit saved and the mortgage isn't much higher than rent, you may as well use that money to build your portfolio rather than your landlords.

[helloyou]

I know it's not scientific.  But I bought my house in Feb 2016 for £200k with a 10% deposit.  My mortgage now is around the same as my rent beforehand.  My property is now valued at over £300k.  and I have over £120k of equity.  For what was effectively a £20k investment that's one hell of a return in less than 5 years. 

Renting has benefits, but if you have cash for a deposit saved and the mortgage isn't much higher than rent, you may as well use that money to build your portfolio rather than your landlords.

Yes like any asset purchase if you have tailwind then you can make load of money.

I also know people who bought nice london flat in london few years ago and are losing money selling their now.

It can go both way. And a mortgage is nothing else than leveraged purchase at low-interest rate.

Gains and losses are multiplied.

Ps: i use my cash to buy stock, so it remains invested and growing with the market.