Calculations and calibrations

Last weekend shortly after making my blog post, buoyed by the confidence that I am approaching debt freedom, I spent several hours calculating whether it would be better for me to save money or to pay off my mortgage.

Firstly, there are several viewpoints on whether mortgage debt counts as ‘debt’. Of course it is different to a credit card or a car loan as you have purchased an asset that will appreciate in value and give you ‘equity’, and you pay off a chunk each month which also contributes. However, as that equity is tied up in the home, and when it comes to selling that house, all other houses will have increased a similar amount, is it really an asset?  It’s not like you can shave off a piece of the wall and spend that money right? And it doesn’t generate you an income, so many argue it is a liability.

I am on the side of thinking that a mortgage is a debt, but as you must live somewhere, you might as well be paying your own mortgage, rather than a landlord’s. Eventually, you will own the property.

I have been lucky as I bought my flat for £237,500 in 2012, and now would be able to achieve £450,000 for today.  I would not have achieved this gain had I rented for the same period.

Pay off mortgage or invest?

I couldn’t find a comparison online to see whether investing spare money in an ETF or making increased payments on the mortgage was better. I decided to have a go.

I made a couple of assumptions. Firstly, I will not start investing until June 2019, as, until that point, I will be paying off my actual debts. Secondly, I will be able to find £2000 per month to do this. Thirdly, that I assumed an annual rate of return on ETF investing of 10%. I based this on reading around blogs to see what other people thought and based on past performance of the stock market.

The assumptions I made about my mortgage were that my interest rate would remain the same as it is now at 1.69% (unlikely I know, but it is the current situation and I am unable to predict the future).

The method

I built the spreadsheet with three different options:

  1. Put £2000 into my mortgage every month, on top of my normal payment and save nothing;
  2. Put £1000 into my mortgage, and £1000 into an ETF; and
  3. Put £2000 into an ETF.

I calculated the monthly interest in each case and then added up so I would see the effects of compound interest accurately.

I don’t claim that this is a pinpoint accurate way to calculate it, but it gives me a picture of where I might end up in the future and the best way to start my FIRE journey.

The results

I was very surprised by the results of this exercise as the overwhelming long term best way to go was to put the maximum amount of money into an ETF. I believe this is for several reasons; firstly, the rate of return assumed of 10% is much higher than on my mortgage. For each £2000 I would make £200 annually compared to the £34 cost to borrow at 1.69% rate I pay. That’s a £166 annual difference for each payment without taking into account compound interest.

When it is shown like this, it is an absolute no brainer, but I still find it shocking. I had always believed that paying down a mortgage was the best way to go. In some ways, if you are in your forever home then it may be a good idea, but really I can’t see any way it makes sense to do it.

Should interest rates increase and the rates of return for the ETFs drop then it may make sense to switch over to repaying the mortgage faster.

The other exciting thing I realised was I will have £1,000,000 in savings by age 50. After that, thanks to compound interest, it really takes off.

The graph below is my total net-worth which includes house value, pension, ETF, and mortgage liability.

Screenshot 2019-03-31 at 14.47.59

 

Another week has passed

I’ve had a good week. My work treated me to tickets to England v Scotland at Twickenham. It was an astonishing game which will stick with me for the rest of my life. I really do wish my Dad had a chance to see it. It would have been an expensive day save that my company will pay for it. Can’t get better than that?!

As for my FIRE quest, I’m feeling much better. My cash flow has improved, people have paid their bills to me and I have the cash to get me to the end of the month.

One crazy development is that I’m now seriously considering selling my car. I absolutely love my car. It’s a BMW M135i which had a 3.0l twin turbo straight six engine. It is terrifyingly quick and I enjoy burning away at traffic lights and surprising the hell out of Porsche Boxter drivers and the like. I bought the car the week my father passed away almost as a distraction from the extreme grief I was feeling. I was thinking about getting a car but never could bring myself to do it. I think Dad dying made me think ‘fuck it life’s too short’.  I got it on a PCP finance deal and have paid £299 per month since then. That has been ok generally. However, I realised this week that the total cost of the car is around £470 a month once insurance, tax, servicing and fuel are taken into account.

That got me thinking, even if I got an Uber twice or three times a week, there would be no way I would spend that much. This car has always been a luxury, and one I very much enjoy, but looking at the hard facts of the money it is costing me, it is very hard to justify keeping it under the new FIRE routine.

One of the first FIRE blogs I read talked about a chap who had to talk his wife out of keeping their BMW. He explained that this was very challenging to do as she did not wish to give it up. I now find myself in the same position. It’s hard and I don’t want to get rid of it, but I know doing so will accelerate my goals. I have driven that car across Europe, to Scotland and Deven. It’s part of me. It’s freedom. I’m giving up more than just the monthly payment.

So I could sell it to webuyanycar.com or similar. I don’t know what to do at this point. I believe the outstanding loan is about £12500, and the value they would give is around the same. I could also leave it until the finance runs out in a year and hand it back. However, that may also have costs that I haven’t anticipated such as servicing etc.

Ultimately, it’s just a car. I can always get a different car later. Or I could just use my bike. Anyway, I’d be interested to hear what people think about this.

January/February 2019 – financial situation

I want to track my progress publically for two reasons; one, tracking will allow me to see the progress I have made, and two, it will motivate me and hold me to account knowing I have told people what I am planning to do.  I know it’s February, but I wanted to start at the beginning of the year.

Assets:

Flat: £450,000

Pension 1: £94,000

Pension 2: £4,382

Investment: £1,800

ETF: £961.00

Savings: £8000

Debts:

Mortage: £259,000

Professional studies loan: £7000

Bank loan: £8000

Car loan: £12000

As you may see, I am swimming in debt. It’s not big and it’s not clever.

So what did I do about this precarious situation?

I contacted my bank for settlement figures for both the loans. I used my savings to pay off the professional studies loan. I then used the remaining £1000 in my savings, money from my current account, and £6000 on an interest-free deal on my credit card, to pay the bank loan off.

As of 16 Feb 2019 my situation is:

Assets:

Flat: £450,000

Pension 1: £94,000

Pension 2: £4,382

Investment: £1,800

ETF: £961.00

Savings: £70

Debts:

Mortage: £259,000

Credit card: £6000

Car loan: £12000