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Mortgage versus ETFs?

  • 06-10-2018 9:54pm
    #1
    Registered Users Posts: 217 ✭✭ DM1983


    Hi All,

    Any thoughts on the following?

    I don't have the knowledge/experience to try to pick individual shares that I believe will give me a good ROI. For this reason, given my reading on here and elsewhere, I believe that ETFs are my best bet in terms of stock market investments.

    Against this, I have a considerable mortgage that I am paying an interest rate of 3.1% on. Am I right in thinking that any money I overpay on this, I can consider as "earning" a yield of 3.1% on after tax? If this is true, is paying down my mortgage a better option than investing in ETFs as I don't think I can expect to earn double that (taking tax into account) for the next few years?

    Am I missing something?


Comments

  • Registered Users Posts: 5,757 ✭✭✭ jive


    Your assumption is correct. I'd overpay (basically a guaranteed return of 3.1%) vs. ETF investing. With ETFs you will need to pay tax on the gains + have the deemed disposal headache after 8 years should you hold for that long.

    3.1% mortgage is risk free, ETFs are not and you can't offset the losses.


  • Registered Users Posts: 685 ✭✭✭ badboyblast


    Money makes money, I can see the argument for paying off a mortgage early but putting money into an ETF gives you a risk but also
    gives you compounding interest year after year when the fund makes a gain, I don`t see how both can be compared , why not invest in an ETF and in 5 years time take the gain and pay the lump sum off your mortgage and retain the initial investment.


  • Registered Users Posts: 5,757 ✭✭✭ jive


    Money makes money, I can see the argument for paying off a mortgage early but putting money into an ETF gives you a risk but also
    gives you compounding interest year after year when the fund makes a gain, I don`t see how both can be compared , why not invest in an ETF and in 5 years time take the gain and pay the lump sum off your mortgage and retain the initial investment.

    You're assuming there will be a gain, it may be a loss. Even if it makes a gain you'll be paying 41% exit tax.

    Paying mortgage effectively guarantees a 3.1%.

    As an Irish investor you would be doing well to realise an actual 3.1% gain after you've given your share to Revenue.

    80% of my net worth is invested in ETFs but if I had a mortgage I would 100% overpay on the 3.1% than invest in an ETF.


  • Registered Users Posts: 53 ✭✭✭ dubliner999


    jive wrote: »
    You're assuming there will be a gain, it may be a loss. Even if it makes a gain you'll be paying 41% exit tax.

    Paying mortgage effectively guarantees a 3.1%.

    As an Irish investor you would be doing well to realise an actual 3.1% gain after you've given your share to Revenue.

    80% of my net worth is invested in ETFs but if I had a mortgage I would 100% overpay on the 3.1% than invest in an ETF.

    41%?


  • Registered Users Posts: 5,757 ✭✭✭ jive


    41%?

    CGT rate for EU domiciled ETFs. 41% owed to revenue on disposal or after 8 years of holding (deemed disposal even if you don’t sell) and you can’t offset losses from other EU domiciled ETFs.

    e.g.
    Invest in ETF1 and make €100
    Invest in ETF2 and lose €100

    Net gain for you = €0
    Tax owed = €41

    (Ignoring the annual CGT allowance of €1270 or whatever the figure is)


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  • Registered Users Posts: 1,649 ✭✭✭ nompere


    jive wrote: »
    CGT rate for EU domiciled ETFs. 41% owed to revenue on disposal or after 8 years of holding (deemed disposal even if you don’t sell) and you can’t offset losses from other EU domiciled ETFs.

    e.g.
    Invest in ETF1 and make €100
    Invest in ETF2 and lose €100

    Net gain for you = €0
    Tax owed = €41

    (Ignoring the annual CGT allowance of €1270 or whatever the figure is)

    There's no CGT allowance for these transactions - it's an income tax charge.


  • Registered Users Posts: 543 ✭✭✭ jonnybravo


    DM1983 wrote: »
    Hi All,

    Any thoughts on the following?

    I don't have the knowledge/experience to try to pick individual shares that I believe will give me a good ROI. For this reason, given my reading on here and elsewhere, I believe that ETFs are my best bet in terms of stock market investments.

    Against this, I have a considerable mortgage that I am paying an interest rate of 3.1% on. Am I right in thinking that any money I overpay on this, I can consider as "earning" a yield of 3.1% on after tax? If this is true, is paying down my mortgage a better option than investing in ETFs as I don't think I can expect to earn double that (taking tax into account) for the next few years?

    Am I missing something?


    Depending on age and income as well a better way to invest long term is through a pension (especially if you're company contribute too). Get tax relief on the way in and can draw down a large lump sum tax free on exiting.


  • Registered Users Posts: 3,127 ✭✭✭ cruizer101


    Another aspect that might influence you is where you are in your mortgage repayment.
    3.1% is a pretty good rate but there are better out there, can you change to get a better rate.
    Are you near a change in LTV band (typically 50% and 80% are thresholds), could you with some overpayment get yourself into the next band down which could help give a better rate.

    I've only just taken a mortgage and plan to overpay, partially because I see it as a good investment but there is also a certain comfort in knowing I will be reducing the term, its not necessarily worth anything but does influence my decision.

    Would echo what jonnybravo said, if employer will contribute towards pension that is the best option by far.


  • Registered Users Posts: 5,440 ✭✭✭ daheff


    just remember that funds paid back on a loan may not be re-advanced to you if you needed them in an emergency.


    But if a time happened where you needed the cash in an emergency your ETF may be at a loss and you would have reduced cash available.


    Looking at your situation,if it were me, I would look to repay part of the loan (even to refinance it if possible -you might get a better longer term fixed rate).

    Any reduction in monthly repayments I would save and reinvest into ETF are regular intervals to try to build that investment OR make further principal repayments.


    I didnt look at any other options other than Mortgage vs ETFs as thats what you asked about.


  • Registered Users Posts: 217 ✭✭ DM1983


    Hi all, thanks a million for comments. Bit more info: Pension contributions are maxed out. I'm 35. Relatively high appetite for risk. The main question was more about timing. Record high stock valuations everywhere at the moment. Great for those that have made huge gains since 2010 but maybe not a great time to be starting out investing in ETFs?

    Very happy to hear about any other good (better!) options. All opinions welcome!


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  • Registered Users Posts: 217 ✭✭ DM1983


    Sorry, also on the mortgage, yes I'll switch again soon but won't do hugely better on interest rate.


  • Registered Users Posts: 10 ✭✭✭ will92ie


    jive wrote: »
    CGT rate for EU domiciled ETFs. 41% owed to revenue on disposal or after 8 years of holding (deemed disposal even if you don’t sell) and you can’t offset losses from other EU domiciled ETFs.

    e.g.
    Invest in ETF1 and make €100
    Invest in ETF2 and lose €100

    Net gain for you = €0
    Tax owed = €41

    (Ignoring the annual CGT allowance of €1270 or whatever the figure is)

    Wait....there's no offset of gains and losses on securities in Ireland?!


  • Registered Users Posts: 1,649 ✭✭✭ nompere


    That's right, with offshore fund investments, you pay income tax on realised gains, and any losses may not be set against any gains.

    Iniquitous, isn't it?


  • Registered Users Posts: 46 EskimoErased


    nompere wrote: »
    That's right, with offshore fund investments, you pay income tax on realised gains, and any losses may not be set against any gains.

    Iniquitous, isn't it?

    So is it possible to invest in any "on-shore" ETFs that would be handled under CGT rather than income tax?


  • Registered Users Posts: 5,757 ✭✭✭ jive


    So is it possible to invest in any "on-shore" ETFs that would be handled under CGT rather than income tax?

    No, it was until Jan 2018 and the new regs came in. You still can via some US brokers, not many, but will be hammered with currency conversions and transfer fees to the point where it makes no sense to go this route.


  • Registered Users Posts: 10 ✭✭✭ will92ie


    nompere wrote: »
    That's right, with offshore fund investments, you pay income tax on realised gains, and any losses may not be set against any gains.

    Iniquitous, isn't it?

    That's mad. And is there also a 1% stamp duty on the buyer or seller? Not sure which.
    You'd swear they're trying to discourage investing in stock markets.


  • Registered Users Posts: 3,612 ✭✭✭ Dardania


    will92ie wrote: »
    nompere wrote: »
    That's right, with offshore fund investments, you pay income tax on realised gains, and any losses may not be set against any gains.

    Iniquitous, isn't it?

    That's mad. And is there also a 1% stamp duty on the buyer or seller? Not sure which.
    You'd swear they're trying to discourage investing in stock markets.
    Yup. Buying, selling and renting houses to & from each other is all that Irish people as a whole understand.
    We are such a small country with a high quality of life - we need to tap into somewhere external at some point...


  • Registered Users Posts: 217 ✭✭ DM1983


    So I had planned to split funds between etfs and mortgage lump payment.

    Just as well my funds didn't clear into Degiro in time to buy before the correction in US! Dodged the current mini dip.

    So any advice? Go in now or is there more of a slide to come over the next few days?


  • Registered Users Posts: 5,757 ✭✭✭ jive


    DM1983 wrote: »
    So any advice? Go in now or is there more of a slide to come over the next few days?

    Nobody can answer this, the dip is insignificant anyway. If you go in now on your mortgage I can guarantee you a 3.5% return ;)


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