Buying house outright vs small mortgage + investment

[JulieGoods]

If you had enough to pay for a property outright - would you? Even if it meant your savings/investments would take a huge hit?

But then save the equivalent of the mortgage repayments each month.

Or are we better to use currently property sale play maybe a small fraction of the savings and then get a mortgage for the difference? (Very affordable repayments)

Of course we'll be asking our IFA but my DH thinks he'll want to protect the investments and get commission on a new mortgage as that will benefit the IFA more.

So wondered if MN would have some opinions too. As we aren't particularly savvy.

My dad is adamant I should get a mortgage for the gearing - but interested to hear other people's views

@DoYouRememberTheInnMiranda

My dad is adamant I should get a mortgage for the gearing - but interested to hear other people's views

Sorry, @DoYouRememberTheInnMiranda , what does he mean,"for the gearing"?

Well, I ended up buying outright because I was really uncomfortable trying to get a mortgage on the basis nobody would lend to me. Had I been in a position to take out a loan, I think it would have been a good idea at the time as interest rates were really low on loans, and even though they were also low on investments, a decent investment would have paid more than the loan cost, IYSWIM. You won't get a good return on a regular high street bank/building society saver account, but a decent fixed term investment with a good risk spread would probably be ok.
You will be paying someone somewhere along the line so go with the IFA and get him to declare his earnings & commission

My sister and her husband. Took out a ten year mortgage and spent some money on the house.

I think what he means is that because you own all the increase in the property value however much of the house you own, then you make a much bigger profit percentage wise if you borrow money and buy a more expensive house, than if you buy a cheaper house outright.

So if you spend 250k on buying a house outright and it goes up 10%, you've make 25k, but if you borrow 250k and it goes up 10%, you've made 50k (less borrowing fees).

But I may have got that a bit confused, I'm not totally convinced I followed his argument.

Sorry, my second paragraph meant if you buy a 500k house (with a 250k mortgage), then a 10% increase means you'll have made 50k less fees

It depends on how mortgage rates compare with your savings/investments. For example, my mortgage is less than 1.5% currently, and my ISA is up over 20% since 2020. So for me, to withdraw savings and pay the mortgage off would be madness right now.

The leverage point discussed by a PP is also worth considering.

Of course we'll be asking our IFA but my DH thinks he'll want to protect the investments and get commission on a new mortgage as that will benefit the IFA more.

And your DH would be absolutely correct.

I'd still ask the IFA but I'd expect them to provide the expected answer.

If comes down to your attitude to risk.

We did as advised and got a small mortgage and invested but took an amount from investments to pay the mortgage.
However this decision was made mostly because we knew we'd only be doing this short term, we planned for 5 years but it only ended up being for just shy of two years

OP, first of all you should leave enough in your cash and saving accounts to face any potential emergency: broken boiler, car break down / replacement, redundancy, etc. There's no point in being mortgage free if you then don't have a rainy day fund.

@DoYouRememberTheInnMiranda . @BlissfullyIgnorant , gearing means leverage, ie debt. Debt increases your gains but also your losses.

Say you buy something (eg a house) for 100, then you sell it for 110. You have made a 10% gain.

Now imagine borrowing half and paying 2% interest: you invest 25, pay 1.5 of interest (=75 x 2%), sell it for 110, you have made a profit of 10 - 1.5 = 8.5, but you have made it over an investment of 25 , so your return is not 10% but 34% (=8.5 / 25) .

If instead you sell it for 90, your loss is not 10% but 46% (=-11.5 / 25)

So, if you have enough cash in the bank, should you buy with a mortgage or without? This is basically the same question as: should you repay your mortgage early if you can?

Well, it all comes down to what else you can do with that money.
Quite obviously, if you are paying interest at 3% on your debts, like a mortgage, it makes sense to invest any spare cash only if that investment yields more than 3%; if it doesn't, you're better off repaying your debts first.

Investments with a guaranteed return, like a saving account, will almost never yield more than the cost of a mortgage.
Riskier investments, like investing in the stock market, may, but there is no guarantee. In general, the longer your investment horizon, the greater the chances that happens.

Thanks everyone.

@ParentOfOne thanks for the in depth summary.

We keep our premium bonds as our emergency/rainy day money. And DCs are where we keep our holiday savings (when we can finally get to Florida). Kid ourselves while they sit they'll also win us the million (nothing this month across all 4 of us!!!)

I think I'll maybe go for what IFA suggests but I'll be able to sound a lot more in the know thanks to all of your advice.