A house is a rent substitute. With some massive tax breaks:All makes 100% sense! I'm indeed hesitant about leveraging up for buying more equity. My understanding that it means going beyond 100% equity portfolio in terms of risk. In particular, taking a loan and holding bonds at the same time does not make sense. The strategy also relies on timing both the interest rates and the stock market. Definitely don't want to use leverage for pension contributions.
I can think of one more scenario there taking a loan "feels right": imagine you are deciding whether to buy a house for cash or continue renting and invest the whole sum instead. You can find a middleground between these options: buy a house and then take a loan of the amount you are comfortable with. This way you have an own house + more money in the stock market in the cost of monthly payments which are less than rent you paid before. So it should not feel like much of a risk. But all your points still stand.
- the UK has very low property taxes by the standards of developed countries. North America uses a percentage of current market value and in Texas that can be 1-2% (it totally depends on which state or province you are in, I believe). So the (fairly ordinary) £1m terraced house in London which pays £2500 pa of Council Tax? In Texas that could be £20k pa
(We do however have quite high Stamp Duty)
- your principle residence is capital gains tax exempt, and you can pass it on to a spouse without paying estate tax. You can shelter up to £1m from Estate tax (I am vague as to the details)
You have to see owning your own home as a rent substitute. Consumption in other words. But it allows you much more control over the cost of housing/ rent. The main problem is because of our planning system, one of the most rigid in the world, there's an enforced housing shortage-- it takes so long to develop land & housing.* That makes our homes more valuable than they should be, and there's a temptation to overinvest - own too much of a house. We all know people who have gotten rich that way.
The mortgage is an inflation hedge (if its interest rate does not track inflation).
What is true about this investing strategy is that you cannot be called unless you lose your job & default on payments. Whereas with a margin loan to purchase stocks if the value of the portfolio falls, the broker can call the margin loan, and force sales of stocks.
Unfortunately in the UK you cannot deduct interest on money borrowed against a stock portfolio, from your taxable income.
There's very few long term financing options, and a mortgage is top of the list.
* you can see this in: declining home ownership rates (age adjusted) for younger generations; long term growth in housing prices faster than incomes; UK housebuilders build around 150k-200k houses pa, v over 300k pa in the late 1960s for a 1/3rd smaller population, but we have a relatively high number of people per household; new homes are 40% smaller than homes built 50 years ago.
Statistics: Posted by Valuethinker — Mon Mar 04, 2024 3:12 am — Replies 31 — Views 2750