This is a quick post about whether paying down debt is the best way to preserve capital in these stormy times.
This Corona Virus has been making me wonder about our long term Finances – at a Global, National and Family level.
One thing that is sticking in my mind is the fact that the government has been committing to spend a lot of money (paying millions of people’s wages) to combat the virus.
I’m not saying that I’m against that – I’m not in a position to say if it’s right or wrong to bail out everyone but I do find that some of the beggars who are coming cap in hand are those that have done their best to avoid paying back/in over the years.
What I’m thinking is that if the government has no particularly clear exit strategy for our health; there is similarly no exit strategy for our wealth either.
Who ultimately ends up paying for the debts incurred now? The obvious answer is taxpayers – but given that we can barely balance our books pre-CV19, what hope have we after?
So it is inevitable that tax rises or new taxes will appear in the future. If councils are talking of 20% cuts to their services than a 25% rise in council tax could be one response?
If workers are already feeling vulnerable then income tax stays at 20% but dividend tax could jump to 20% from 7.5% or even higher?
Or a wealth tax, or 25% VAT, or removal of the personal allowance or CGT or anything else you could think of.
Tax Rises are Coming?
If tax rises are coming, then what can I do now to prepare for the eventual fall out.
Also, what if (since I am not a star stock picker like Woodford my investments all have negative growth over the next few years – as the world slips into recession and depression – my money is just wasting away. Maybe it would be better to put it into something which is low risk and “safe”.
So I’ve been flirting with the idea of overpaying the mortgage. It’s currently at around 1.75%, fixed for another 40 months and is around £150,000. I could pay all/most it off in the next year or so from free cash from work, investments (VCTs). (I think that there is a 10% overpayment limit per annum).
A fully paid off mortgage would be a great relief. Although in paying off the mortgage our FIRE Assets would be diminished because I’d be diverting pre-pension money into something which only reduces my mortgage interest cost and I can’t easily access (re-mortgaging after being mortgage free might be a pain!).
Maybe I’m flip flopping a bit. I’ve previously thought that an Interest Only mortgage is the way to go and I’ve applied for a mortgage holiday as I prefer the free cash over reducing the mortgage balance.
My instincts say that if you have to chose between cash (or fixed interest) or equity (shares) after a bust then the best thing to do now is invest in shares. But it’s the question of tax that is making me think and I can’t see any feasible way that the government can tax housing equity – which is what paying off your mortgage gives you.
I’ll think about what’s the best way to play it. I reckon that filling ISAs, LISA, paying into the pension should be the fiscal priorities right now but there’s always a question of what should I do with money above that? There’s the spectre of tax and losses alongside the promise of growth and riches. The mortgage is incredibly cheap (a cup of coffee shop coffee a day costs about the same as the mortgage interest on £50,000 – if only the cafés were open).
Bigger picture is that we are in a fortunate position compared to many.
The risk of tax rises is in my head (for now) and maybe the best option is to fill up the ISAs (including JISAs) this year and then take another think about things.
Finally, I think that in this crisis there are people who can’t afford their car payments, mortgage/rent or even to feed themselves – millions of people! Financial Independence has given me the resilience to know that now that the shit has hit the fan that I’m covered! No need to indulging the “poverty mindset” that I have – we’ll be fine one way or the other.