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Dr James:
What is up team? Welcome back to the Dental Invest podcast with returning face, john Doyle. I almost said Dr John Doyle, because you had a few dentists on here recently. We wouldn’t want to make you out to be anybody. You’re not. You are, of course, an IFA, and incredibly good one of that, john. How are you, my friend?
Jon:
I’m very good. If I have a doctorate, mate, it’s because I bought it off the internet somewhere no. My wife is doing a PhD, so maybe a doctor in the house at some point, but not a medical one, and you don’t want me anywhere in the UT.
Dr James:
Did I ever tell you where I got my doctorate? No, no, no, joking, I’m joking. Just to be clear, for the record, that is a joke Anyway.
Jon:
John, how have you been? I’m a doctor for Simpsons.
Dr James:
How have you been my friend?
Jon:
What is fresh I’m enjoying the summer. I’m enjoying the summer. What little we get of it here and there. But yeah, no, we had a really nice holiday down in Cornwall recently, just when I saw the sites. My wife’s from Cornwall, so we took the kids around. Like you know, did they walk around where she grew up in the late 90s.
Dr James:
Lands End and all of that, or did you make it that far?
Jon:
Didn’t go as far as Lands End. We did the Eden Project, we did North Coast, south Coast. There’s a really sweet spot called Watergate Bay. They’ve got beautiful hotel, beautiful restaurants, great seafood. My oldest kids obsessed with mussels. It was like that was. The one thing she wanted was to eat mussels, overlooking the sea. So we did that, and Watergate Bay took the dog. It was brilliant.
Dr James:
Nice one. Shout out to Watergate Bay anybody who’s visiting Cornwall. John, we’re here to talk today about something very contemporaneous and pertinent, given how juicy interest rates are right now, and that is the question of how should we prioritize paying off our mortgage versus investing right? And this is all on everybody’s mind, everybody because it gets tempting when you look at your eyes and it’s doing really badly, and it has been for a while, and your mortgage is getting higher and higher and higher. It’s tempting, it’s juicy, to just go ahead and pay that thing off right.
Jon:
Yeah, yeah, it’s a really interesting one. We’re having a number of conversations with clients. In fact, even just Friday I had a very long conversation with a young client who’s expecting his first kid about this very question paying off the mortgage, putting down the ICES, moving house, all of the things all at once. Yeah, it’s a really interesting one, and especially now a lot of people come in towards the end of fixed rate deals in the next 18 months or so. Interest rates significantly are, and we’ve got what I like to call sideways markets. They’re a bit flat really. Yeah, gives and takes, so it’s a really present question, gotcha.
Dr James:
Well, it’s pertinent, it’s going to be on people’s minds and you know what? You know that conversation that you had on Friday, obviously with us respecting every single rule that there is whenever it comes to how can we say you know privacy? How did that conversation go? Because that would allow the listeners to put themselves into the shoes of somebody who’s thinking along these lines and they might even resonate with this. Might even resonate with them.
Jon:
Yeah, yeah. Well, first I’ll put out there they’re not a dentist, so no one listened to this is likely to know each person, so there’s no point making any guesses either. They’re in another industry altogether, but they are higher in that sort of painful tax bracket 45%. So you have all of these questions Of well, to pay my mortgage, I have to earn X and I’m going to be paying, you know, 6% in the next three, four months on this mortgage. What do I do about it? And then they’ve also, just a few weeks ago, had a baby. So you’re right at this moment that we’re thinking of moving house, thinking of this, about what do we do, and we’ve got two sides of the brain that we approach this conversation with. We’ve got the purely numbers driven side of the brain, which is, you know, I think it’s the right side, but I always forget Right, this sort of analytical one of the numbers.
Dr James:
I think it’s the left, because the way I remember this is I’m right-handed, and then I always tend to think that the right side of my brain is logical because I’m right-handed, but then I actually find out that the left side are you with me, and that’s how I always remember that I’m pretty sure it’s left. I could be wrong, but anyway.
Jon:
I think now you say it, I think you’re right, I think you are correct. So it’s kind of analytical side of our brain anyway, just driven by numbers. You know, is it going to be numerically better? But when it comes to money, none of us are purely analytical people. We’re emotional beings and money is very, very tied to behavior and to emotions and to how we react to things. And so we’ve got this whole other side of us going off at the moment with what am I going to do? How is it going to affect my lifestyle? And so I like to approach these conversations from both angles. You know, what is the, the financial numbers driven thing that we need to look at. Let’s look at the numbers of this and then, where am I in my life, what kind of goals have I got coming up, what kind of objectives, what’s going on for me? And is there an emotional reason to make it to override the numbers decision?
Dr James:
Love that right. And then, of course, when we’re making these decisions, I find as well. Human beings were such creatures of the moment. Yeah, sometimes you make this decision from our perspective, right here, right now, without understanding the long term implications, which is why this podcast is going to be really valuable, because at least when you understand the long term implications, then you’re making an empowered decision. You might make the same decision, but at least you know it’s an empowered decision.
Jon:
Yeah, yeah, completely, completely, and so you know to speak into that. In particular, if we’re talking about long term decisions, the decision shouldn’t be I’m not getting a return or I haven’t had a return on my ISO this last 12 months. Therefore I should. When we drive these numbers to the clients, it’s what the historical long term average of the stock market portfolio you’re in is X and long term interest rates are looking like they’ll be Y there. The numbers will run this off. Ok, and we ran these same numbers three years ago, two years ago, when portfolios were far exceeding average returns and I was the boring guy, was going it’s not going to go on like this, but we’ll enjoy it. We won’t always get 12 percent a year or 15 percent or whatever we had in those years. We’ll have these moments, which is what averages always do. They will be to me in reference to average eventually. So, yeah, we can go into some of the numbers side if you like.
Dr James:
You know what it’s going to be like this, isn’t it? It’s going to be like a little bit of a seesaw, this decision, isn’t it really? And I suppose what we can do to put dentists in the best position to be able to decide what they might do next is if we present both sides and then maybe offer a little bit about what we personally think as well, and then I feel that the numbers will come into play through that framework too, won’t they? Because when we come to consider both sides, we’ll say this this is what we can expect long term extra turns versus X interest rate, or however that looks. We can have some fun.
Jon:
Yeah, absolutely so. The decision that you make, or the thought process, will vary depending on how you’re structured as an individual Right because, the decision for a basic rate taxpayer might be very different from someone who’s an additional rate taxpayer.
Dr James:
Well, this is what I was going to say, because the example that we had at the very start with that person, presumably they were employed and hence they had no choice about being in the higher rate tax, should they earn that level of wealth, whereas dentists, we’ve got a little bit of playroom, don’t we? Because we’ve got our limited companies, or at least some of us do. But anyway, not to interrupt.
Jon:
And we can put certain expenses through to manage our tax thresholds. If you want to go out and buy new equipment, take a course. Those sort of things allow for expenses. Speak to your accountants about those sort of things. It can really come into play. But when you’re thinking like I’ve got this ISA that makes, let’s say, historical average return of 7%, let’s just use that number. I know some people all throw in the S&P doing 10, but if you’re globally diversified you may not want to run off 10 as an average particular 7% is conservative right. Yeah. So if we run off 7%, let’s say you’ve got 100,000 in your ISA. On average, over time you’re going to be making 7,000 pounds a year, whether you’re a higher rate taxpayer, whether you’re a basic rate taxpayer, whether you’re an additional rate taxpayer of 45% or you’re in that horrible trap where you lose your personal allowance. We’ll call that a 60% taxpayer because that’s the sort of threshold area that you’re in. What you get in your ISA will be the same, but to pay a mortgage you’re going to have to earn different amounts to pay a mortgage. Let’s say your mortgage payment is a. Let’s say I’ll try and think of some easy numbers here. Let’s say you’re I’ll just put something in the spreadsheet, but I can give you some numbers. Let’s say your mortgage is a thousand pounds a month, yeah, if you’re a basic rate touch pair, so that’s £12,000 a year. If you’re a basic rate touch pair, you have to earn £15,000 to pay your mortgage. Yes, yes, if you’re a higher rate touch pair, it’s £20,000. If you’re an additional rate touch pair, so over £125,000 a dish, it’s £21,818. And if you’re in that tax trap, it’s actually about £30,000 worth of income needed. I mean the numbers. You’d have to go precise, but this is ballpark areas. So as the tax threshold, your marginal break, goes up, the amount you have to earn to pay £1,000 a month changes dramatically. And that really will play into this decision that you make. Because we can make £7,000 average in our eyes versus how much am I going to save by paying this money off my mortgage and how much is it going to effectively return to the net of tax? Does that make sense?
Dr James:
It does, it does, yeah, it does totally.
Jon:
Yeah. So that’s the first thing we’ve got to say with all of this is it really depends on what level of tax you pay as to how these numbers end up looking. So you have to. That’s why it has to be about you as an individual, in a personal circumstances. I think then, if we run an example let’s say someone’s on a mortgage of £100,000 will keep the numbers nice and simple. Who’s got a mortgage of £100,000 at the moment? Who’s under the age of 14? Not many, but there might be a few. But let’s say £100,000, you can multiply it by however many times you need to get your mortgage amount. And let’s say you’ve got the same in an ISO. So you’ve got £100,000 in the mortgage and £100,000 in an ISO and our interest rate on the mortgage is 6%. We’re making 7% in the ISO. So the interest that’s. The bit that we’re concerned about is the interest we’re paying on the mortgage, because that’s really what our return is on paying off the mortgage. So our interest is £6,000 a year and we’re making £7,000 in the ISO. So on a pure like-for-like basis, the ISO is better because we should make 7% and that’s going to compound, whereas the interest on a mortgage, if it’s repaid, is going to decompound.
Dr James:
Reverse because it’s like well, that’s the theory isn’t it? Because it’s a little high, relatively speaking at the minute.
Jon:
It’ll be. You’ll be paying less and less interest each year as you’re paying the mortgage down. So in theory, over time you would be far better off keeping that money in an ISO. But then we come into the amount of income you need to earn in order to pay that mortgage. Because if you’re a basic rate taxpayer paying £6,000 interest on your mortgage, you need to earn 7,500. You’ve got 40%, you have to earn 10,000, 45% is 10,100. So let’s you know. And then that marginal rate is even worse by 15 grand. So you can see that the higher up the tax thresholds you go, the kind of better gross return you’re going to get from paying off that mortgage, and so the numbers in the short term can really stack up for paying off your mortgage. We need to think about it in the rounds of our lives as well.
Dr James:
Yeah, 100%. Not just what’s dangled in front of us in the here and now. But I love that. I love that thing about the gross return really, and, as boring as it sounds, it’s about minimizing your outgoings, isn’t it? And that’s really boring because obviously we earn some money to be able to enjoy it to a degree, but it does help. It’s worth making.
Jon:
Well, I think it’s about, then, what you do if you do pay a few mortgage invoices. What will you do with that money that comes available? So we can sort of look at a few examples of people that we might look at doing with them in certain situations. So, for example, we’ve got someone in that scenario who is, let’s say, 50 and relatively well capitalized, got a very specific target time to to exit in their business or retiree. You might say, well, let’s take some money out of the eyes, let’s pay the mortgage off, and we’ll redirect that money every month that you would have paid on the mortgage into pension. And then not only are you releasing, you’re getting that interest return by not paying the mortgage, but you’re also then going to get the tax relief on that income and you’re going to be putting monthly back straight into the markets and whatever you’re repayment about a bit. So, very suddenly, you can kind of leverage that position. You don’t get any cash flow month to month but you’re in a very attractive position. So in that scenario where we’re taking those funds, we’re putting them straight into a pension, you might look at it in the round and say that’s a really attractive thing to do and we’ll go ahead and do it and it could play into a financial plan in a really effective way taking some money from a tax-free position, clearing a load of interest that we’re going to pay taxable and directing income into a tax deferred account like a pension.
Dr James:
Taxi, because you’re doubling your money in some instances.
Jon:
Yeah, absolutely, absolutely.
Dr James:
But then of course pensions means we can’t access our money. There’s the whole accessibility contract argument.
Jon:
So we just got to consider that that’s where this person we’re talking about maybe is in their 50s.
Dr James:
They’re a little on yeah.
Jon:
So we’ve got a very specific timeframe where one we might be able to get access back from our money if you need it. But also the time horizon is very short and we’re less likely to have other things going on in our life that might be needing this cash flow, but less likely to have children in childcare, less likely other sort of things going on that might make that more suitable. Then you could look at someone in there well, I’ll take this as quiet I was speaking with last week who is early 30s, married, newborn baby. He’s got a mortgage coming to an end very soon, but he’s also looking at moving house in the next 12 months because they want to move to a bigger house and the decision we’ve made in this instance is actually to cash in the ISAs to clear the mortgage for a couple of reasons. We’re going to start one we’re going to redirect those monthly mortgage savings straight back into an ISA. He said why are you keeping me poor? We just don’t want to get used to it. So we’re going to keep paying straight back into the ISA. But also we’re going to start looking at moving house straight away, like whenever the most appropriate time is, and we’ll see what the house they find looks like what all the deals look like, to then go. Do we then take out mortgage and put money back into the ISAs? If it’s before the end of the tax year, use the flexible nature of these ISAs. What’s his bonus going to be from the work that he is looking at? Because you’ll get a bonus every March. The whole load of other things that will come into play. There aren’t anything to do with 6% versus 7%, but how do we use your resources to get a maximum return on life?
Dr James:
And we should mention as well that depends on what type of ISA, doesn’t it?
Jon:
Massively and this is a really that’s a really setting point. I get spoiled because the ISAs that we use as inviolable the ones that we use at Juniper are all flexible ISAs. We don’t use any ISAs that aren’t flexible, but it has been highlighted to me recently that there are some ISAs providers out there, particularly in the retail or DIY environment, where their ISAs aren’t flexible. So you will have to check with your ISAs provider before you try and use those facilities. And, obviously, lifetime ISAs, as we discussed a few months back. You’re going to be penalised very heavily for trying this with a lifetime ISAs.
Dr James:
And it’s dependent on what asset you have in the ISA to be with me. So if it’s a cash ISA, well right, we miss out on a bit of interest. You know what I mean. If it’s a stock, if a stock share is ISA, take it out of our flipping portfolio, miss the boom times, because who knows the hell when they’ll be back, or even if or when they’ll be back, or well, here’s the thing. It works both ways. It could continue to go down, but on balance of probabilities, 75% of the years, I believe, the S&P 500 goes up. So it’s an odd thing and we’re not saying do this or do this, we’re just saying here’s things you have to consider, and there’s so many layers to this decision. Are you with me?
Jon:
100%, 100%. You know scenario is where we wouldn’t look at doing anything with the ISAs. You know, if you have like no consideration to move out, if you’re funding your ISA maximally every single year or paying into it every month and your mortgage comes up and you can still afford to pay it, you know it’s not a problem for you financially and you’re able to get a deal that’s anywhere south of 7%. Then we might look at this and say now let’s stick with the ISAs, stick with your investment ISAs and let’s stick with your mortgage as well, because over time you’re going to be better off financially in most circumstances. And then it really comes down to that emotional side of things. You know you’ve got all sorts of considerations around income security. Now most of the illicitness here are going to dentists. Where the income security is? It fluctuates but it’s generally pretty strong. Most dentists are not going to struggle to find somewhere to buy their trade pretty recession proof as financial buyers. Yes, we specialise in dentists and majority of our clients are dentists and doctors, but we also have a number of business homes. The advice we might give them might be very different depending on the industry and profession they’re in and the cyclical nature of it and the income security that they may or may not have. I’ve got a few plans from tech startup founders. No, way. A very different story paper that millionaires. But in reality it live in month to month on a payroll with all roles and diets on the next funding round. So you either very, very specific to circumstances. I kind of lost my train of thought.
Dr James:
What were we talking about? We were talking about dentists having recession proof earnings.
Jon:
Was that the?
Dr James:
thing, or was it prior to that?
Jon:
No, we can pick up the tech founders, because dentists have this sort of recession proof earnings. We don’t have any worries about there being a period over the next 18 months 22 years, of not being able to earn money or losing a job. That shouldn’t be a fear for most dentists. We’ve got a few dentists that we’re working with where we are looking at moving assets around, where they’ve bought businesses and they’ve got loans with Lloyds or RBS that are based over. There’s some really interesting stuff you can do there that we do with some planning on those. Maybe that’s for another podcast on SIP SASSs.
Dr James:
Conversion Properties. We should definitely do that, because I’ve never done a podcast like that.
Jon:
Okay, we’ll pick that one up another time, because most dentists will have this really strong income and fairly recession proof. We can play the game of continuing to pay the mortgage and continuing to invest in ISIS. Then it’s that emotional thing, because what everyone’s feeling and I don’t know how you’re feeling it, but certainly anyone with kids is feeling is the cost of living squeezed, even if you’re already shopping, you’re out of your little, you’re seeing those monthly food budget costs coming up and things just getting a little bit tighter. Nothing we can’t handle yet for most of the people listening, but just getting that little bit tight, starting to notice it, I think, is probably what I’d say with most of our clients, just to really notice the pinch. For some of us we might have extended ourselves a little bit much private schooling, big mortgage very common things that happen in the dental world big cars. It might be that actually, because we need to keep the cash flow situation right, that it is the time to rejig some assets. Isis might be one of those things that we look to access to clear off some mortgage debt, but there might be some other assets that we have that we might look to rejig to clear down some mortgage financing Cars. I’ve come across people with pay-in-tent two, three, four cars on finance. You go well, that’s something we can deal with. We can clear down this. If you are in a position where you’re thinking of caching in ISIS, caching in investments, to pay down the mortgage, you’ve got to do the hard work first of going through your budget and going do I really need this, that sort of value-use assessment on your budget? Do I need this? Do I need that? Do I need Sky Sports, tmt Sports, desoad? Do I need Disney Plus, netflix, amazon Prime, paramount Plus, all of these things? Do I value them? We’ve got to go through those processes as well before we start to come into this decision about clearing out our long-term security for the panel for mortgage.
Dr James:
And that’s the sound bite for the podcast. Right there, there’s just so much to it. It’s about number crunching and, you know, here’s one thing that we didn’t even get wrong to mention in the podcast, and that was that when you owe someone money, inflation works for you. When you’re investing, inflation works against you. So when a high inflationary environment, you’re de-incentivized to pay off your mortgage, which is another factor to consider as well. How does that work If you owe someone 100 grand and the interest rate is 10%? Well, sorry, no, actually rewind so the interest rate, forget about the interest rate. The inflation rate is 10%, right, and actually that’s devaluing that 100 grand that you owe to somebody. And let’s say there was zero interest rate right Now. You’re never going to get a loan like that. But let’s say that there was zero interest rate. Then actually you owe less and less money in real terms with time. So it’s in your interest to spread that out if inflation is really high.
Jon:
I’ll tell you a story on that. You know how my dad was a dentist. I actually. The other week I found a picture of him from the late 80s of his practice. Also I’ll say to somewhere I might share at some point on the group. He was telling me when we were sat due in the fact that the week that he bought his first practice in 17, nine I think it was 79. And the interest rate on his practice loan was 25%.
Dr James:
Jeez is that even possible?
Jon:
Yeah, yeah yeah, but inflation was that mad that the amount of debt it was nothing in five years time. You know he didn’t even like it wasn’t even a thing because of the way it went. It was just like it didn’t really feel that painful in the end.
Dr James:
Imagine borrowing a million and own 1.25 million in a year. That’s like loan shark rates almost. That’s like yeah.
Jon:
But you are talking, you know you’re talking 9 to 39 or whatever, so it’s probably like 20 grand or 30 grand or something. You know, you know. Yeah, there you are, wow.
Dr James:
There we go, fun fact, fun fact for the day. Jon, we’re coming up to closing time. Now we’re coming up to end in this podcast. Is anything that you’d like to say in conclusion?
Jon:
Yeah, I think the main thrust of this is, if you’re worried about paying your mortgage or you’re feeling it, you know that you’re seeing the jump coming from a mortgage, you know. 1. Plan early. We all know when our fixed rate mortgage deal comes to an end or we can find out quite quickly. Don’t bury your head in the sand until like three weeks before. Then, you know, ring Ben A or whoever and try and get all sorted. Plan ahead, plan early and try and get ahead of the game. Number two ISAs are a very useful tool in part of this discussion, but not the only tool. So we want to think about the various portfolios, various assets, various cash things we’ve got so we can use all options. And number three if you’re struggling to run these numbers yourself, seek advice. You know that’s what advisors are here for and it could be very, very valuable to see you over the long term.
Dr James:
Boom. Jon, thank you so much for your time today. You’ve been super generous with your knowledge, as always. Looking forward to having you back on the Denysine Verge podcast very, very, very soon.
Jon:
Absolutely pleasure.