Capital growth v mortgage debt

A question about : Capital growth v mortgage debt

We took a mortgage of Ј105,000 out with A+L in May 2004. This is half repayment and half interest only. We have friends provident endowments on previous mortgages which were to cover Ј45000 (who knows what we'll get) and are due to finish in 2012.

We have inherited shareholdings which were worth at best Ј65000 in May 2004 and currently Ј95000.

Mortgage is up for review in May 2006.

My question is my husband keeps telling me we are doing the right thing by keeping the shares for capital growth and dividends rather than paying off the mortgage and over the last two years he seems to have been right on the basis of the rise in share values. Is this correct? Basically because the shareholdings were inherited he doesn't see them as his money and he just wants to pass them on to our kids, but they'll get the house anyway.

Our circumstances are that we have a joint income of Ј45k, three kids and no debt apart from this huge mortgage!

Best answers:

• depends on your attitude to risk and what is right for one person isnt right for another. You need to ensure that you sell at the right time with shares - but that is harder than it sounds.
  If I was you (AND I AM CLEARLY NOT) I would:
  1 - Sell the shareholdings now and pay off majority of mortgage
  2 - Review endowments to see if its best to cash them in now. If yes, clear mortgage and take remaining lumpsum.
  3 - Use the money you were paying into the mortgage and endowment to start reinvesting in a similar or same portfolio with that money and if they do what your husband thinks they will then you will get excellent growth and if they dont. at least you are mortgage free and dont have to worry about a roof over your head. You can simply divert your savings elsewhere if the performance doesnt meet expectations.
• If you don't have the shares in a tax wrapper (i.e. PEP or ISA) you will be liable for capital gains tax by selling the shares in one go. The Ј30,000 gain you've made on the shares is much higher than the 2005-2006 CGT allowance of Ј8,500.
• Are the shares in a single company?
  If so, then that is a risk
  If you wish to invest, then spreading across the markey using an index tracker is safer
  It sounds like it would be best to start selling the shares in parcels so as to reduce the CGT, ie sell enough to stay this side of the limit in March (ie this tax year) and then sell some in April (next tax year) The next sale would then be in April 2007
  The shares have done well but the extra return is the premium for risk and to cover tax
  Overpayment on the mortgage is a risk free tax free rate of return equal to your mortgage interest rate
• Shares are not in a single company but bulk are in Glaxo and BP. Thanks for the tax advice I had no idea about this. Ј30000 gain is only in last two years. Over the six years we've held them they've actually lost about Ј10k in value. It all sounds very complicated but at least I'll have more info. when the two year mortgage tie in ends in May. Thanks for all the advice.
• I suggest speaking to an IFA. You might want to sell off the shares in tranches over the next few years to maximise your tax allowances - that means selling the first tranche before the end of this tax year (5 April 06), so it would be worth sorting it out fairly quickly.
• Whilst doing your research, consider splitting between the pair of you to maximise allowances
  CGT rules have changed since I studied them but transfers between spouses do not trigger tax, as far as I recall
• I once had options in a company that were worth 6.50 each. Seven months later they were worth 1.45.
  Fortunately, due to some very,very unusual circumstances, they went a lot higher 2 years later.
  Just shows though that you should never treat shares as cash.
• I thought that was the case... so if you allow the shares to go past breakeven point and past the allowed allowances then you will start paying this money as part of your income tax.
  I think that an IFA will try and sell you products but they have to be justified. As long as you both fall into a medium to high risk attitude profile, an IFA will continue looking to try and get you to take products that fit this profile. Thus risking the capital you have for a potential higher return at the risk of a loss to the capital.
  Should you think that my route was a sensible one then a would say that you are low to medium risk because you want to ensure that your home is secure and your own firstly but want to build up a portfolio of shares/savings once this has been done.
  Clearly your husband has some input on this decision but I know that not having a mortgage will give you financial security...