Should I take out a bigger mortgage, or pay a greater cash deposit?

Question

Let's say I want to buy a house worth £400k. I can get a mortgage up to £300k, and I have £150k cash sitting in the bank. Which would be my best option:

1) Take out the maximum mortgage of £300k and add £100k in cash deposit to buy the house, then invest the remaining £50k in stocks.

2) Take out a mortage of only £250k and add all my £150k in cash deposit to buy the house, with nothing left over to invest.

I am interested in which one will be typically the most financially profitable option overall on average, without going into the micro details such as volatility of the stock market, fluctuating interest rates, fluctuating house prices, the fact that I would have no cash in the bank to spend... I would just like an overall idea of whether putting more cash into buying a house is better than spending that money in investments.

My intuition is that it is better to take out the maximum mortgage, because mortgage repayment rates are likely to be lower than with standard loans, because the bank has less risk due to the property it partially owns. Therefore, if I wanted to invest $50k in stocks, it would be better for me to "borrow" that via the mortgage, and invest my own cash, rather than borrow £50k ordinarily and invest that. Am I correct?

Answer 1

At a minimum, I would save 20-30k, because you need to have both a safety net and some money for home repairs. Very few people move into a house and then do zero repairs - painting, usually, at a minimum, and there's almost always something that comes up pretty soon after. Even if you're buying a condo, you'll want to be sure you can fix anything that needs fixing within that first year or two.

Beyond that, you have to decide based on your risk tolerance and your other details, like your income. Taking a smaller mortgage means a guaranteed 3% to 4% return, right now. That's not quite what you'll probably get on the market over the long term, but how did your investments do last year? My 401(k) was down slightly... In order to do better than that 3-4%, you're going to have to invest in stocks (or ETFs or similar), meaning you could have 10+% swings potentially year over year, which if that's your only (extra) 50k might be more than you can tolerate.

If you're very risk tolerant and mostly looking to make money over the long term, then it may be worth it to you. But if a larger mortgage makes it harder to pay the monthly payments (a meaningfully smaller buffer), or if your job is such that you might end up having to sell those investments at a loss to cover your mortgage for a few months because you (didn't make enough|got laid off|etc.), then you may want the smaller mortgage to make that less of a risk (though still setting aside the safety net in something minimally risky).

Answer 2

The answer to your question depends on your answer to this question:

Would you be willing to take out a loan at that interest rate and invest that money straight into stocks?

That's basically what you're planning to do. You leverage your stock investment, which is a valid and often used way to improve returns. Better returns ALWAYS come with more risk.

Depending on your location there might be a tax advantage to a mortage, which you can take into account.