By Ross Martin, Accountancy Director at Hive Business
Esse quam videri means “to be, rather than to seem” in Latin. It’s been adopted by many groups as a motto since Cicero wrote, “Few are those who wish to be endowed with virtue rather than to seem so.”
I wonder, is it better to be rich or seem it? Is it better, for instance, to own a £1m stock portfolio or a £1m house outright? In financial terms the stocks win because they’re easier to cash in, trade and diversify. They would more than likely pay for a house with the dividends. They represent more wealth. The mortgage free house, on the other hand, feeds the psyche — it feels, looks and sounds better to other people.
The question particularly matters to dental limited companies because for every pound they make over £45k they keep just 55p if they want to spend it. A common reason for taking money out is to overpay the mortgage. People think, “I’m doing well, I should make hay while the sun shines and pay off more while I can.”
That saver’s instinct would serve you well in a saner world, but not in this one where HMRC wants 45%. People do it anyway because they get a kick out of owning things and an even bigger kick when they pay them off.
An Englishman’s home is his castle and his dream, the dream that eclipses all others, is for that castle to one day be mortgage free. If he achieves this it’s a symbol for having completed his life’s work early, which is why mortgage free homeowners cannot resist telling you about it — they can scarcely believe it themselves.
Who could possibly want to forgo that dream and stretch their mortgage out for as long as possible? Who wouldn’t want to save money on interest payments? Anyone who can forgo the symbolism and look at the numbers: if your mortgage rate is 2% then your interest payments are negligible.
Imagine instead taking the money you were going to overpay your mortgage with and investing it somewhere else, in your business perhaps, or in stocks and shares. Any investor in the world can get you 2%, but what a shame to settle for such a poor return. You can get at least double or triple that.
For instance, instead of overpaying by £2k a month, if you invested at 4%, the difference between the mortgage interest you would have saved compared to the 4% return you will get is £110k after 20 years.
Something called the Balance-Matching Heuristic can help us understand the temptation to forgo that £110k. This is a term for our tendency to focus on the balance when repaying debt because of an inner desire to feel good when it’s fully repaid. More often than not borrowing is highly non-optimal — a paper published last year found the balance-matching heuristic is the best predictor for 66% of repayments.
Some people have cottoned on that it’s not worth repaying cheap debt at all. We’ve seen a significant shift towards asset building within holding companies, for instance, which opens up more options, including passing wealth efficiently to your children.
When a tax regime punishes personal ownership it’s perfectly logical not to own assets yourself – as the American businessman and politician Nelson Rockefeller said, “The secret to success is to own nothing, but control everything.”
I wonder, is the thing separating you from real success not how hard you work or the amount of money you earn, but where you put it? Esse quam videri.
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