I have to change the mortgage on our flat from ‘Residential’ to ‘Buy-to-let’ before the end of May. I find mortgage applications painful. Endless forms giving the bank you are already with, the same information that they already hold about you. If only they could find it in one of their creaky underwriting systems. So, given a choice I’ll defer the process until, say, March. It’s kind of busy just now.
But…. we also plan to release some equity.
Releasing equity can be tax efficient as the mortgage interest is a deductible expense. So there is an argument for switching as soon as possible rather than deferring.
But given the tax changes coming ….. do we really want to release equity now?
We’d only be tying it up in a new asset investment.
Recognise the type of decision or my indecision?
I suggest that this is only a complexity level 2 decision: There is a deadline that is not so far away. There are also choices about equity release and re-investment that are subject to contextual factors. But these decisions can be supported by modelling scenarios with less than 4 dimensions.
Complexity level 2 decisions can be de-constructed into a series of simpler (level 1) choices. For example I’d break this down into five choices:
- Sell or keep the flat? – Lifestyle choice
- Change mortgage type? – Mandated by the bank
- When to change type? – Flexible within bounds
- Equity release or not? – Simple choice that trades income for access to capital
- Re-invest in property? – Deferrable & dependent on the attributes of specific investment opportunities.
In this example there is quite a nice linearity about the choices.
1) is independent of the others and has to be made first. 2) is dependent on 1) so not really a separate choice. 3) is not currently constrained but will become so as time rolls by (a classic risk when deferring decisions!). 4) is enabled by and depends on 2). 5) is dependent on 4) but not constrained in time. 4) & 5) are both well suited to some simple modelling as the inputs and outputs can be expressed in numbers (e.g. Lending Rates, Loan Terms, Rental Income, Costs etc). Even better, the two models can be explored independently.
The advantage of a linear decision tree is that you can make decision 1 without knowing what decision 5) will be. There is a connection between them but I claim it is second order.
Decision 1) is a strategic choice and while you could spend a lot of time doing economic scenario modelling the decision is probably driven by individual experiences and preferences.
If I make the strategic choice without doing lots of modelling am I being irresponsible?
If I make the strategic choice based on gut instinct am I being irresponsible?
Possibly yes on both counts but there are lots of judgements tied up in that word ‘irresponsible’. Are other people depending on you to make a good choice? Employees. Family. Colleagues. Does your strategic choice impact them? If it does then you might want to do something to reassure them and you that you have made an informed choice at least.
Working out which information to seek out and to pay attention to is a key component of the Business Decision Design® approach.
What if you cannot de-construct decisions into linear independent decisions?
What if you cannot support decisions with spreadsheet models because the inputs and outputs don’t lend themselves to numerical representation?
Then you are dealing with level 3 or level 4 complexity and you need to do something different. Happily there are techniques, some really simple, that can help. I’d be delighted to help you to explore them and pull a few together into an approach that works for your business.
Here is the Link to this weeks picture.
I hope you enjoy the week.