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This is arguably one of the most difficult questions for households to answer. Should I focus on paying off the mortgage, investing for the future or some combination of both? One reason why people struggle with this question is due to the long timescales involved. After all, you may be paying off your mortgage for the next 25 years and investing for retirement could go on for 40+ years. Over this time you also have multiple variables to consider such as interest rates, fees, inflation and investment performance. Little wonder people are confused!
Here at Cedar House, our financial planning team wanted to offer this short guide on this topic to help inspire your thinking and gather your thoughts. We hope you find this content helpful, and invite you to contact our team here at Cedar House for more information or to access personalised financial advice:
020 8366 4400 or firstname.lastname@example.org
The case for paying off the mortgage early
Let’s start by looking at some of the reasons for focusing on repaying your mortgage. First of all, it’s important to recognise that many people are motivated for reasons that go beyond finances. In particular, it can be very psychologically attractive to think about owning your home outright rather than being beholden to a bank via a mortgage. This can also help justify improvements to your home (e.g. an extension) since you more likely feel that you are the one who will benefit most from them.
Yet there can be sound financial reasons for paying off your mortgage early. In particular, having no monthly mortgage commitment can bring much more financial freedom. If you lose your job and need to take a large pay-cut, for instance, then having little/no mortgage might make this a viable option. Those with a mortgage worth £1000, £2000 or more per month, however, need to maintain their level of income or would likely need to downsize if their circumstances changed.
The case for prioritising a portfolio
Investing in stocks, bonds and other non-property-based assets can feel daunting to some as they seem less tangible than bricks and mortar. Yet there are many great benefits to building a diverse portfolio of investments. One of the biggest advantages lies in the investment growth potential in front of you. In short, investments such as equities arguably present a path towards greater wealth in the long-term compared to paying off mortgage debt.
As a simple guide: if the rate of return from your portfolio (after fees and tax) is greater than the interest rate on your mortgage, then there is a strong financial case for investing. For instance, if your fixed-rate mortgage is 3% yet your average annual returns from your portfolio is 6%, then the interest on your investments is accumulating faster than that on your mortgage. For loans with a very high interest rate (e.g. credit cards), however, it can make sense to pay these off first before increasing contributions to your portfolio. Yet, in 2020, the base rate of the BoE (Bank of England) is at an historic low – i.e. 0.10%. As a result, it is currently possible to get a fixed-rate mortgage with a low rate of interest (assuming you have decent equity for a deposit – e.g. 20% of the property value or more).
Why the answer partly is – “it depends”
Of course, what really matters in all of this are your financial goals. If your main aim is to pay off your mortgage quickly and you are sure that this will bring you peace of mind, then it makes sense to build a financial plan which places this as a central pillar. This is often an attractive route for more “cautious” investors who are focused on minimising financial risk.
Yet for those with a long investment horizon before them and who have a higher tolerance for investment risk, focusing on building a portfolio can be a better way forward. There are many decades ahead for your investments to recover if there’s a crash, and currently in 2020 there is little rush for many people to pay off their mortgage due to low interest rates.
However, it’s important to recognise that this is not a simple binary choice for most people. In many cases it will be sensible to build a portfolio and perhaps repay the mortgage early where possible (e.g. overpayments funded by a bonus from work). Here, a financial adviser can add value to your financial plan in at least two ways. First of all, they can help you find a prudent balance between your mortgage and investments in your own particular case. Secondly, they can help you find ways to increase your real returns and possibly also reduce your mortgage payments. For instance, on the former it may be that there are options to mitigate the fees you pay on your portfolio, whilst on the latter perhaps there are better mortgage deals for your needs which would lower your monthly interest payments.
Conclusion & invitation
Interested in discussing your mortgage, investments or wider financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team via a free, no-commitment consultation:
020 8366 4400 or email@example.com