12th January 2017
Thanks for visiting the Informed Decisions Blog.
The last few Blogs have been focused on informing you on how you can access money from your Pensions, both Personal Pensions and Employer Company Pension Schemes, when that time comes.
For many of us I am conscious that the single biggest financial mountain to climb is one’s mortgage. This can often lead, and I’m sure has done for some of you, to the question;
“Should I invest and save for the future, or focus on getting rid of my mortgage.”
I had the very same question put to me by a friend recently, he had a large lump sum of money which he had been managing for several years, rolling it over in various accounts, the interest rates constantly falling. He was considering throwing it at the mortgage, bring down the term left. What should he do……………………………………………What would you do?
Listeners to the Informed Decisions Podcast will recall Episode 8 (listen here) where we saw the massive impact a relatively small change in mortgage repayment can have on the term of one’s mortgage. This Episode was hugely popular and the Pro’s below outline why.
For completeness sake lets look at some Pro’s and Con’s of ‘Clearing my Mortgage’ instead of ‘Investing my Money For the Future’
So there are lots of really great ‘Pros’, but before we write the cheque lets look at the full picture, this side is somewhat technical, so brace yourself!
As you have deduced by now, the ‘Pros’ to clearing your mortgage are fairly obvious and appetising to most of us, however the ‘Cons’ are somewhat more murky and financially complex, reliant on long term inflation effects and discounted present and future values!
If you sought advice on the matter many Financial Advisers may will quickly highlight to you the long-term historical returns for a given investment product of 6-8% per annum. When this is compared to mortgage rates of 3-4% it seems there is no debate. Common sense would also suggest the following:
Investment returns via such a vehicle are highly variable, they can have periods of double digit growth which far outstrip mortgage rates, and indeed periods of double digit downside (losses) where even paltry mortgage interest rates represent a far superior return on your investment.
As we all know the future is not the past and returns will vary, but mortgage interest saved is a bird in the hand. It is important to acknowledge however that suitably chosen investment funds have more often than not outperformed mortgage interest rates over the term of an average mortgage (20-30 years).
While the mathematics may well point to the fact that investing for the future should provide the investor a greater return in the long term than clearing the mortgage it really is a personal decision. This decision will usually be driven by one’s motivations and by how they want to feel, and that to me is proper, provided it is an informed decision.
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