Pay off mortgage or invest

Hi,

After getting a lump sum of money, is it advisable to pay a lump off the mortgage. We're not on a tracker. Or put the money into prize bonds or otherwise?

Difficult if not impossible to say without some context. For example, if your mortgage balanace is very low, you have good income(s) and otherwise are in a good place financially, it may make sense to think about savings or pension planning/enhancements. Or if mortgage has you under pressure perhaps paying a lump off the mortgage is a better option.

Also will you need access to the money at siome point, as that will be an important consideration in terms of your decision to lock it away.

As a general rule I would say pay down debt, and if its not a tracker rate, then its probably more expensive debt than the return you might obtain, without taking unnecessary risk. But really depends on your circumstances, including financial.

You don't say what i rate you are paying.

Let's say it's 5%.

If you wanted to earn 5% nett post-tax you'd need a return of 7-9% depending on your tax band.

So unless you like gambling in the hope of such a high return then pay off that loan.

The question of whether is it better to pay off a mortgage or invest is a popular one, but one to which there is no definitive answer suitable for all. In simple mathematical terms, as olnick says if you are paying an interest rate on your mortgage of 5%, this means that you are paying interest to the lender of 5% of the amount owed, each year, although often interest is calculated on a daily, weekly or monthly basis.

So by using capital to reduce or even completely redeem such a mortgage, you are saving the 5% annual interest that you would otherwise pay. So in a manner of speaking you are getting an effective return of 5% on money you employ to do this. In the long-term, the rate of interest on a mortgage would be expected to be greater than the rate available on deposit, so if you don’t require access to your capital it is preferable to pay off a mortgage than to leave you money on deposit for an extended period.

However, paying off your mortgage is not a very accessible way of investing your money. If you need to access your capital, you will need to either apply for a new loan or sell the property. In addition, tax relief on mortgage interest must be considered as it reduces the effective rate of interest you pay on any mortgage.

It is possible to invest in a variety of Managed Funds which are likely to produce a return greater than prevailing mortgage interest rates but none of them will guarantee to do so. You have to be prepared to increase your level of risk. Investing in alternative funds may provide a greater return; it may not – indeed the value of your investment may fall as well as rise. That's part of the "risk". In summary if you are prepared to accept a higher level of risk in return for the potential of higher returns over the medium-to-long-term, you should invest elsewhere; if you want a more secure rate of return that will nonetheless be greater than bank deposits in the long-term, you should pay off your mortgage.

Liam D. Ferguson