It’s one of the most common questions people have about their finances: Should you pay off your mortgage early or invest the money you save by making minimum repayments on your mortgage? It’s a complicated question with no one right answer.
Like most big life decisions, the answer is dependent on your preference, situation and financial discipline. No one enjoys being in debt, it can feel smothering and imposing. Keeping debt around too long can feel dangerous, but so can putting all your money into your home, as this is essentially making it your one large asset.
So, should you pay off your mortgage or invest your money? Here’s what to consider before you choose.
Let’s begin with the option of investing. Investing your money can work extremely well in the right circumstances. The money you invest can make you more money than paying off your mortgage can save you. How does this work? Mortgages generally have reasonably low interest rates, and the earlier you are within the loan, the more interest you will have to pay with each payment. Over time, the mortgage interest will decrease over time.
Conversely, the money you invest works in the opposite way. Due to compound interest, the more your investment makes, the more interest it will gain over time.
So, with this in mind, it would be wise to consider investing and building up your savings, rather than paying off your mortgage. Tom Anderson explains that the reason this works “is that your savings, invested in a diversified portfolio that approximate market benchmarks, will be compounded, meaning that those savings will grow faster than your debt. Most people will benefit more from a strategy of saving/investing than paying down debt early.”
As previously stated, choosing this strategy, like any major life decision, requires circumstances to be suitable, both with yourself and the market.
Firstly, you must know how to invest effectively. Taking trading courses like those offered with Learn To Trade is a great way to ensure this. Half of traders are unprofessional, and learning even basic strategies for trading on the Forex market, for example, can be immensely beneficial.
Secondly, this comes down to personal spending habits and how you feel about debt. The money you don’t use to pay off your mortgage has to be saved and invested for this strategy to be viable. Spending money on material luxuries and holidays will leave you in a heap of trouble.
Lastly, ensure your mortgage interest rate is low! Below 5% is optimal. If it’s too high you are in danger of paying too much towards your mortgage and losing the profit of your investment.
So, at a most basic level, investing rather than quickly paying down your mortgage can benefit most people in the right situation. This is because the interest earned from quality investments is more than the interest paid on most mortgages.
However, understandably investing money whilst a huge debt hangs over one’s head is certainly not for everyone. So, when or why, should you pay of your mortgage rather than investing.
There are plenty of ways to pay off your mortgage early, and countless resources out there to help you through such a process. But why should you do it, when, as discussed, investing can make you more money than your mortgage costs?
Firstly, and most obviously, getting out of debt and owning your home provides a huge sense of security to most people. We mentioned that a factor playing in this decision is up to individual preference and as Todd R. Tresidder explains, “the prospect of making monthly payments for the next 30 years is antithetical to freedom.”
Deciding to pay off your mortgage early can of course save you money. Paying more principle (even just a small amount) will shorten the lifespan of the loan and hence will save you in interest costs. Additionally, once it is paid off, you will find you have much more cash to work with. Mortgages are typically one of your largest monthly expenses so without one, your cost of living will be significantly reduced.
Paying off your mortgage can also be beneficial as it’s a clear cut and achievable goal. It’s something you can work towards with a degree of safety most other investments fail to offer. Doing so will make a huge difference in your life, and this difference is not only easy to picture but its attainable.
Should you pay off your mortgage or invest? The answer will be different for everyone. What you decide to do, and how you decide to do it will be based on your personal situation. Life will have unexpected events, plans can and likely will change. Researching and understanding your options is key to considering what to do!