Be Mortgage free or invest the money?

Neo2k6

A family member has a mortgage of 41K, has come into money, 48K. Is unsure whether it would be better to pay off the mortgage or invest the cash, what would you wise moneysavers advise?. The mortgage rate is very good as works for financial institution, around about 4%.

Can you advise?.

Chris

comping_cat

Personally, i would pay off the mortgage, i would still have £7K left over to invest, could also start saving using the mortgage payments i would no longer be making and the house would be all mine!!!! If i got into trouble later on, i could always re mortgage!!!
Also, you never know which way the interest rate is going to go, its not so good for savers at the minute!!!!!

jamesd

Savings at 5.76 before tax, 4.576 after basic rate tax are available from Ruffler Bank for that amount.

If a basic rate tax payer the family member would clearly be better off not repaying the mortgage and getting the extra 0.576 or 236 a year in interest to spend.

For a higher rate tax payer the after-tax rate is 3.46% and that is less favorable than repaying the mortgage.

Better for both is to invest the money in the stock market, which can be expected to return more than 10% before tax over the long term. The maximum 7000 ISA use in more conservative investments which can be expected to return over 5% after tax would put all of the money into fully tax exempt interest earning in about 7 years (assuming ISAs remain available after 2010). Even very conservative investments can be expected to do substantially better than repaying the mortgage.

Tim_L

There is no rational reason to pay off a mortgage. Mortgage rates are miniscule and can still just about be beaten with savings rates (savings rates will tend to track interest rates up). Paying off a mortgage sinks capital into your home where you can't get at it when it's needed - in times of difficulty it is difficult to remortgage almost by definition.

That said, there is an obvious pyschological attraction to having no mortgage. I can see why people do it, but I think it's better to be in a position where you can pay off your mortgage if necessary rather than actually doing it. I'm fortunate enough to be in this position, but wouldn't consider paying off the mortgage as I can make far more from having the cash than the mortgage payments cost me. In fact I'd keep my mortgage for ever if I could.

Can I also quibble with the idea that you have a choice only between savings and stockmarket investments (low and high risk respectively). There is a whole continuum of risk available for investments, which I think the poster implies but doesn't make obvious, but you do need expert advice. The stock market is available as one possible option only.

Fitzy29

Buy a couple of investment properties, the capiatal gain in these over the next ten years will make your current mortgage seem like small change!

observer_2

Neo2k6 wrote:

A family member has a mortgage of 41K, has come into money, 48K. Is unsure whether it would be better to pay off the mortgage or invest the cash, what would you wise moneysavers advise?. The mortgage rate is very good as works for financial institution, around about 4%.

Can you advise?.

Chris

It depends on what will make them happiest.

Having no mortgage
Having money to invest

Currently the difference between both with safe investments is minimal, Depends on age, situation and outlook really.

Luke

This is what I would do.

Use the £48k to pay off your mortgage.
You are now mortgage free.

Enjoy this for a while, then remotgage your house and use the money to buy either one or two more houses. These can be rented to cover the cost of the mortgage and make a bit of profit each month.

Your 7k will help you with solicitors costs plus any other outstanding debts you may have or a holiday if you want.

Your queston mortgage free or invest? my answer both.

Martinslovechild

I have been throwing money at my mortgage while at the same time investing a small amount each month into stocks & shares.

If I had known when I started investing in stocks (5 years ago) what I know now, then I would definitely have minimised my mortgage payments and maximised my investments. In the past 3 years alone, I have made returns of 26%, 47% and 28% and believe me when I say that 5 years ago, I knew absolutely nothing about shares.

Part of the problem is the media-induced fear of buying shares that you stand to lose everything. Well - the old adage still applies - don't put all your eggs in one basket, and most importantly of all - buy what you know, i.e. if everybody else is buying comodities or dotcom shares, then ask yourself why?.

Of course your friend could lose money, but he could also stand to gain. Historically, the average long-term returns on stocks is 12%, compared to 9% on property. If property is overvalued as pretty much every economist has reported over the past couple of years, then why would you invest in buy-to-let now? Wait until prices settle back. Stocks, meanwhile, are still on low P/E's, which effectively means that there's a lot more upside, i.e. money to be made.

poppy_f1

id personally go for paying off the mortgage - for the security as well as saving the money i'd be saving paying the mortgage and the additional sum left over
guess it depends on the priorities of your family as well as how long is left on the mortgage

Franko43

Martinslovechild
what approach did you take to the share market. Did you deal yourself?

dwsjarcmcd

Thinking about this issue myself. There could be a 'best of both worlds' solution. Take out an offset mortgage and invest the same amount in the savings element, therefore the savings effectively pay the mortgage, but you can still release the capital as and when you need it, which allows you control and flexibility. You can get money out at ATM's or order a cheque from you bank or BS. No fees or remortgage cost.

Any spot any flaws?