Sir Edward Coke, the 17th-century judge and jurist, famously said: “a man’s home is his castle”.
At least that is how the lengthier and less catchy original quote found itself simplified over the years.
Purchasing your own “castle” can be one of the defining financial milestones of your life but being beholden to a mortgage can be stressful. This is especially true when markets are in turmoil and mortgage rates are on the rise.
If you have spare cash or have received a sudden windfall, could you solve your housing headache? And would it be more beneficial to invest your funds and help protect your money from the eroding effects of high inflation?
Read on to discover the pros and cons of paying off your mortgage debts early versus investing.
Which might be the better option for you?
Paying a mortgage off early may help reduce your overall debt but can leave you liable for charges
Before considering paying off your mortgage early, assess whether you have funds set aside to cover an emergency. It is vital to always have access to rainy day funds for unexpected issues. This should ideally cover at least three months’ worth of rent, utilities, and essential household purchases.
Once you have a financial safety net, you might consider using surplus cash to reduce your mortgage debt.
A key factor in this decision may be whether you’re on a fixed-, variable-, or tracker-rate mortgage. If you are on the latter two, or if your fixed rate is due to come to an end shortly, you may be looking at vastly increased payments and a larger overall cost in light of rising interest rates.
The Bank of England (BoE) recently raised the base rate to 2.25% (as of 14 October 2022), and in turn, lenders across the UK have raised their respective rates.
If your agreement is likely to be affected by rising interest rates, paying your mortgage off early will help you save money in the long term.
You may be hit with charges if you opt to make early repayments, so you’ll need to factor this in.
You should consult your agreement to find out if any early-repayment charges (ERCs) apply. It is likely that the bigger your overall payment, the more you may be liable for in potential charges.
Typically, ERCs are between 1% and 5% of your repayment amount. So, for example, a repayment of £75,000 with an ERC of 3% would result in an additional fee payable of £2,250.
Investing gives you the chance to make big returns but they’ll be risks attached
Another option is to invest your cash. This offers the possibility of good returns over the long term.
According to HSBC, investing your money gives you a better probability of beating inflation than leaving your cash sitting in a savings account. You’ll need to factor in the risks though and have a long-term goal in mind.
There are two main different ways you could choose to invest your funds.
1. In a pension
You could invest in your pension by upping your monthly contributions. Not only will your pension provide for you during your retirement, but any contributions towards it earlier on in life will see compound growth over time.
Pensions are also incredibly tax-efficient. You will likely receive tax relief on your contributions. If you are part of a workplace scheme, you will also get the added benefit of employer contributions.
Although investing in your pension can boost your retirement income, it should be noted that you won’t have access to these funds until you turn 55 (rising to 57 from 2028).
2. In an investment vehicle like a Stocks and Shares ISA
Investing in the stock market is typically a long-term strategy. You will need to leave your money invested for at least five years, but ideally up to 10. This allows compound growth to really take effect and allows for recovery following periods of short-term volatility.
Over the term, your money will hopefully see returns that keep pace with inflation and ideally better it.
Another advantage to investing is that you will still have access to your cash. This means that if you are hit with a sudden bill that you haven’t budgeted for, you can sell your stocks and shares to cover it.
The problem with investing is the associated risks. Firstly, your returns aren’t guaranteed, and you could lose some or all of your investment.
Secondly, the performance of your portfolio will be dependent on the stocks and shares you choose – and even if the investment pays off in the long term, you may still see short-term losses.
Which is the right option for you?
The right option for you is dependent on your personal circumstances and goals. There is no one right answer.
You might find it’s a difficult emotional decision, as much as a financial one.
In simple terms, if you want to see real growth, you will need to be willing to tie up your funds long-term and be prepared to ride out short-term dips in the market.
However, with interest rates rising, opting to pay your mortgage off early may be a prudent option.
You will need to weigh up the costs and risks attached to each option and seek out professional advice before deciding.
Get in touch
If you’d like help deciding whether now is the right time to take the plunge into investing – if you’d like help managing a current investment – please get in touch. Email info@lloydosullivan.co.uk or call 020 8941 9779.
Please note:
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Production
