Mortgages vs Investing

Mortgage vs Investing

In FIRE communities there is a question asked daily; should one pay their mortgage off as soon as possible, or use that spare money to invest?

For the last couple of decades, it has made sense, for many people, to invest in the stock market, as even passive index funds would generally offer a greater return, in the long run, than the rate of interest being charged on a mortgage.  If you are receiving 8% on an investment, and only paying 2% on your debt, it’s clearly better to invest as much as possible and let the debt run over a longer term.  However, things are starting to change, and change rapidly.  

Recent weeks and months have seen several sensationalist headlines talking about interest rates rocketing up.  Yes, rates are increasing, but what does this mean to the question of mortgages vs investing?

This isn’t just a question of numbers.  It’s also a question of what you are comfortable with psychologically.  Going down the route of investing as much as possible, whilst keeping mortgage payments as low as possible via a longer payment term, means that your investment is growing and compounding, and you can use the returns generated to pay the mortgage debt.  However, these things don’t operate on a linear basis and investments can increase and decrease in value over time.  You might end up in a better financial position overall, but you have the mental weight of a mortgage hanging over your head for longer.

If you concentrate on paying your mortgage down as quickly as possible, it means that you will pay less interest overall.  However, this means you have less money to invest.  Once you pay your mortgage off, that money isn’t coming back.  Granted, from the moment it is paid off you have more disposable income, but if you want to invest until your mortgage is repaid, the investments have less time to grow.

I don’t think there’s a right answer here, and much depends on your own unique circumstances and what you are comfortable with.  I know many people who are scared of investing because they don’t think they can handle investments increasing and decreasing in value over time.  I understand why some people think this, but it’s important to remember that gains or losses are only realised if you sell, and long-term investors generally don’t want to sell as their investments are generating income.  

My approach is to use more of my spare money to invest, but I’m going to start putting a little more money into my mortgage.  My thinking is that part of my mortgage is coming to the end of its interest rate in 2023.  The rate in place now is very low (0.91%) and that is likely to jump massively.  It’s only a fairly small amount at that rate, less than £20,000, but I still don’t want to pay more interest than necessary.  I’m going to put a bit more towards paying that part of the mortgage down so that any increase in rates will be mitigated.  

What are your thoughts about paying your mortgage vs investing? Leave a comment and let me know. If you enjoy my content, please leave a tip by clicking on the Buy Me A Coffee image below.