Mortgage headache - weighing up your options

What factors might impact your decisions? 

Interest rate: Clearly, the interest rate you're being offered, or moved to, is a big factor in your decision. In simple terms, if you think you can get superior returns from a long-term investment portfolio, you may be better off to not pay off the debt at an earlier stage, and vice versa. 

Cash reserves: For many people, if you keep large amounts in cash (separate from your emergency fund) and don't wish to invest it, you're unlikely to be receiving more interest than your mortgage rate, so would be better off repaying part of the mortgage.

Mortgage options: When you look at paying lump sums off your mortgage when receiving bonuses or inheritances; If you have the income to service the interest, the compound returns you might receive from investing lump sums for the long-term, can be compelling. This does of course depend on the rate offered and your specific circumstances.

Diversification: There's also the risk of having a large proportion of your wealth in property. You may have worked extremely hard to pay off your mortgage early and own your home outright. Unless you have other assets that can generate income, you may be forced to either downsize, or continue working at a time you were hoping to slow down and without enough time to benefit from long-term compounded returns.

Understanding the options

Consider this example scenario. You have a £500,000 mortgage, at 5% interest and 20 years remaining on the term. You receive a net bonus payment of £50,000, long term net investment returns in this scenario are the same as the current interest rate, so 5%.

Option 1: Pay the £50,000 off the mortgage. The monthly mortgage payment will be £2,970, so over the term of the mortgage, you'll have paid a total of £712,752.

Option 2: You pay the £50,000 into an investment account and use your ISA allowances for the next 2.5 years, your net return is 5% p.a. You have monthly mortgage payments of £3,300, so your total payments are £791,947, £79,195 more than option 1. However, your original investment has grown to £132,664.89, so you are left with an additional £53,469.89.

You should carefully consider your options whenever making decisions on your mortgage. There are many factors which determine the best outcome for you, such as job security, level of equity in the property, level of income, and other assets, among other things. It is also difficult to predict in advance how mortgage rates may move and there are of course no guarantees of investment returns. We would always encourage utilising modelling tools to clarify your objectives and decide what your best course of action is, as well as seeking independent advice.

To speak to one of our specialists, please contact Doug Rodman in our Financial Planning team. Alternatively, fill out the form below and we'll be in touch shortly.

Disclaimer: This insight has been prepared to keep readers abreast of current developments. Professional advice should be taken in light of your personal circumstances before any action is taken or refrained from. 

Please note that past performance isn't a reliable indicator of future results and investment returns are not guaranteed.