05 March 2015

Can you invest if you have mortgage?

It’s a question that anyone with a mortgage must ask themselves before they consider investing. Does it make sense for them to take on risk with their money when they could instead be using it to pay off their mortgage faster? The answer depends on the mortgage – and it depends on the person.

Paying off debts should usually take precedence over investing. In most cases, the interest rate that you are paying on debts far exceeds the rate of return that you could realistically hope to make from investments. And this means that the benefit of paying off those debts is greater than the benefit you could hope to gain from investing. Mortgages, though, are a slightly different prospect. Because the interest rates you pay on them tend to be lower than those on, say, a credit card debt, it’s not necessarily the case that paying off the mortgage faster is always the best option. Whether investing whilst you have a mortgage is right for you depends on your situation, your attitude to risk and your financial goals.

What’s your situation?

Not all mortgages are equal when it comes to the impact they have on your finances. The question of whether a person should invest before their mortgage is paid off depends on many different factors: the amount outstanding on the mortgage, the interest rate they are paying, the type of mortgage, the remaining term of the mortgage and their personal circumstances. For example, for homeowners with interest-only mortgages, who are paying off only the interest and not the capital from their mortgage through regular monthly payments, an investment strategy could be vital to ensure they can clear the mortgage at the end of its term, or if somebody has secured a low interest rate on their mortgage, if they are meeting their monthly payments comfortably and if they expect to continue to do so for the foreseeable future, then investing could well be an option. However, even a person in this situation should only consider investments if they have already been able to set aside an appropriate rainy day fund in cash. This needs to cover their regular monthly outgoings, including their mortgage payments. If you are unsure about the suitability of investing, you should seek financial advice.

What’s your attitude to risk?

Any person considering investing needs to think carefully about their appetite for risk: whether they are willing to accept the possibility of their investment declining in value; and whether they can afford for it to do so. When that person is a mortgage holder, they also need to consider their attitude to the mortgage itself. For many people, their number one financial priority is to pay off the mortgage, and they are unlikely to feel financially secure until they have done so. Others though, might see a mortgage that they are confident of paying off as a great, long-term, low-cost loan – and therefore a possible opportunity to pursue other financial goals. In some cases, those goals could be achieved through investing.

What are your goals?

Paying off a mortgage is a long-term financial priority. However mortgage holders have other, short and medium term financial goals that they need to balance this against. All should aim to build up an emergency fund in cash, but in addition they may want to build up funds to pay for their children’s education or buy a new car, for example. It’s difficult to save for such goals if you put all of your disposable income towards paying off a mortgage. And it’s important to bear in mind that it’s not always straightforward to extend your borrowing on a mortgage again once you have paid it off. In some cases, it may make sense to pursue different strategies for different financial goals – and investments could have a role to play for some of them.

For some people who are comfortably meeting mortgage payments, their financial goal might simply be to pay off their mortgage as fast as possible, by generating returns at a faster rate than the interest their mortgage charges. If they are willing to take on some level of risk in order to do so, then investments could be part of their approach. As with many important financial decisions there isn’t one size fits all answer. It’s important to consider all the aspects of your personal circumstances every time. Like all investors, mortgage-holders must consider the possibility of their investments declining in value and ensure that they have a plan for paying off the mortgage at the end of the term should that happen. However, by taking on some risk with their disposable income, there really are times when investing at the same time as paying a mortgage may help to make you mortgage-free faster.

Important information

Please remember that with investments such as stocks & shares ISAs: the value of investments can fall as well as rise which means that you may not get back the amount you originally invested.

Your Financial Planning Manager will advise and make a recommendation for you after assessing your needs. Please note, we offer restricted advice on a range of carefully selected products available through Legal & General – ask us if you’d like to see the list of the companies and products we offer advice on. Nationwide’s Financial Planning Service is available to those who have joint or sole savings and/or income of £50,000 or more.

Our online investment service is designed for people who are comfortable with making their own financial decisions without receiving personalised investment advice. The Nationwide online investment service is provided by Legal & General.

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