Paying down your mortgage sooner or investing
A common dilemma for homeowners is whether to pay down the mortgage faster or invest their money elsewhere.
Both options have merit. The right choice depends on several factors, which this article works through.
Interest rates and mortgage terms
Look at the interest rate on your mortgage and the term remaining. If your rate is relatively high, paying the mortgage down faster may be the better move, because every dollar off the balance saves interest over the long term.
If your rate is low, investing elsewhere may make more sense, where potential returns could outpace the interest you would save.
Risk tolerance and investment returns
Investing in shares carries risk. Think about whether you are comfortable with market movements and possible losses over the short or medium term.
Historically, share markets have delivered higher returns over the long term than mortgage interest rates. If you have a higher tolerance for risk and want higher potential returns, investing may suit you.
Diversification and financial goals
Paying down your mortgage gives you the security of owning your home outright, which is a significant milestone.
Investing in a diversified portfolio spreads your risk and gives you returns from different asset classes. The aim is to balance building home equity with diversifying your investments, based on your long term goals.
Time horizon and financial stability
If you are nearing retirement or have a shorter timeframe, paying down your mortgage faster can give you peace of mind and a retirement without debt.
If you have a longer timeframe and are financially stable, a well built investment portfolio can help you build wealth for long term goals, such as your children’s education or a comfortable retirement.
What this means in practice: for many people, a balanced approach works best. Splitting surplus cash between extra repayments and investing, and reviewing the split regularly, builds wealth and security at the same time.
How Finsol can help
Our lending and investment advisers work together, so we can look at both sides of the decision and model what each option means for you. See also our guide to paying off your mortgage faster.
Call us on 0800 346 765 or book a free consultation.
Finsol is a financial advisory business founded in Hawke’s Bay in 2010, looking after more than 6,000 clients across New Zealand. This article is general information only and does not take your personal circumstances into account.
