Honourable and personal residential letting experts

21Feb

Clear your mortgage or invest in more property?

In this blog we shall discuss the dilemma of whether you should clear your mortgage or invest in more property.

  • Should you use the equity in your portfolio to expand or pay off your main mortgage
  • How mortgages work
  • The pros and cons for paying off your mortgage
  • Who you should listen to about market

House for sale

With interest rates on the up (and down dependant on what paper you read), I have been talking to a number of owners recently on the pros and cons of using funds in their portfolio to pay off the mortgage for their own home. Whilst I am very honoured that our customers would ask my opinion, I always point out that I am neither a mortgage broker nor pensions expert. Therefore, any conversation we have is based on the landscape as how I see it. 

But – I thought it would be an interesting piece to write about.

The question posed to me was:

‘I have equity in my portfolio. Should I reduce the mortgage on my main home or should I expand my portfolio?’

As ever, it is always going to be dependent on your personal circumstances and how you feel about risk.

The landscape today 

Interest rates seem to be staying high over the medium to longer term, therefore reducing debt is likely to be wise. The problem is no one really knows what is around the corner. 

So what if the rates come down quite sharply and the cost of mortgage debt returned to the low levels we have experienced for the past decade or so?

The pundits would have us believe that inflationary pressures are going to ease by spring but given what is happening in the Middle East, that is a very difficult call to make I think.

But if you are applying for a mortgage now, you may face an uncomfortable period of higher repayment costs, but this might well abate in the medium term.

Two houses with keys and a stack of coins

A quick update on mortgages 

Mortgage payments are made up of two components: interest on the loan and a ‘principal’ amount, which goes towards paying down the outstanding balance. 

The longer you have the mortgage and the higher the interest rate, the more you pay in interest. This is especially true in the early years when the loan balance is larger, and you are proportionally paying a lot more on the interest than the capital.

One thing is for sure, you’ll save thousands of pounds in interest by paying your debt down sooner.

Paying off your mortgage 

If you do decide to pay down or pay off a mortgage you must consider any penalties for doing so. Early-repayment charges (ERCs) often apply during any fixed or discounted period and are usually calculated as a percentage of the amount you repay. Depending on circumstances, it can be worth paying an ERC as the interest saving could be more than the fee incurred.

Investors who are also homeowners with a mortgage face an ongoing choice through their financial lives – pay down the mortgage or invest excess cash in expanding the portfolio.

It’s a simple question, but the answer as I mentioned before really depends on personal circumstances: age and job status, the terms of the loan and the interest rate, and, very importantly, whether you are a risk taker or more risk averse.

Arrows pointing different directions

What’s the best option for you? 

To me the exam question is:

What is going to generate higher returns? As investing may generate higher returns than the cost of a loan.

You have to weigh up the peace of mind of lowering mortgage expenses and gaining not much financially  against advantages of investing. In the end it’s going to be down to what’s important to you.

If you have a smaller mortgage, over investing can make your financial position more resilient. Plus when you overpay your mortgage, the debt will shrink and you will have more disposable income, which you could use to invest. 

However, if you are happy taking risk, investment returns over a long period of time can be a hugely powerful force – provided your investment strategy is sound, and you have a long enough runway ahead to deal with any rental.

Who should you listen to? 

Definitely not the man / woman down the pub – even if they sound as if they know what they are talking about!

 

Kate Faulkner OBE at Property Checklists  (who some of you would have met at our landlord seminars) is a stats superstar and she listens to the below experts (as do I): 

  • Lucian Cook and Lawrence Bowels at Savills
  • Richard Donnell at Zoopla
  • Colliers quarterly residential report
  • Richard Bowser – Property Investor Magazine
  • Carol Lewis and David Smith of the Times

Armed with the right information you can decide what is best for you and your family.