Gulf News, April 17, 2010
19 April 2010
Gulf News: "Paying Mortgage Versus Investing in Funds"
Q. I am 40 years old and married with one child aged 12, and have a house in Dubai with a mortgage on it. What is the best thing to do – pour more into paying off the mortgage quickly or to invest more into mutual funds and other retirement plans – I guess there are arguments both ways but I am just not sure what to do and need some expert advice.
As there is a wide choice of investments on the market these days, you will not be alone in asking questions like the one above, it can be confusing to know what to do. But as a general rule, it is worth remembering the old saying; “don’t put all your eggs in one basket”.
It is also important to identify both your short and long-term goals and objectives for yourself and your family. Should you pay off your mortgage early? Or should you focus on making investments with your spare cash which may generate extra income?
One of the biggest advantages of paying off your mortgage early is peace of mind. Once you’ve paid it off, you’ll wake up every morning and fall asleep every night knowing that the roof over your head is 100 percent yours. For many people this kind of security is something that you can’t put a price on.
As well as the comfort and security aspect, paying off your mortgage early is a bit like locking in a guaranteed investment return. For every dirham that you pay early, you’re “earning” the interest that you would have otherwise paid on your mortgage over the balance of the loan period.
Another advantage of paying off your mortgage early is that doing so protects you from yourself. While paying the minimum on your mortgage and investing the difference might sound like a good idea, there are no guarantees that you’ll actually follow through on the second part of the equation and may simply end up spending the sum intended for investment.
The flip side of the “guaranteed investment return” argument is that mortgage interest rates are often quite low, and because of this factor paying off your mortgage early loses some of its attraction. Your mortgage contract may also contain an early repayment penalty and before making a decision on this you should check this with your lender.
But, the biggest downside to paying off your mortgage early is the potentially large opportunity cost you will face, by which I mean that you will be giving up the chance of investment returns that may significantly outpace your mortgage interest rate.
In other words, why pay off a 5 percent mortgage when you could be earning 8-10 percent interest on the same money? One only has to look at the past year or so when people, especially in Europe, have been able to financially benefit in this way. However, you must remember that these sorts of returns are not guaranteed, whereas mortgage savings are.
Another important point to consider is the effect of inflation. Over time, inflation erodes the value of your money. This means that your future mortgage payments will effectively cost less than they do now.
As mentioned above, it is essential to consider your goals and objectives for the future before committing to any particular decisions. It would therefore be helpful to discuss your situation with an independent financial adviser who can tailor a solution that is most suitable for you and your family.
Roy Gaunt, Chartered Insurance Broker, Sales Training Manager, Nexus Insurance Brokers, wwww.nexusadvice.com