Should You Pay Down the Mortgage or Invest? with Moira O'Neill
Should You Pay Down the Mortgage or Invest? with Moira O'Neill
💸This year has definitely not been the easiest financially. It’s been especially tricky for anyone with a mortgage or considering buying a home - with higher interest rates and inflation, making a decision on what the best options are for your money is difficult to say the least.
We decided to speak to independent freelance investment journalist Moira O'Neill to get her opinion on whether it makes more sense to pay down your mortgage or invest in the stock market, the best ways of reviewing your existing mortgage, how to prevent inflation from eroding your savings, and more.
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“Your money in a pension can grow free of any taxes that it would be subject to if it was growing outside a pension.”
economy overview
With the Autumn Statement, the main theme was the fight against inflation. The Bank of England has been putting interest rates up to tackle inflation - this means that our mortgage rates have been rising. A lot of people will now be struggling with rising mortgage payments, but they'll also be struggling with the rising cost of living.
Food prices, energy bills are going up and we're all feeling the pinch. In the Autumn Statement, the Chancellor said that he was going to freeze some of our income tax rates, which effectively means people are paying more tax, and people on higher incomes will be paying more than those are very low incomes.
The Chancellor reduced the capital gains allowance and the dividends allowance. Those things only really affect you if you're holding money outside of tax efficient ways of savings, so if you're holding money outside of ISAs and pensions, which some people may do by mistake. Then, you might find that you are paying more tax on the growth in your investments and the income that you get from them.
That’s why it’s become really important after that Autumn Statement to make sure that your money is now safely stashed away in an ISA, where it can grow free of any capital gains taxes or taxes on income.
It is also important to use pensions, because the same thing happens there. Your money in a pension can grow free of any taxes that it would be subject to if it was growing outside a pension.
invest or pay off mortgage?
Even if you feel like you've got quite simple financial affairs making decisions between, ‘should I put my money in the bank? Should I start investing? Should I pay off the mortgage? Should I put more into my pension,’ they're all quite complicated things, and a lot of people don't do anything because they can't make a decision.
The important thing is to do something to make sure that you keep moving, even if it's not perfect, because a lot of us want to do the perfect thing, but you can't necessarily be perfect all the time with your money.
A of the sensible things you can do with your money you can educate yourself about. You can use your pension, make sure that you're getting your workplace pension, for example, and you're getting your employer's contribution into that. It's so valuable and it's free money. Also, the money you put into a pension gets upfront tax relief, which means you don't pay income tax on it.
Mortgage interest rates have gone up, and you may not want to prioritise it, you may want to think about other things, doing other things alongside it, and do a bit of everything that you could do with your money. But there's no reason why you shouldn't think about paying a bit of that mortgage off, particularly if, say, within the next five years you're wanting to move up the housing ladder because you want to put yourself in a better position to get a bigger mortgage.
If your mortgage is something that stresses you out because you think you've way overstretched, or it's something that causes arguments at home with your partner, you should prioritise paying it off.
If it doesn't stress you out and you're quite happy with a lot of long-term debt, and if you're on a rate that you can deal with, then fine, have a bigger mortgage. But it's a very personal thing and what your friend is doing might not be the same as what's best for you.
buying a property and mortgage rates
For first time buyers, but there's never a right time to buy. You either feel like you're buying at the top of the market or the bottom of the market, or mortgage rates are good and could be awful in future or they're bad at the present moment.
If it's affordable, if you have a good deposit, have a bit of leeway to work with on the payments so it's not your whole income, if your job feels secure — go for it, because in ten years’ time, if you've managed to keep your mortgage payments going, that property will feel like a good decision.
Buying a property is a very big financial decision, but once you've done it and you're paying off those monthly mortgage payments, it feels a lot better than paying rent because you know that you're building your financial future. You're not paying a landlord.
The renewal of a mortgage is going to be something that strikes fear into a lot of people because you could be paying hundreds of pounds extra a month once you renew it. Take the opportunity before the renewal date comes up — three months or so before and go and see what deals are available.
Speak to a mortgage broker then because you might be able to lock something good in, but make sure the mortgage broker is an independent adviser who is what's called whole of market. This means they have access to all the products and all the lenders and are not affiliated to one lender because then your options will be more limited.
You can look at what rate you're paying on your mortgage and what you would expect to get from an investment product in the long run. Your mortgage rate might stay fixed for five years, but the stock market, when you're investing, will go up and down over the long run. If you do the math, make sure that you think you can get a better return from the investments than the mortgage. If so, then go for it!
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