Where/how to invest 50k?

Discussion in 'Investments' started by philipb, Jun 21, 2007.

  1. philipb

    philipb Frequent Poster

    We will have 50k coming to us later in the summer. But I don't know whether to use it to pay off some of the mortgage (500k plus), invest it elsewhere or start some significant savings. Or do a bit of all three. We don't have any other debts and have no need/desire to move house in the future. I will be seeking financial advice on this, but would also appreciate your thoughts. Thanks.
  2. ClubMan

    ClubMan Frequent Poster

    At least calculate the potential interest (and maybe mortgage protection life assurance premium - if you reduce the effective term) savings attributable to reducing the mortgage using Karl Jeacle's mortgage calculator (this calculator will not factor in mortgage interest relief). Then compare the results to the actual or potential return on whatever investments you are looking at.
  3. LDFerguson

    LDFerguson Frequent Poster

    The question of whether is it better to pay off a mortgage or invest is a popular one, but one to which there is no definitive answer suitable for all. In simple mathematical terms, if you are paying an interest rate on your mortgage of 5%, this means that you are paying interest to the lender of 5% of the amount owed, each year, although often interest is calculated on a daily, weekly or monthly basis.

    So by using capital to reduce or even completely redeem such a mortgage, you are saving the 5% annual interest that you would otherwise pay. So in a manner of speaking you are getting an effective return of 5% on money you employ to do this. The rate of interest on a mortgage will almost always be greater than the rate available on deposit, so if you don’t require access to your capital it is preferable to pay off a mortgage than to leave you money on deposit for an extended period.

    However, paying off your mortgage is not a very accessible way of investing your money. With most lenders, if you need to access your capital, you will need to either apply for a new loan or sell the property. In addition, tax relief on mortgage interest must be considered as it reduces the effective rate of interest you pay on any mortgage.

    It is possible to invest in a variety of Managed Funds which are likely to produce a return greater than prevailing mortgage interest rates but none of them will guarantee to do so. You have to be prepared to increase your level of risk. Investing in alternative funds may provide a greater return; it may not – indeed the value of your investment may fall as well as rise. In summary if you are prepared to accept a higher level of risk in return for the potential of higher returns over the medium-to-long-term, you should invest elsewhere; if you want a more secure rate of return that is nonetheless greater than bank deposits, you should pay off your mortgage.

    Liam D. Ferguson

    CCOVICH Frequent Poster

    See also this recent thread (which includes links to more dicussion on the same topic).