“Should I invest and save for the future or focus on clearing my mortgage?”.

A client recently asked me this after inheriting a lump sum. As a financial planner, this is a question that comes up regularly. So, I have decided to put pen to paper and look at the pros and cons of clearing the mortgage versus investing elsewhere.”

Pros of clearing the mortgage early:

Peace of mind

Many of us have a real emotional drive to clear the mortgage, even if it is not the best option from a financial planning perspective. Once the mortgage is gone and the house is paid for, this will provide many with a real peace of mind.

Reduced monthly outlay

By removing the mortgage payment from your monthly outgoings you are reducing your costs. This will allow you to save much more money on a monthly basis going forward.

Save on interest costs

You can save tens of thousands in interest, which you would pay if not for clearing the mortgage early.

No need for mortgage protection

If you have no mortgage the lender cannot insist on you holding mortgage cover anymore.

Achievement

There is a great sense of accomplishment attached to having cleared your mortgage and owning your house outright.

So, there are a lot of pros, but before you go and write the cheque let’s look at the full picture.

Cons of clearing the mortgage early:

Low return on investment

The money you borrowed from the bank for your mortgage is the cheapest loan you will get your hands on. Most mortgage lenders are offering between 2-4% on their loans today. If you are lucky enough to hold a tracker mortgage you could be paying less than 1%. Compare this to rates available on car loans (>8%) or credit cards (>20%).

All eggs in one basket

Investing all your funds into clearing your mortgage will mean your wealth is all tied up in one asset class (property). This will leave you vulnerable to any decline in prices.

Make money by owing

If you have a tracker mortgage or indeed a very good deal on a fixed rate, the interest you are paying could be lower than the prevailing inflation rate. Inflation is currently running at 3-5%. You can literally earn money by borrowing at a rate lower than this, even if paying interest every month.

Money available for other purchases

Your mortgage is most likely your biggest financial outlay of the month. However, many people will rely on car loans and home improvement loans to finance other purchases they make. The rate of interest on these types of loans are far more expensive than a mortgage. If you need money in the future for any of these purchases, it would be a shame to have to borrow at expensive rates because you cleared your mortgage early and do not have the cash available.

Equity for a 2nd property

You may be lucky enough to be able to purchase a 2nd property, maybe as a holiday home or as an investment. Before you can get a 2nd mortgage, you will require a deposit of 20%. By keeping your savings liquid and not using it to pay back your first mortgage you will have the flexibility to consider this option in the future.

Higher Rates of Return

Your savings can achieve higher rates of return than you pay on your mortgage. Your mortgage is a long-term loan and the going rate of interest is 2-3% currently. Over the long term if you were invested in a good equity fund, you could expect an average annual rate of return in excess of 7%. This means, through good financial planning you can borrow at low levels of interest and invest your savings at more lucrative rates.

Which scenario is better in death?

Not a nice consideration but an important one. When you hold a mortgage, you must also hold mortgage cover. If you pass away your mortgage is paid off and your family will inherit the house outright.

Take for example; Joe Bloggs has €100,000 in savings and €100,000 left on his mortgage.

In scenario one, Joe pays back his mortgage using his savings so there is no debt due on the house. The next week he passes away and his family inherit the house.

In scenario two, Joe decides to invest his savings. Unfortunately Joe passes away the next week. The mortgage cover he holds with the bank pays out and clears the loan. His family inherit the house with no debt attached and also inherit his €100,000 investment. This leaves Joe’s family in a far better place than in scenario one.

From a financial planning perspective, early repayment of your mortgage is not the best option. Your mortgage is the cheapest loan you will ever have and often we are too quick to get rid of this luxury.

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TESTIMONIALS

My initial meeting with Darach was as a Lecturer in LIT who will have less than 40 years- service at retirement.  After a completing a review, I had a clear understanding of how my pension worked and how best to optimize it going forward.

I have found Darach to be very friendly, knowledgeable, no way pushy and quite transparent in his recommendations. I would strongly urge you to have that initial consultation. My experience of Honan Financial Services has been a very positive one both personally and financially.

Tim Galvin , Lecturer, Limerick Institute of Technology

I was looking for alternatives to saving in the bank as there was little to no growth to be had in their savings accounts. Honan FS made it very easy to invest in a multi asset fund which meets my long-term goals. I’d recommend Honan FS to anyone looking for advice on any aspect of their financial planning.

Sean, Business Development Manager

When taking out our mortgage we were offered mortgage protection by the bank. After a review with Darach we found a policy which was more comprehensive and better value for money. We were also able to optimize our savings through a regular savers policy which has achieved far better returns than what was on offer with the bank.

Anthony O’Halloran, Director, Deloitte

At the start of 2021 we both decided to do a health check on our financial status. We both had occupational pensions schemes left from previous employers and we reached out to Darach for assistance and advice on transfer options. Darach was excellent in helping us map out our future financial needs , determining our outlook to risk , providing sound financial advice and discussing best performing options to suit us

Darach dealt on our behalf with the previous pension providers and their associated agencies and the whole process we felt was very professional and a seamless transaction to us. Because of interest rate returns on bank deposits /post office being virtually zero and essentially loosing money on deposit we also seeked advice on alternative investment products for the mid to long term.

We were looking for products that gave a good rate of return and that we could lock away for 10 years plus to help with education funding. Both requirements were met very professionally by Darach and his team. We are both very happy we reached out to Darach . The only regret was we didn’t do this a few years earlier but better late than never.”

Gerard & Niamh O’Grady, Private Clients
Darach has looked after my pension for a number of years and once he setup Honan Financial Services, it was an easy decision to move my pension / financial planning with him. Darach continuously demonstrates a thorough and rigorous approach to customer service and his clients individual’s needs. He is thoroughly professional, exceptionally friendly and the best in the west in my opinion. I would highly recommend him to all.
Shane Murphy, Private Client