Is it best to pay off a mort­gage, or in­vest?

CityPress - - Tenders -

Maya Fisher-French looks at which strat­egy – in­vest­ing or pay­ing off the bond – will pro­vide the best re­sults over 20 years, the av­er­age pe­riod al­lo­cated to mort­gage re­pay­ments. She ex­am­ined three pos­si­ble sce­nar­ios and found that sev­eral vari­ables were at play, and that it was likely that a com­bi­na­tion of the two strate­gies would pay off in the long term. It’s for you to de­cide.

In each of these sce­nar­ios, we as­sumed a R700 000 mort­gage at the cur­rent prime in­ter­est rate of 10.5% with a min­i­mum monthly mort­gage re­pay­ment of R7 000 a month. We also as­sumed that the in­di­vid­ual had an ad­di­tional R3 000 a month to in­vest.

Sce­nario one

Pay an ad­di­tional R3 000 a month into your mort­gage.

You in­crease your mort­gage by R3 000 to R10 000 a month and your house is fully paid off in 108 months (nine years). You then in­vest the R10 000 a month into a pure eq­uity unit trust for the re­main­ing 11 years.

Af­ter 20 years, you have a R2.8 mil­lion in­vest­ment.

Sce­nario two

Split the R3 000 be­tween mort­gage and in­vest­ment.

You pay an ad­di­tional R1 500 into your mort­gage, in­creas­ing re­pay­ment to R8 500, and in­vest R1 500 into a pure eq­uity unit trust. Your to­tal monthly com­mit­ment is R10 000.

For this sce­nario, we as­sume you re­ceive a re­turn of 12.4%, the av­er­age his­tor­i­cal longer-term re­turn of the JSE.

Af­ter 12 years (145 months), your mort­gage is paid off and you have R500 000 in in­vest­ments. You now al­lo­cate the full R10 000 to the in­vest­ment for the re­main­ing eight years.

Af­ter 20 years, you have a R2.9 mil­lion in­vest­ment.

Sce­nario three

In­vest the full R3 000 a month.

You in­vest the R3 000 into a pure eq­uity unit trust. Again, in this sce­nario, we as­sume a re­turn of 12.4% on the in­vest­ment.

You pay your min­i­mum mort­gage pay­ment of R7 000 a month and set­tle your mort­gage af­ter 240 months (20 years). You in­vest R3 000 a month into a pure eq­uity fund for 20 years.

Af­ter 20 years, you have a R3.16 mil­lion in­vest­ment.

Based on these three sce­nar­ios, you would be bet­ter off in­vest­ing than ac­cel­er­at­ing your mort­gage re­pay­ments. The re­sults, how­ever, de­pend on the rel­a­tive dif­fer­ence be­tween in­ter­est rates and re­turns.

In our cur­rent in­ter­est rate environment, there is a 190 ba­sis point dif­fer­ence be­tween in­ter­est rates and the longer-term re­turns from the JSE.

If in­ter­est rates were to rise, that dif­fer­ence would nar­row and the rel­a­tive ben­e­fits of in­vest­ing would be re­duced. There is also a risk of lower in­vest­ment re­turns. Pos­si­bly the best sce­nario is to find a bal­ance be­tween in­vest­ing and pay­ing off your mort­gage.

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