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