If you find yourself in a situation where you have spare cash at the end of the month, it is not always clear what you should do with that money. Should you invest it or use it to pay off your mortgage?
Debt should be your first priority; it can often be difficult to guarantee that investment returns will match the interest rate on your debt. Interest rates are currently low so it makes sense to take advantage of this and clear as much debt as possible.
If you wanted to invest the spare cash then the interest rate needs to at least match the interest paid on your mortgage. It would need to match that interest rate after all charges have been taken into consideration. That would include management fees, platform fees, exit fees, fund costs and taxes and the other charges many other providers will charge investors.
Focus on cost
These costs eat in to your investment returns and cost is the only part of an investment you can truly control. If you do decide to invest ensure you take advantage of the tax wrappers available to you. The Individual Savings Account (ISA) is one of the best wrappers available to you as it is incredibly tax efficient and flexible. When investing whilst holding debt it is important that you can access funds quickly and respond to changes in interest rates. Some tax efficient accounts will charge you a penalty for exiting early, this is not the case with the ISA.
The same can be said of investment providers or even savings providers. On the market there are fixed-term savings accounts, withdrawal fees, early withdrawal penalties and quick withdrawal fees. Each of these costs negatively impact your real returns and could limit your chances of beating your mortgage rate.
Consider your financial goals
Investors should also consider their goals with this spare cash; is it to build up enough to move house in the future, pay for a future holiday, or is it something longer term? Depending on when you need the money should help shape how much risk you are prepared to take. The longer you plan to invest the higher the risk you can take. With risk comes the opportunity for greater returns but also the chance for greater losses.
Individuals need to ensure they get the advice they need. Digital wealth managers, like Moneyfarm, help you to understand your investor profile based on your attitude to risk, knowledge of financial instruments and personal circumstances. Based on your investor profile you are assigned an investment portfolio and historic returns can be seen for each of these.
Your mortgage should not stop you from saving, many individuals have these throughout their working lives. Investing regularly can be a good way to grow wealth over time and doing this in a flexible account such as the ISA allows for life changes. Ultimately the decision to invest or pay off your mortgage depends on how comfortable you are holding debt and your appetite for risk.