What’s best: repaying your mortgage or borrow even more to invest in property?
Should you use today’s low rates to clear your mortgage? These calculations suggest you should borrow and invest, and maybe even go into buy-to-let
Your home is rising in value. You’re sitting on a fortune in equity. And, at the same time, mortgage interest rates are at their lowest in history and set to fall even further.
So what should you do?
On the one hand is the prudent path of paying down your mortgage as a top priority.
With interest rates so low you should be shot of your debt all the sooner. That will give you a fantastic financial headstart, and free you up to prioritise other aspects of your finances, such as putting more into your pension.
On the other hand is the temptation afforded by very low rates and the growing equity in your property. Surely now is the moment to take a little risk? Why not borrow a little more, and go into buy-to-let? After all, what’s the point in paying down a mortgage when it costs so little?
Do not be tempted to take the money and invest it. You’ll have to work hard to get the same level of return on your cash and, as Mr Hollingworth points out, you’ll have to pay tax, too.
In terms of the effective return on cash, overpaying a mortgage at a rate of 3pc could only be matched by a gross savings rate of 3.75pc for basic rate taxpayers and 5pc for those paying the 40pc, higher rate of tax.
Don’t gamble. Do the sensible thing and pay down the debt you already have. You’ll sleep better at night knowing how much money you’re saving every single day, without even having to lift a finger.
The number of homes repossessed by lenders last year fell to their lowest level since 2006.
The Council of Mortgage Lenders (CML) says repossessions fell by 26% to just 21,000, with mortgage arrears also falling to an eight-year low.
The improvement was attributed to the rising levels of employment and continuing low interest rates.
But the CML warned that more homeowners would get into financial difficulty once interest rates started to rise.
“No-one should be lulled into a false sense of security that the current low interest rates we are experiencing will last forever,” said the CML’s director general Paul Smee.
“Rules are in place to ensure lenders assess future affordability, but these are not a substitute for careful borrowing.”
“It’s essential for borrowers themselves to have one eye on the future.”