In the world of personal finances, there are very few yes/no answers, though there are some.

  • Should I invest in complex investment products? No!
  • Should I entrust my investment decisions to someone who gets paid to trade? Never!
  • Should I buy cheap and hold long term? Yes!
  • Should I engage a fee-only financial planner? Of course.

But these are the few exceptions. My default answer to many questions asked is:

– It depends.

This is not a cop out. I’m not sitting on the fence.

I get asked many of the same questions by clients, friends and family members. The most obvious one is “should I overpay my mortgage if I have the available cash to do so?” or some variation of it. It’s a very straight forward question, but one which doesn’t always deserve a simple Yes/No answer.

But is it? Well, it depends (you knew that was coming, right?).

Factors such as the mortgage interest rate, the term of the loan, cashflow, what other financial needs are competing with the mortgage and what their objectives are all come into play.

Yes

Paying a lump sum off an expensive variable rate mortgage is a no brainer, unless you are then heading to the bank for car finance at 9.50% APR. But it comes back to basics – bang for your buck.

Of course, you don’t necessarily have to have a lump sum for this strategy. I recently advised a client to increase her mortgage repayments by €250 per month. It will reduce the term of the mortgage by six years, which will make a massive difference at that stage of her life about ten years hence. It will contribute to her being able to retire early, which was a goal of hers.

No

But then there are circumstances in which it would not make financial sense to overpay the mortgage by that €250 or lump sum.

For example, if you are lucky enough to have a Tracker rate.

Assuming the €250 per month is surplus, (or a lump sum that could be put to good use elsewhere) it is worth considering what it would earn in a pension fund or perhaps as a way to pass on wealth to the next generation in good time (through a S. 73 policy, or something to that effect).

Pay off the mortgage or invest?

A classic variation on the question is “Should I put this lump sum into my mortgage or invest it?”

You can guess what I’d say.

Invest it in what? For what term? At what level of risk and return? Will this investment move you closer to your objectives? What other investments do you have (including property)? Many of the “regular investment plans” on the market achieve less than stellar results owing to the excessive (hidden) fees and charges, so why bother?

The thing about putting the lump sum into an investment is that you are going to end up paying fees to somebody and those fees may erode the return the investment might make (up to 40% in some cases – I wrote about the shocking extent of fees and charges in January).

The investment fund would need to be making more, after fees and charges, than your mortgage interest rate for this to be a logical thing to do with a windfall.

“There’s no simple answer but I will say this: a few people will definitely gain from your investment (including your broker), but there is no guarantee that you will”.

You see, it takes a bit of discovery on my part to advise you properly. We need to sift through the many, layered arguments on both sides. That’s why I believe it’s in your best interests to talk to a fee-only financial planner. I might not give you a straight answer initially, but we will arrive at the best course of action after considering all options.