In this post, we are going to talk about a big loan that many people have but one which is difficult to clear away within a short timeframe. Yes, that is correct – we are going to talk about the mortgage on your home.

In the previous posts of this mini-series we talked about the general concept of clearing your debts before you begin to invest and we also talked about determining a priority for situations where you have more than 1 debt or loan outstanding.

You can review those posts here:

Before you begin to invest – step 1
Before you begin to invest – step 2

Mortgages are somewhat different to to other loans and debts that people have:

For many people, with a little bit of planning or discipline, it is perfectly possible to payoff car loans or credit card balances within a couple of years or even months. This is because these types of loans are often small relative to annual incomes (sensible banks will not allow you to borrow multiple times your income for these types of loans).

However when it comes to mortgages, paying it off quickly can be very difficult since for many people a new mortgage might equate to 2, 3, 4 or even 5 times your annual income. As a result of large loan sizes, most people take out mortgages that last 20, 25, 30 or even 40 years in duration. This gives borrowers a long time to payoff their mortgage.

So, we can appreciate that mortgages will take a long time to payoff for most people but the story does not end there. Many people accept this situation and invest at the same time as holding a mortgage. This is because if they waited 20, 30 or 40 years to clear off their mortgage before investing then they would effectively run out of time in order to invest effectively.

But why would they do this ?

In previous posts of this series we explained that holding loans at the same time as investing might cause you losses because the interest paid on the loans is quite likely to be higher than the returns achieved from the investments.

So why do people hold mortgages and invest at the same time ?

The reason is because residential mortgages normally incur very low rates of interest. You could easily have a situation where the mortgage rate of interest could be say 2% or 3% but the returns achieved from investing over the long term could be much higher at say 5% or 7% or more per annum.

This is one of the basic concepts of investing:

If your interest costs are lower than your investing returns than the investment should be considered. However, if the interest costs are higher than the investment returns then it does not make sense to invest.

However, remember that whilst you are investing, the value of your holdings can fluctuate up or down and you may face a loss if you are required to liquidate your portfolio at the wrong time. Hence you have to be prudent and risk-averse if you invest whilst holding a mortgage (which is a very large loan in simple terms) – since failure to keep up with mortgage payments can result in the loss of your home to the bank.

Paying off lump sums from your mortgage from time to time can reduce this risk since your debts go down – this is the prinicipal behind a repayment mortgage.

To conclude then, its still important to clear off as much of your debts as possible before you start investing, but it may be ok to invest whilst holding a mortgage as long as you can manage both your investments and your mortgage.

NOTE – please discuss with your independent qualified financial advisor for advice on investing whilst holding a mortgage. Your financial circumstances are unique to you so you should obtain advice from somebody who is authorised to advise. The ‘GymOfWealth.com’ is not qualified to give you advice – we only give you information for your education.