Investing versus paying off your mortgage

Have you been able to save heavily in recent years, received an inheritance or a nice bonus from your boss?

Sometimes you have a windfall that leaves you with an amount of money in your bank account. You can of course put this money in your savings account or leave it there, but you can also choose to invest this money.

For example, investing your money or paying off part of your mortgage.

Both have their financial advantages. What is wise in this and where do you get the most benefit?

Invest or redeem?

The choice between investing and making extra mortgage payments depends on your financial situation, risk appetite and investment horizon.

Repaying provides immediate security through lower monthly payments or less debt, while investing offers more potential returns in the long run, but also carries risks.

So which is better, redeeming or investing? That choice is entirely up to you, and one choice is not better than the other.

So by paying off part of your mortgage, your mortgage debt shrinks. This may lower your interest rate and reduce your monthly expenses.

So you save on your mortgage every month after repayment. But investing can also be an interesting option.

In the long run, this can yield greater returns than savings interest alone. Even though this is not always without the necessary risks.

What is ultimately most advantageous depends on the amount of your current mortgage interest rate and the possible return on investment. By the way, it is also possible to do both, investing part and paying off another part.

Always use only money left over

The most important tip with both investing and paying off extra is to do it only with money you don’t need in the short term.

With an investment account, it is often possible to withdraw your money. However, due to the uncertainty of the stock market, you may find that your money has become worth less by the time you want to withdraw it.

When making an extra repayment on your mortgage, it is not so easy to withdraw your deposit. The money is then “stuck in your house” and cannot be withdrawn just like that.

So take this into account before you make additional repayments.

Advantages and disadvantages of redeeming and investing

Benefits redemption:

• You save the mortgage interest you would otherwise pay, which equates to an immediate and certain return.
• Your monthly expenses decrease and your debt decreases, providing more financial security.
• With higher equity, you can pay less tax on your assets in Box 3 after repayment.

Drawbacks redemption:

• Your money is tied up in bricks and is not readily available for other purposes.
• The savings are limited to mortgage interest, while investing may yield higher returns.

Advantages invested:

• In the long run, the return on investments often exceeds the savings on mortgage interest, partly because of the interest-on-interest effect.
• Your money is not tied up in your mortgage debt, allowing you to use it for other purposes when you need it.

Disadvantages invested:

• Investing involves risk; the value of your investments may fall.
• You need a long investment horizon (15-20 years) to absorb fluctuations and achieve good returns.
• If you need money on short notice, you may have to sell your investments, risking a loss.

Investment guidelines and seeking advice

So finally, there are some guidelines you can follow to help you when you want to start investing, such as:

• The lower the interest rate, the more attractive investment becomes relative to repayment.
• Very important: invest only with money you don’t need.
• Provide a financial cushion and don’t invest money you need in the short term for unexpected expenses.
• Consider a combination: you can use part of your savings to make additional repayments and invest the other part to enjoy both benefits.

Be well informed to make the best choice that suits your personal financial situation.

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