Investment to pay off your mortgage
Have you got spare cash in a lump sum or some cash in your monthly budget? Either way, it makes more sense to do something meaningful with it. However, you might be confused about whether to repay your debts early or invest. Being a proud homeowner, you may not like the idea of paying the mortgage every month over the next few decades. However, considering the diverse investment options, it can feel like you are missing out by not investing.
Invest or Pay Mortgage Early: What should you do?
Being a homeowner, most people dream of the day when they no longer need to pay the mortgage. Being free of debt is a great goal. However, it might not make the most sense financially. There is an opportunity to grow your money through investments.
For example, say you have a mortgage of £200,000 for 30 years with a 1.5% fixed rate. You would make monthly payments of £690. This means you would spend a total of £48,474 in interest on that mortgage.
Now, let’s say you manage to earn £300 extra each month, to put towards that mortgage. As a result, you would be able to reduce your repayment period by 10 years 7 months, and save yourself £17,831 in interest.
Alternatively, you could take that £300 monthly and invest it.
Kuflink’s Auto-Invest product, diversified across hundreds of loans, returns 7% annually – so let’s use that for our calculations;
Investing £300 each month with a 7%pa return, compounding it annually, would earn you a massive £246,803 in interest!
So rather than save £17,831 in debt interest, EARN £246,803 of investment interest.
If you want to get really detailed – consider that the interest you are earning on your investments will, over time, become greater than the outstanding mortgage debt. If you want to be debt free, you could pay off your mortgage sooner by investing.
Should you Pay Your Mortgage Early or Invest?
It is best to invest the money instead of funnelling savings towards paying off your mortgage early from a financial perspective. However, to help you make the right decision according to your financial plan, let’s discuss the pros and cons of paying off early vs investing.
Pros of Paying Your Mortgage Early
- Peace of mind: the idea of constant debt can be unpleasant. Hence paying the mortgage early can give you peace of mind. In case of emergency, having a paid home means you do not have to worry about missing the monthly mortgage payments.
- Building equity: by paying the mortgage faster, you can build equity in your home. This way, you can qualify for refinancing, which means you can save more in the long term.
- Saving on interest: this is probably the biggest benefit of paying your mortgage early. You can save thousands of pounds in interest payments by paying your mortgage early.
Cons of Paying your mortgage early
- Wealth is tied up: the property is an illiquid asset, so you cannot convert it to cash. In case of a financial emergency, you would be left with only one option of selling your house, which too can take a long time until the right buyer is available.
- Loss of tax breaks: if you decide to pay off your mortgage instead of maxing out your tax-advantaged retirement accounts, you will be giving up those tax savings.
- Opportunity cost: the money you spend on paying the mortgage early is the money you are unable to use for other financial goals. Think about it; you may be paying off the mortgage at the expense of your retirement savings, your emergency fund or other higher return investment opportunities.
Benefits of Investing
- Returns On Investment: the most significant benefit of investing your money rather than paying your mortgage earlier is that you can get high returns. For example, for several years, the returns on stocks and shares are significantly higher than the mortgage rates, which means you can save the money even after paying your mortgage amount.
- Contribution matching: you can invest your extra cash in a retirement account, and your employer offers a matching contribution to it. You can enjoy the benefits of compounding interest on this additional free money.
- Liquid Investment: when you invest in a home, it ties up your money. Invest in bonds, stocks, peer to peer lending, or other alternative investments so that you can have access to some cash in the time of need.
Drawbacks Of Investing
- Increased Debt: Investing money may not be a good option for individuals who do not like the idea of having a loan to their name. You cannot own your home until you repay the mortgage amount. Moreover, there is always a risk of repossession if you fail to repay on time.
- Higher Risk: the stock market is more volatile than the real estate or housing market year on year. Similarly, alternative investments carry their own risk. So, there may be chances of losing money. When you make your investment strategy, always keep in mind your risk tolerance and be mentally prepared for any type of risk.
Refinance and Invest: The best of both worlds
If you still don’t know which option is the best, you may not have to choose one. Instead, you can take a hybrid approach to reduce your debt and grow your wealth.
Mortgage rates are low; this means it is the right time to refinance. If you took out a mortgage or refinance years ago, you can save more by refinancing to a lower interest rate and reduce your mortgage term length. Just make sure to consider the closing costs when calculating the numbers.
With your newfound mortgage savings in place. You can invest as well. This way, you will spend less on the mortgage while you can still take advantage of higher returns.
All the above is for information purposes only. Please always seek professional advice before acting.
*Capital is at risk and Kuflink is not protected by the FSCS. Past returns should not be used as a guide to future performance. Securing investments against UK property does not guarantee that your investments will be repaid and returns may be delayed. Tax rules apply to IF ISAs and SIPPs and may be subject to change. Kuflink does not offer any financial or tax advice in relation to the investment opportunities that it promotes. Please read our risk statement for full details.
Update On Kuflink’s Financial Results And Auditor Reports
These accounts have received a clean bill of health from its new auditors, who are the respectable MHA MacIntyre Hudson. This is the news we’ve been waiting for.
The 2021 Peer2Peer Finance News P2P Power 50
Khattoare has said that Kuflink “is in a strong position” this year, which is demonstrated by the fact that the P2P property lending platform moved into profitability for the first time during the pandemic. Kuflink surpassed the £100m lending milestone earlier this year and has introduced many new features such as a mobile app and instant bank transfers using open banking.
Kuflink mulls new BTL product suite as demand heats up
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Kuflink Introduces New Features to Enhance Customer Experience
The Kuflink team shared that their platform has been made simpler for Select IF-ISA. Their most recent improvement has been made to make it clearer for their investors when investing into their Select-Invest deals.
Kuflink’s New features for September 2021. Stand Up with CTO
The Kuflink Tech Team has continued to worked diligently to bring new features for September 2021 forward. Together, with your feedback, we are able to fulfil Kuflink’s purpose in ‘Connecting People to Financial Freedom’.
Quote for September 2021
“Going the Extra mile: When you go the extra mile, the Law of Compensation comes into play. Going the extra mile is the action of rendering more and better service than that for which you are presently paid. When you go the extra mile, the Law of Compensation comes into play.” – 4 of 17 Napoleon Hill’s 17 Principles of Success. (To see previous Napoleon Hill’s 17 Principles of Success please refer to previous CTO blogs).
What’s New or on its way to the Kuflink Platform & Kuflink Mobile APP for September 2021
1) Released! Platform made simpler for Select IF-ISA
Our most recent improvement has been made to make it clearer for our investors when investing into our Select-Invest deals. We received a lot of feedback from people about making their Investment ISA eligible, saying it was easy to miss.
You will also see that as you click through the different scenarios of the deal, when investing (Lending case, Loan information, Loan rating etc.) we have made the information a lot clearer for our investors.
2) Released! Changes to the portfolio screen
You are now able to see the amount you have invested along with the interest accrued without having to click on each of your investments.
3) Released! The way we name deals has changed.
For “Land” deals, we have now put the road name first so that this will be easier for you to search your portfolio.
4) Released! The feature to show all other linked Tiers and Tranches in Select deals has now been introduced.
5) Released! You can now see a release of our new dashboard which shows you Select investments with or without an IF-ISA wrapper.
6) Coming Soon! We are now working on a new feature that will allow IF ISA Transfers In to enter into ISA eligible Select Invest Deals – this means clients can decide which ISA eligible Select Invest deals they want their ISA transfer to go into.
7) Coming Soon! A new segregated IF-ISA wallet, and SIPP wallet (which also comes with surprise features) – development has started.
8) Coming Soon! A new feature showing borrowers who have links as individuals, shareholders or directors, to other loans already on the platform is being built. As an interim measure, we comment within the lending case if there is a link to another loan for the borrowers.
9) Coming Soon! A new feature showing where each development loan is in regards our new 7 phases of development – work is progressing.
10) Coming Soon! On the lending arm, we are currently building the process, through Open banking, to add an additional layer of borrower verification in real time and building a process to ascertain income vs expenditure for a potential borrower across all accounts. This is a step forward in reducing paperwork and unnecessary communication thereby improving efficiency in the process. All in all we should, in theory, gain access to all necessary information through a simplified online process as opposed to numerous phone calls, email chasers etc.
11) Coming Soon! Work on upgrading our proprietary deal risk / pricing tool in our CRM system by connecting to live data feeds, and allowing new fields to better assess the risk and price on deals is continuing. This is especially important in light of economic events like Brexit, the COVID-19 pandemic, and price hikes on raw materials (which will affect on-going Development appraisals). We are working with a ‘Royal Institution of Chartered Surveyors’ (‘RICS’) valuer and a seasoned developer / builder (both in our Credit committee), to further enhance the tool’s sensitivity to such events. We envisage connecting this information to our live loans on our platform to provide a timeline of any given loans risk.
12) Coming Soon! We are working on upgrading our Dashboard. Live Charts, proprietary budget tools, links to other investments, accrued interest, etc. will be on display in a singular view.
13) Coming Soon! A new feature to allow clients to re-term their Auto Invest / Auto IF-ISA investments.
CTO thoughts for September 2021
What is Fintech? This term in essence is about automating movement of funds in a simple and smooth way. Innovation is the key. Originally this would have been called the Barter System, which gradually moved to currency. Innovation is at the heart of how money is handled.
Fintech has an extra edge with technology. In our hearts we wish to “Serve our customers”, which fuels innovation. The urge of making lives simpler for our customer, understanding their pain points, quick query resolution and the need of automation together feeds our purpose.
* Capital is at risk and Kuflink is not protected by the FSCS. Past returns should not be used as a guide to future performance. Securing investments against UK property does not guarantee that your investments will be repaid and returns may be delayed. Tax rules apply to IF ISAs and SIPPs and may be subject to change. Kuflink does not offer any financial or tax advice in relation to the investment opportunities that it promotes. Please read our risk statement for full details.