Stop Investing And Pay Off Your Mortgage.

Interest rates are shooting up at the quickest rate in decades and with them the cost of your mortgage. At the same time forecasts for stock market returns look bleak… Should we put the breaks on investing and now focus on mortgage payments instead?

Is it time to forget about investing and just focus on paying off our mortgage take a listen to this clip part of the reason that you’ve been so bullish on equities for many years at this point is the interest rate environment you’ve looked at interest rates and said interest rates are gravity on stock prices and when interest rates are so low stock prices inevitably

Are going to climb it is gravity that’s warren buffett discussing his thoughts on interest rates and how when they rise they make safer investments like bonds more appealing and that in turn pulls down the value of other assets like stocks bad news for their expected returns and at the same time it makes debt more expensive which is concerning in this case for

Mortgages i got a comment the other day asking about this decision and it got a load of likes and since then i can’t stop thinking about sandra bullock you see in 2013 she starred alongside george clooney in a movie called gravity the film is visually stunning if not scientifically questionable uh if there’s one thing i remember about that movie more than anything

Else it was sandra bullock’s pay you see she took a slice of the equity of the film she bet that taking a portion of the film’s takings would pay off for her and she was right the movie didn’t flop and it said that she earned 70 million dollars from that one movie when faced with gravity she bet on equity and she won she also got 20 million up front for the movie

So really she wasn’t going to lose either way but now that gravity’s arrived and interest rates are rising do we copy sandra do we bet on equity not in the form of a slice of a hollywood blockbuster but instead the equity that forms the value of our homes rate at your goat which you’re going to be able to get your next fix has gone up very substantially in the last

Six months and it’s a rude awakening right now with the increase in rates 6.7 percent is what you’re looking at now it’s said that isaac newton first labeled gravity as gravity i mean we all know the story about that apple hitting him on the head but it’s his third law that i think applies today for every action there is an equal and opposite reaction if the force

Or action in question is interest rates then since 2008 where we’ve had had record low interest rates the response or the reaction to that was asset prices floating away to record highs both central banks around the world have started to jack rates off the opposite reaction we’ve seen can only be described as violent as this gravitational pull just pulls them all

Back down to earth now homeowners face the reality their mortgages will cost them hundreds more a month crypto lies in tatters and the pain inflicted on your portfolio of curated companies is comparable to a kick in the george clooney’s and like anyone who’s ever been kicked in the sandra bullock’s nose the pain gets worse over time rate rises look set to escalate

With the market predicting that the bank of england base rate could be as high as 5.5 by the end of july 2023 from a pure numbers perspective if you’re on a two percent deal at the moment with the uk average home you’re paying around 1057 pound a month if when you come to remortgage the rates are closer to seven percent you’re looking at one thousand nine hundred

And three pound a month that’s an extra 900 quid a month for the exact same home quite simply that will just wipe some people out you just can’t do it now on face value it might seem like an obvious decision just to pay down your mortgage that as it gets more expensive but in reality it’s far from simple there’s so many moving parts and variables that need to

Be considered here your own personal financial circumstances your risk tolerance and just what makes you happiest i can’t answer these questions for you but today i’m going to give you some of the pros and cons of overpaying your mortgage versus investing when interest rates are rising as they are and at the end of the video we’ll discuss a strategy that might

Just cover all of the bases it might be a good way for some people to go right let’s start with the pros of overpayment first up the guaranteed return in the past this decision was a lot easier to make because to put it simply the guaranteed return you got from paying off your mortgage was a lot lower than the expected return that the stock market would give you

Essentially mortgage rates were so low that the return you got from paying it down wasn’t really all that worth it now rates are rising this guaranteed return you’re getting from paying down your mortgage to many may offer an attractive return if you remortgage you know on a five percent rate you might sit there going hold on that’s actually quite a decent return

And i’d much rather get that guaranteed return and take my chances with the market especially when forecasts to predict that global markets will return less in the next decade than they have in the previous but please bear in mind in 2008 they forecasted that investment returns would be lower they thought we were going to have a double dip recession it didn’t really

Pan out as they expected and returns over that decade were really strong forecasts can often be wrong but really central banks around the world actually want you to have this conversation with yourself interest rates are on the rise in order to combat inflation what that means is they want you to stop spending they do that by making saving and paying off debt

Look more attractive so essentially by raising those interest rates they want you to sit there and go hmm should i be paying off my mortgage now instead the next benefit is access to lower rates the interest rates that you’re offered by lenders are normally influenced by the amount of money that you can put towards the purchase of the home or how much equity you

Already have in your existing home the best rates typically become available for those who have paid off more than 40 percent of their home but you’ll see better rates at anything above 15 the next point is payment holidays if you struggle while it’s never guaranteed it can be the case that those who make regular overpayments to their mortgage are more likely to be

Accepted for payment holiday if they were able to struggle in the future so if you’re sat there worried about the fact that when it comes to remortgaging time that you won’t be able to afford the payments then overpayment now might mean that you’re more likely to carry some favor with your lender but i do think there’s better ways to approach this than banking on

The ability to get a payment holiday and we’ll cover that in a second finally we have the psychological benefits getting yourself to a point where you’re mortgage free or even just reducing the term of your mortgage through overpayments or will create for many a great sense of freedom in their lives and that’s really hard to equate in terms of value versus say oh

Well the stock market will provide a better return some people will just value that freedom far more than they will a greater return on investment through stocks okay so now i want to look at some of the negatives of overpayment starting with it isn’t necessarily the best return first of all it’s still widely believed that even at higher interest rates for mortgages

A consistent investment into the stock market over a long period of time will produce the best returns if you have a mortgage of 220 000 pounds on a six percent interest rate over a term of 30 years and you overpay it by 200 pound month you will save 82 636 pound in interest and clear that mortgage in roughly 22 years if you invested the same amount and achieved

A six percent return for 22 years you would have a hundred and nine thousand pounds the reason the stock market wins even at the same interest rate is because of the benefits of compounding assuming you don’t take any money out of your investments the gains on the investments are reinvested and then those gains make more gains like a snowball rolling down the hill

Picking up more and more snow as it gets bigger also as well in this assumption your mortgage rate would stay at six percent for the whole term of the mortgage i think that’s potentially unlikely as rates might change and also you’ll get better access to rates as you pay off more of the mortgages we discussed but a six percent return on the stock market seems much

More realistic long term some might even argue that it’s a conservative rate you would actually only need to achieve a long-term return of four percent from the stock market over 23 years to match the 85k gain you get from overpaying the six percent mortgage i did this example on six percent because of the forecast of where interest rates are going and because

It represents a realistic return from this stock market long term obviously if interest rates raise above that level this relationship is tested if you’ve got interest rates of 15 on mortgages it’s unlikely that the stock market’s going to deliver that sort of return long term so in that example you would then be like okay paying off the mortgage is the best thing

To do but just to counter this even if rates did go that high you also need to consider the use of taxed advantaged accounts like pensions uk taxpayers can claim tax relief on pension contributions which could be as high as 45 tax relief as well as the long-term benefits of investing which could still provide a greater return than overpaying your mortgage next up

You lose access to your money this one’s really simple once you pay the money to the mortgage it’s essentially gone you can’t get it back without refinancing it and that means then there’s a lack of flexibility what happens if you focus on hammering down your mortgage and paying it off and then you lose your job you could still be in a position where you lose your

House anyway because all of the spare money that you should have built up you’ve thrown into your mortgage you might have been better just putting that money to one side as an emergency fund say so that you could support yourself if you were to lose your job and continue to pay your mortgage another thing people don’t consider is overexposure to property for many

People in the uk the majority of their net worth is tied up in the value of their home now the issue with this is a home while you live in it is a non-income producing asset what that means is if you were to lose your job that property will sink you it won’t save you because you need to continue to pay your mortgage now i appreciate once you’ve paid it off that’s

A completely different set of circumstances but the idea and the concepts of continually overpaying your mortgage may leave you overexposed to property when really you should focus on building a portfolio of income producing assets that can support you if you were to fall out of work as well as this it’s just good diversification to spread your money around a few

Different asset classes so you’re not overexposed in one area the next thing is rates might not even be as bad as you thought when you come to remortgage i think it’s important to acknowledge we’re unlikely to return to the low rate environment that we’ve enjoyed since 2008 and the consensus online seems to be that anyone remortgaging at the minute should look

To lock in a deal because rates will likely rise leading up to 2023 but beyond that nobody knows and if the forecasts are correct and inflation does come under control they could start ratcheting down the rates from then so you could panic overpay leading up to that and then find your remortgage is actually not as grim as you thought finally and i think this is

A big one the impact of overpayments might not be even that good because let’s say your biggest concern isn’t the best returns but instead you’re worried that when it comes time to remortgage you’re not going to be able to afford your payments once they shoot up i just sit here and question how much of an impact making over payments to your mortgage is going to

Have on the overall payment that you need to make on a monthly basis if you overpay by 10 on the mortgage within a 12-month period you’ve got to commit say 20 000 pounds to the mortgage in extra payments probably only to bring the payment down by a couple of hundred pound a month than what it was wouldn’t it be best to have that cash sat there instead so that if

You can’t afford the payments you’ve got the 20 000 pound there which can help support you making the mortgage payments across the term before you get to refinance again hopefully a lower rate i wanted to sit here and just give a definitive answer to this question but i think we all know the truth is there isn’t one for me personally i think if you’ve got a long

Time left on your mortgage a mortgage represents some of the cheapest debt you’ll ever get even at the higher interest rates and inflation and the appreciation and the value of the home over time will diminish the impact of the mortgage and the debt on your finances but i can also appreciate that someone near the end of their mortgage might sit there and go well

This guaranteed return in the short term right now is much better than the potential of the stock market over the next few years so i’m just going to hammer it and there’s a lot of people there that will value the freedom of paying off a mortgage far more than they will the potential risk or return of the stock market over the next few years whenever we make a

Decision about our finances we’re unlike sandra bullock we don’t win both ways we make a sacrifice we decide to allocate capital to one thing and that ultimately takes away from another i can’t sit here and tell you if that trade-off is worth it to you for those of you who are still sat there thinking well i’m unsure what i want to do in terms of paying off the

Mortgage etc there might be another option that you could consider that might just give you the best of all worlds let me explain what i mean i was having a chat with a good mate of mine his name’s kiki i met him the other day and we went out in liverpool with another one of our mates he’s called polly we’ve all now come to the decision that we’re never going to

Drink again now when we weren’t dancing to german lumper bands playing scar classics we were pondering this point about overpayments between us you see cakes recently bought a home and he is worried about rising interest rates and the impact that’s going to have on his monthly payment when it comes to refinance because he’s currently on a pretty good deal let’s

Call it say two percent but he’s also worried about committing all of his spare cash to overpaying his mortgage and a lack of flexibility that gives him in terms of if something was to happen to his job etc that he can’t get the money back out of that mortgage very easily so to combat this he’s currently saving cash in a high interest savings account at a rate

That is higher than his mortgage not by much like i said he’s on a two percent and he says that he can get 2.5 percent on cash savings i think he’s using a company called zooper for this one benefit of rising interest rates is a better return on savings accounts even if it does take these banks ages to trickle through the rates they’ll slap the mortgage rates up

Instantly they’ll pull him off the shelf at a sniff of the rates rising but you know it takes months for them to trickle down the interest rate rise into savings accounts so key he’s now building up a pot of cash so when it comes time to remortgage if rates are sky high he can make the decision to pay a lump sum off and to reduce the balance and get a better

Interest rate or if this all calms down and central banks bring interest rates back down he has a pot of cash there he can invest in the markets or in any other opportunity that comes his way and finally if the worst happens and he loses his job he can use that part of cash to maintain mortgage payments while he finds work now while cash is being eaten away by

Inflation and that is not ideal these times are heavily uncertain and no one knows what’s going to happen and at least with this approach you’re preparing for all eventualities for me personally stopping investing is never the answer especially in the bad times as this is often when the best long-term returns are to be had but instead of letting the gravity of the

Situation wear you down get ahead of the decision plan for it and give yourself options so if the narrative changes you can always pivot right i know for a new investor sat here right now they’re probably thinking why have i decided to start investing at the worst possible time ever these nine percent returns that everyone used to talk about seem long gone now

Well you need to watch this video next in it i show why nine percent returns have always been rare and never really been a thing but why that is ultimately okay also i get kicked out first class on a train and i end up at a finance youtuber’s celebrity house so yeah enjoy that

Transcribed from video
Stop Investing And Pay Off Your Mortgage. By Damien Talks Money