From time to time we find ourselves with a lump sum of cash in excess of our immediate needs. It might be an inheritance, a bonus or some other form of unexpected windfall. This question stumps many people into inaction and to avoid working through the issues.
Here are two key things that we think you should consider and an example to show you how this might work out in practice.
Interest rates vs investment returns
Mortgage interest rates are relatively low. According to the Bank of England the average Standard Variable Rate in the UK was 3.58% (end of April 2016), but you may be paying less than this. Check your mortgage interest rate. You should consider paying off high interest rate debts such as credit cards before investing.
Whereas mortgage interest is paid away, investment returns add to your wealth. In fact, the power of compounding means that you can get growth on your growth! Your capital is at risk, but you have the opportunity to increase its value if you achieve higher returns than your mortgage interest rate.
Access to capital
Once you have used your capital to reduce your mortgage you will no longer have access to this money. You will have to pay off your mortgage eventually, but if you invest the capital you can use it in the meantime to help you achieve your financial objectives.
It might be possible to extend your mortgage if you have an unexpected expense such as replacing the car, but this could be costly and take more time to access than you have available. You probably wouldn’t be able to extend your mortgage if you wanted to access this money for another purpose such paying for a wedding.
However if this money is invested you can access this quickly and easily. Please remember that when investing you should consider a time frame of at least five years.