Should You Pay Off Your Mortgage Early Or Invest Your Money In 2025? | Finance Consultant Explains - video Dailymotion

Matt | Personal Finance

Are you wondering whether to pay off your mortgage early or use your spare money to invest?   In this video, I break down the numbers and compare the pros and cons of both options, providing a detailed comparison to help you make an informed decision based on your personal situation. Watch now and get the clarity you need to choose the best path for your money!  #homeownership #mortgage #mortgagerates #investing #stocks #shares #stockmarket #flat #property #firsttimebuyer #propertyownership #debt #debtfree #retirementplanning #personalfinance #moneytips #mortgageoverpayment

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00:00If your goal is financial independence, then you may be asking yourself, is it better to pay off

00:05your mortgage early or use that money to invest? In this video, I'm going to compare the two options

00:11and share some of the pros and cons. Understanding what's best for you is going to depend on a number

00:17of factors, including what interest rate you pay and the length term and how your mortgage is

00:22broken down. From this, you can work out what makes most financial sense for you. If you're

00:27new to this channel, I'm Matt. I'm a finance consultant. I've spent over eight years working

00:32for one of the top consulting companies in London. I now run my own company and on this

00:37channel, I talk all things personal finance. So let's first look at mortgages. A mortgage

00:41is a bank loan to a property buyer and it's typically made up by the loan amount plus an

00:46interest charge from the bank as a percentage of that loan amount. Mortgages follow something

00:51called an amortization schedule, which shows each payment due on the loan until the end

00:56of the mortgage term. If we go through an example, John is 40 years old and has a mortgage of £200,000

01:02on a property worth £400,000. So a 50% loan to value. The mortgage term remaining is 20 years

01:09and the interest rate on the mortgage is 5%. So the monthly repayment is £1,320. At the start

01:17of the mortgage repayment, £487 per month goes to paying down the loan and £833 goes to interest

01:25on the loan. That means that the total cost over the full term of 20 years, if the interest

01:30rate remained the same at 5%, would be £316,779, meaning over £116,000 is paid in interest

01:40on top of the original £200,000 mortgage loan. So when looking at the financial benefit of paying

01:46off your mortgage earlier, if you can reduce the loan amount faster, then not only are you paying

01:51off your mortgage quicker, you're also reducing the amount of interest paid on the mortgage,

01:56saving you a lot of money over the long term. Paying your mortgage off early has a number of

02:00benefits. Firstly, it gives you increased peace of mind and reduces your risk. As the smaller your

02:06mortgage is, the less chance you'll have of financial problems, for example, covering a period

02:11of unemployment or long term illness. Secondly, it lowers your debt to income ratio, which may enable

02:17you to secure additional loans to fund other investments or business ventures. It can also

02:22have tax benefits. If you're investing in stocks and shares, then any income or capital gains outside

02:27an ISA is taxed. In contrast, paying down your mortgage delivers a tax free return via the future

02:34interest payments that you'll never need to pay. And the final point is that it's simple. You just make

02:39the early mortgage payment online or over the phone with your bank compared with investing in stocks or

02:44shares where you really need to research before investing. Now let's look at the opportunity cost

02:49of using that money to invest instead of paying back a mortgage faster. If you were to invest in

02:54the stock market, for example, the average annualized returns on the S&P 500 is around 7 or 8%. There is

03:01risk in the stock markets and returns can fluctuate each year. For example, with a financial crisis in

03:072008, markets dropped and returns were on average negative 37%. So a lot of people who had investments

03:15in the stock market and sold at this time were losing money. In this year, it would have been better

03:20to pay back your mortgage than invest. But then the stock market rebounded in 2009 with returns of 26.5%.

03:28So in that year, it would have been better to invest rather than pay back your mortgage.

03:32It's hard to forecast the ups and downs in the stock market. And generally investing with a long

03:38term mindset reaps the best rewards. The opportunity cost of investing versus paying back your mortgage

03:44early really depends on your personal situation and the economic climate. You'll need to consider

03:49things like how many years do you have left on your mortgage versus how many years left to invest?

03:54What's your loan to value? And what are the current interest rates? But generally speaking,

03:58the more time you have left on your mortgage, the greater the potential benefit of investing is

04:02over that same time period. That's because of the power of compounding your investments.

04:07Let's look at some examples. Based on the example I gave earlier of a property owner with a £200,000

04:13mortgage over a 20-year period at a 5% interest, I've looked at the following four scenarios.

04:19Scenario one is a standard repayment mortgage with any spare cash being spent on lifestyle.

04:25Scenario two is a standard repayment mortgage with spare cash of £500 per month going on mortgage

04:31overpayments. Scenario three is again a standard repayment mortgage but with the £500 per month

04:37spare cash being used to invest rather than make mortgage overpayments. And then scenario four is

04:43an interest only mortgage making zero payments on the loan amount, only paying mortgage interest and

04:48then investing 100% of the remaining money. Calculating net worth for these four scenarios shows that

04:54investment scenarios three and four give the best financial outcome with the interest only mortgage

05:00and investing the remaining money the overall winner. This is because the returns for investing in this

05:06example are higher than the interest rate and you compound the returns immediately which grows the

05:11net worth balance exponentially. When the variables and assumptions change, so does the outcome.

05:16If the investment return is only 3% and the interest rate remained at 5% then scenario two where you're

05:24paying back the mortgage is better. And if you adjust the mortgage length and you only have five years

05:29left on the mortgage then the financial benefit is much closer between paying back the mortgage and

05:34investing as the benefits of compounding investments over time is greatly reduced. The two key takeaways are

05:41the lower the interest rate the better it is to invest and the longer the mortgage time horizon also the better it is to

05:48invest. Although more risky than paying back your mortgage early, investing can give a larger financial benefit. It

05:55really depends on your personal circumstances. I suggest using a mortgage versus investment calculator like the one

06:02I've shown in the video today and put in your own personal situation and also speak to an accountant and mortgage

06:08advisor to work out what's best for you. I hope this video has been helpful. Feel free to leave any

06:14questions in the comments and give the video a like and a subscribe and I'll see you next time.

Should You Pay Off Your Mortgage Early Or Invest Your Money In 2025? | Finance Consultant Explains

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