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PLANNING POINTS:

The time might come when, after covering all your expenses, including your regular mortgage repayments, you face the happy conundrum of deciding what to do with surplus funds. 

Should you put them into the mortgage or invest them elsewhere? It’s a great problem to have - an embarrassment of riches - and the answer isn’t always that clear. Read on if you’re one of the lucky ones.

Why you might want to pay off your mortgage early

If you’re risk averse, one of the most compelling reasons for paying off your mortgage early is that it’s an investment that gives you a guaranteed return - its interest rate. This is particularly appealing during times of high market volatility and low returns, such as we’ve recently experienced.

What you save on the cost of the interest by paying off your mortgage early can be significant. At the current prime rate of 10.25%, the minimum monthly repayment on a 20-year/R1 million bond is just over R9 800. But if you add an additional R600 to this minimum every month, you can pay off your home in less than 17 years - in the process saving more than R255 000 in interest.

The best part? There’s no tax (capital gains tax or income tax) on this saving.

There are also no investment fees involved. And if you have an access bond, you can also use the funds for emergencies. Very importantly, being bond-free provides you with a sense of relief. Who doesn’t feel good when a debt has been paid off?

Why you might not want to pay off your mortgage

There are also plenty of good reasons not to pay off your mortgage. First, you could earn a better return on the surplus amount by investing in a high-equity fund and holding it for the long-term. This is particularly true when investing in retirement vehicles such as a retirement annuity (RA), as the contributions are tax-deductible and the growth within the fund is tax free. This effectively accelerates the growth within the fund, which will probably be higher than a mortgage rate.

Another important reason you might not want to kill your mortgage is the need to diversify your portfolio by investing in assets other than property. It’s unwise to be over-reliant on the sale of your home as part of your retirement plan, because there’s no guarantee you’ll be able to sell at a good price when you need to and release some capital by downscaling.

The need to diversify holds particularly true for entrepreneurs who tend to invest heavily in their homes and businesses and need protection from creditors should their businesses go belly up.

Investments in retirement vehicles such as RAs, pension and provident funds are not accessible to creditors, but your home is - even if it’s in your spouse’s name.

Your home might be your castle, but a good rule of thumb is that your mortgage contributions shouldn’t exceed 30% of your gross monthly income. If they do, it’s likely that you’re not diversifying adequately and cannot really afford your home.

Also, it’s good to start investing for retirement early so that it becomes habitual. Once you’ve seen the benefit of accumulating a diversified portfolio, you’ll be motivated to continue.

And last, there’s good reason not to pay off your mortgage early if it’s on a rental property, as the interest component of the repayments is tax deductible.

It’s your choice, but get advice

Deciding whether to pay off your mortgage early is a big deal. The most appropriate decision depends on your personal set of circumstances including the stability of your income, your earnings potential, time horizon and the prevailing economic climate and interest rates.

Whatever you do, be sure to get advice from a certified financial planner about this decision - and about how to invest the surplus should you go this route.

DIY investors are notoriously emotional investors, and more often than not sell and buy at the most inappropriate times, and end up with investment returns that are lower than mortgage rates.

Janet Hugo is a director of Sterling Private Wealth and the Financial Planning Institute’s Financial Planner of the Year 2018/19.

PERSONAL FINANCE