Martin Hawes on should you invest while you have a mortgage?

Martin HawesMartin Hawes
Chair, Summer Investment Committee

I’ve been involved in financial markets and financial advice for decades. In that time, there is one issue more than any other that has been asked and discussed: should you invest while you have a mortgage?

For me there is an easy answer to this question: if you have some spare cash – whether lump sum or on-going surplus from your salary – these funds should be applied to repay debt rather than invested.

There is one big exception to this advice (KiwiSaver – more on that later) but reducing and eliminating debt should be your first financial target. That means that any lump sum that you receive (for example an inheritance, gift, sale of an asset etc.) or any cash that you have left over after paying your regular expenses should go to debt repayment.

The reason for this is that if you choose to use spare money to invest, you must get an after-tax investment return of at least the equivalent of the interest rate that you are paying for your mortgage. That means that if you are paying 5.5% p.a. interest on the mortgage and you invest instead of paying off the mortgage, that investment must return at least  5.5% p.a. after tax to have you in the same place.

You may be able to get an investment return of 5.5% p.a. after-tax, but you will need to take some risk to get it. And, of course, repaying debt has no risk. Therefore, on a risk adjusted basis you would have to find an investment which returns significantly higher than 5.5% p.a. - and few investments will give you that.

Therefore, in most circumstances, you should pay off debt in priority to making investments.

Of course, one of the worst things that you can do financially is to have money on deposit in the bank while you have a mortgage. If you do this, you are effectively lending the bank your money (the deposit), the bank puts a profit margin on and then lends your own money back to you (the mortgage).

Such a situation looks something like this: the bank will pay you (say) 3.5% p.a. for your money on deposit which might reduce to 2.5% p.a. after you have paid tax on the interest. The bank then charges you 5.5% p.a. on your mortgage which means that you are 3% p.a. worse off! Having cash in the bank while you have a mortgage really is one the worst things that you can do financially.

KiwiSaver is the big exception to declining to invest while you have a mortgage. Generally, people are eligible to receive subsidies if they are aged between 18 and 65 and anyone who is eligible for subsidies should consider KiwiSaver.

This is because the subsidies on KiwiSaver are so good that they make for great wealth creation. Subsidies and investment returns mean that your KiwiSaver account is likely to grow much faster than your mortgage will reduce - and so, rather than pay off the mortgage a bit faster, people should join up to KiwiSaver and contribute enough to get maximum subsidies.

Of course, some people get more subsidies than others: employees can receive a subsidy from their employer but generally those between 18 and 65 (including the self-employed) get the Government contribution (called the Member Tax Credit).

The amount that you save will grow with your contributions, the addition of these subsidies and with the investment returns. Therefore, you are better off to join KiwiSaver and contribute to it rather than use those contributions to pay off the mortgage.

Make debt repayment your first financial priority and only start to invest when it is repaid. Yes, do join KiwiSaver, but other investments are unlikely to compensate you sufficiently for the risk that you incur by investing instead of repaying debt.


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