Ben asks: I have a mortgage on my house with about 10 years of payments left. I also recently inherited a number of shares, the value of which slightly exceed the total amount I still owe on my house. What should I do?
1. Sell the shares and become debt free, using the extra money I will then have every month to start investing in shares from anew.
2. Keep the shares and keep paying off the house over the next 10 years.
If the answer is to keep the shares, what would your honest answer be to someone that asks you if they should take out a second mortgage on their house to invest in shares? Would that not be the same as not selling the shares?
Maya replies: I really like the way you ask the question about the second mortgage — you raise an excellent point.
The reason taking a second mortgage to buy shares is not the same as keeping your share portfolio is that your current mortgage falls into your financial plan.
You need a place to live and your mortgage is in effect a rent which will ultimately allow you to own your home.
Your share portfolio could be used to supplement your retirement funding or provide you with flexibility in your career later in life. In 10 year’s time once you have gained work experience and paid off your home you may want to start your own business or move into consulting and dictate your own hours. Money gives you flexibility.
By taking out a second mortgage you go further into debt simply to buy shares — that can all go horribly wrong.
In your situation I do not believe there is a right or wrong answer — just a personal one. Currently your interest rate is about 9% so you need the share portfolio to outperform that. Historically that has been the case over a 10 year period.
Fund managers are warning that we will see lower returns but still around 12% per annum. That is not to say that we won’t see further market corrections in the short-term.
However you may feel more comfortable knowing that your house is paid off and it provides you with a sense of financial security. If you chose this route make absolutely sure that you put a debit order in place to build up your savings again — and make this a non-negotiable.
Psychologically we are more likely to repay a mortgage than we are to build up savings because if we don’t pay our mortgage we lose our house, whereas our savings are more long-term so we do not feel the immediate impact of not saving today.
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