With interest rates being just 0.5% and mortgage rates being at historic lows, many property owners have decided to overpay on their mortgage.
The reasoning is simple: with interest rates unlikely to remain so low in the long run, why not take advantage of a favourable climate and use the money that previously would have been used to make interest payments (when interest rates were higher) to reduce the total amount outstanding on the mortgage. That way you can pay off your mortgage quicker and live a debt-free lifestyle even earlier than you had envisaged.
A Better Alternative
Although this is a much better idea than simply spending the money you have saved, investing in shares in an even better idea. In fact, in the long run, it could make a much bigger impact on your personal finances and lead to an even earlier retirement date.
That’s because the dividend yields on a number of shares are much higher than the cost of borrowing at the present time. For example, the standard variable rate on mortgages is currently around 4% (depending on the proportion of the property’s value that you borrow), while there are over 20 stocks in the FTSE 100 alone that yield more than that.
So, instead of overpaying on your mortgage, you can use that capital (which costs 4% for you to borrow) and generate an income of more than 4%. And, the vast majority of the 20+ stocks that yield more than 4% are forecast to grow their dividends in real terms (i.e. after inflation) over the medium term, which means that the spending power of the dividends should rise, too.
Valuations
In addition to offering top notch yields, many companies in the FTSE 100 are attractively priced at the moment. Certainly, the FTSE 100 has just hit a record high, but since this level was last reached over fifteen years ago, company earnings have risen significantly and so the index is now much better value than it was at the turn of the century. Furthermore, with the outlook for the UK and global economies being relatively upbeat, now could be a great time to buy shares.
Risks
Clearly, investing in any company carries an element of risk and, as such, it is crucial to diversify. However, with interest rates set to stay low for many years according to the Bank of England, property owners who would normally overpay on their mortgage may be able to afford a degree of volatility in the short run in return for the exceptional long term gains that shares are set to deliver over the long run.
