Quite often I am asked whether or not a client should pay their home off or invest, and lately there has been a definite increase in the discussion about whether or not interest rates will increase, which in turn increases the discussion about investment versus debt reduction.

On the question of, 'Will interest rates go up?” I can tell you right now – Yes they will.

The unknown factor is when and on that question my crystal ball suddenly went foggy.

So why is it that everyone is so concerned about whether or not interest rates will increase? Shouldn't the real concern be, 'how much interest will I pay?”
After all the interest rate is important in a home loan, however, it is only part of the equation when determining how much you will repay on a mortgage.

For most people repaying a mortgage over the traditional 25 year term will see them pay up to 2.5 times what they borrowed back to the lender. In other words, borrow $300,000 and pay it back to the lender over 25 years and you will pay back just under $700,000 (assuming an eight per cent interest rate and payments are made monthly); yes that's a lot of money.

So if you can get a 0.5 per cent reduction in your mortgage the interest over the same period of time is now only $665,000, however, if you could not get an interest rate reduction, but made fortnightly payments (equivalent to your normal monthly payment, i.e. the monthly payment divided by two), you would only pay $601,000 back and it would only take you 19 years to pay off the home.

So in a longwinded way, the answer to the very first question of whether you should pay your home off, or invest, the answer is, 'it all depends”. However, you should do something and while trying to make up your mind on whether you should invest or not, pop into your bank and ask them to provide you with a small portion of your loan as a flexible credit facility, (every bank I know of has one of some description) so that while you try to decide what to do you can be making extra payments into the mortgage. If you decide later that you want to invest that money you can redraw those funds and invest them appropriately.