Should I invest in an Isa rather than pay off my offset mortgage?

21 January 2014

Q

I have an offset mortgage of around £400,000, on which I'm paying interest at 2.5% (loan to value is less than 60%). At this rate of interest there is much less benefit in making capital repayments, so I am thinking about placing the money into a stocks and shares Isa invested in a range of global funds and switching the mortgage to interest-only. Even assuming a return of 6%, I would be much better off doing this - and could even afford to reduce my capital repayments. Clearly, this is a higher-risk approach but it seems like the risk is minimal given this approach assumes retiring at 60 and not downsizing. I could always retire at 65 and downsize if the 6% return did not materialise.What are your thoughts?
From
RS/St Albans

A

In this very low interest rate environment, you are not alone in wondering whether it's worth taking some investment risk in pursuit of higher returns.

On the surface, there is a fair chance that doing so might leave you better off. However, there are two main potential catches to consider. Firstly, interest rates could rise in future. In the longer term, rises are inevitable and this might mean investing to provide a higher return becomes a much taller or even unrealistic order. You should also check whether your current mortgage rate is explicitly linked to base rate for the life of the mortgage. If not, you could find your interest rate rising in future even if the base rate remains static.

Secondly, as you understand, investments can be pretty volatile and there's no guarantee you'll do better. Aiming to invest for at least 10 years and combining a range of asset types that tend not to all move in the same direction at the same time should improve your chances. Bear in mind you'll need to hold your nerve if investments fall in value in the shorter term.

While I wouldn't normally encourage anyone borrowing to invest, your situation is one of the few where it can potentially make sense, subject to the above caveats.