Would it be better to invest P500,000 or deposit it into my mortgage bond?

This is a great question that Financial Planners get asked (in one form or another) a lot.

Paying off your mortgage bond would reduce your overall debt, and the cost of your interest – and that would be a good thing. However, putting everything into paying down debt does have some negative factors to consider.

There are two approaches: the old fashioned view that we should pay off home loans and any other debt as quickly as possible to avoid high levels of debt, and the more modern approach that investing in liquid assets can be more beneficial for individuals in the long run.

The Debt-Reduction Option

So, on the one hand, paying down your mortgage bond will allow you to pay off the debt capital sooner, reduce the term of the loan and reduce the overall interest paid. On the other hand, interest rates are the lowest they have ever been, and paying extra money into your home loan does not provide you with liquidity if money is needed.

With the current Covid situation, many risk having salary cuts and losing jobs, so having your cash reserves tied up in a house loan could be more risky.

 The Investment Option

If you decide to invest the money, stay away from investments that have a lock-in, and target your investments at your main financial goals. Those could be retirement, planning for children’s education, or even funding an overseas holiday or an investment property purchase.

Investing in the correct asset classes - equities, property, commodities, bonds & cash (both local and international) could save you more and earn in excess of the interest rate.

 Diversification

Wealth diversification is important - Investors should always spread their risk and not be too concentrated in one asset class. Putting everything into your mortgage bond will mean you might have too much exposure to property and will have all your eggs in one basket.

You could continue paying your home loan as you have been, and invest the P500,000 lump sum. Depending on where you invest, you could gain enough growth and income to be able to use part of the gains earned to pay a portion towards your monthly bond repayments. The invested P500,000 would provide peace of mind as it would remain a liquid asset - and could even be treated as an emergency fund for unforeseen circumstances.

 Get Professional Advice

In conclusion, the decision is not as simple as one might think. It is recommended that you seek advice from a qualified financial planner who can analyse your current situation and guide you in the right direction towards your financial goals.