High Return, Low Risk Investments
It’s every investor’s dream, a high return, low risk investment but everyone will tell you it isn’t possible. It depends on your definition of possible or impossible, and more to the point where you are looking. This is not some complex financial instrument that has a cool sounding name which is barely even understood by its creators let alone mere mortals. We are talking about your mortgage!
Surprised? You shouldn’t be because the amount of return you can get on even an extra £100 paid towards your mortgage every month can have staggering results. Let’s take a concrete example.
High return investments are of course a great idea, but come with their associated risks.
Presuming a mortgage of £150,000 at an annual interest rate of 5% over 30 years you will be paying £137,000 in interest. The latter is based on the presumption that you have a fixed rate mortgage. Paying an extra £100 every month leads to paying off your mortgage in under 24 years and the total interest paid will be £104,000, amounting to £33,000 in savings.
Any investment counselor worth his salt will tell you that an investment portfolio should be varied and that you shouldn’t sink all your savings into one stock or fund. The best type of asset allocation is one that combines both low risk investments, for security, with medium to high risk investments for growth. Your mortgage is the ideal option for the low risk end of your portfolio because the other option usually means investment in bonds which have an average return of 3%. By paying off your mortgage sooner, your return on investment will be at least 5%.
Looking at it in absolute terms if you invest £100 every month in bonds with an annual interest rate of 3% you will make approximately £22,000 profit over 30 years, whereas with your mortgage you will save £33,000 in 24 years. The numbers speak for themselves.
Don’t fall into the trap that saving money is not the same as investing because by paying off your mortgage sooner you get to keep that money in your wallet rather than giving it to the bank for free. You also need to remember that interest rates on bonds tend to only be fixed for a certain number of years, after which they can fluctuate, and they don’t always fluctuate in your favor.
