Given increasing interest rates, does it make sense to pay off your mortgage debt or should one...

Question:

Given increasing interest rates, does it make sense to pay off your mortgage debt or should one invest in bank deposits, equity, etc.? Why?

Interest Rate:

The interest rate indicates the cost of borrowings and also the return on investment. An increase in interest rate would make loans less attractive to acquire for business expansion.

Answer and Explanation:

In this case, the answer would depend on how the mortgage interest rate was stated in the mortgage agreement. If the mortgage interest rate is a fixed rate for the entire life of the loan, an increase in interest rate would not cause additional cost to the home buyer.

However, if the mortgage interest rate was a floating rate according to the market interest rate, the home buyer should think of paying debt sooner when their available money is not set aside for other upcoming expenses or investment. This decision would help to reduce the monthly payment and the interest on the mortgage loan.

On the other hand, if the available money could be invested in an investment or bank deposit with a higher return rate compared to the mortgage interest rate, the home buyer should process that investment since the return on investment can cover the mortgage interest expenses.


Learn more about this topic:

Loading...
Buying a House: Mortgage Types & Loan Length

from Finance 102: Personal Finance

Chapter 7 / Lesson 4
9.3K

Related to this Question

Explore our homework questions and answers library