Advising Investment Clients About Mortgage Debt

Tomlinson, Joseph A.
June 2002
Journal of Financial Planning;Jun2002, Vol. 15 Issue 6, p100
Academic Journal
The article offers advice for financial planners in advising clients about mortgage debt and investments. Mortgage debt is a popular discussion topic between clients and advisors. Common questions include should I pay down my mortgage faster? and should I take out a home equity loan and invest in the market? All these questions involve issues of leveraging investment portfolios with mortgage debt. This article focuses mostly on fully taxable investments. Perhaps the most important conclusion from this article is that there are no easy rules of thumb that can be quickly applied when advisors and clients discuss issues involving trade-offs between investing versus paying down mortgage debt. Some advisors or clients may feel they can earn higher returns by focusing on investments in attractive industries or sectors. The author's view is that sector concentration will likely add significantly to volatility without helping returns. Diversified portfolios offer a better chance of success. When investing in bonds or other fixed income investments instead of stocks, borrowing money at a fixed rate and then putting the funds in fixed income investments is almost always a bad idea. Such investments tend to offer much narrower spreads over mortgage rates than we might expect from stock investments, and they also may carry risks that do not diminish significantly with longer time horizons.


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