Should I invest my cash or pay off my mortgage?

Q: I am due to receive a fairly large lump sum. I have an interest-only mortgage but I am otherwise debt free. I don't have any savings.

I think I should use the lump sum to pay down my mortgage. Am I right or is there something better I could do with the money? Would I be better off investing it?

Patrick Connolly is a certified financial planner for AWD Chase de Vere.

A: First you should address your lack of savings. It is always good to have a rainy-day fund of at least six months' earnings to cover emergencies.

It is sensible to pay off debt where you are able to, particularly if any return you might get from saving or investing is likely to be less than the amount of interest you are paying on your mortgage.

With interest rates at a historic low, you could be paying a very low rate on your mortgage, which you might think you can beat with an investment.

This might prove a fruitful tactic, but you are taking a risk at a time when stockmarkets are very volatile and returns on cash are pretty poor. The effective gain you will make on your money by investing it rather than paying off your mortgage with it will be the return you achieve minus the interest you are paying on your mortgage.

Bear in mind that, as you have an interest-only mortgage, you need to consider how you are going to pay off your mortgage loan.