≡ Menu

Why I’m not paying off my mortgage

For a brief moment I felt the joy of clearing my mortgage early. Now I have some explaining to do: because I’m not going to pay it off after all.

I have the opportunity. I own the full amount of my mortgage in cash and index trackers – split 50:50. The simple thing to do would be to flog off the trackers and hand over everything to the bank with a cheery: “Thanks for the loan, pin-stripes, you’ll never hear from me again!”

That would be simple. That would be safe.

It’s got a lot going for it.

But I can’t do it. Not with interest rates at an all-time low.

The opportunity

Interesting times

This feels like a historic opportunity to me. A chance to earn more by staying invested in the market over the next 10 years than I could gain by removing the mortgage-leech that’s latched onto my cash flow.

My assets currently yield double the amount I’m paying to service the debt. That alone stays my hand.

But this is a story about trading certainty for potential.

My current mortgage interest rate is 1.24%.1

The FCA is projecting nominal UK equity growth rates of 6.5% to 8% over the next 10 years. That would comfortably spank my tracker mortgage, as long as interest rates don’t go beserk.

Liquidating my equities now will deny me the potential for a decent return from the stock market for the next few years.

It would take several years to rebuild my position and I’ll always be saddled with the opportunity cost if the market marches on.

Yes, I could pocket the guarantee that my mortgage can’t get back off the floor like a B-movie baddie, but that comes at the expense of diversification. Most of my wealth would be concentrated into one, large, illiquid asset. With curtains.

And that asset comes with more baggage than the Sultan of Brunei. I suppose we could sell the house in the event of a crisis but the emotional fall-out would be huge.

Diverting cash or equities from the ‘mortgage jar’ would stick in the craw too, but at least I can do that in small chunks. It’s not like I can sell off the spare room to cover a period of unemployment.2

So the plan is to keep building my cash holdings over the next seven to eight years until I eventually hold my entire mortgage balance in safe assets.

Meanwhile, the equities that are currently earmarked for the mortgage gradually move into the retirement jar as they are supplanted by cash.

I win if they bring home nominal growth that outstrips my mortgage interest rate.

What does disaster look like?

I’m taking a risk here, I’m not kidding myself. There’s a danger of trying to be too clever and The Investor has neatly stacked up the case for investing versus mortgage taming before.

But risk needs to be couched in personal terms, and for me disaster is a five-way car crash that looks like this:

  • Losing my job.
  • Losing my redundancy pay.
  • Not finding another job.
  • Ms Accumulator losing her job, too, and not finding another job.
  • Interest rates rising like a Saturn V rocket while equity prices plummet like Beagle 2.

Now that would be a divine comedy roast with sauce, but I reckon the risk of it all happening at once is relatively low. (At least I’d make a few quid as a cautionary tale in the newspapers, I suppose.)

If equities dip then I’ll be back in the mortgage red but I’m happy to ride that out. I only really need the equity funds in a hurry if I can’t service my interest payments3.

Of course, a serious crash is the bunkmate of mass unemployment so it’s worth noting that equities may offer scant protection just when I need them most.

If the scenario is soaring interest rates then I have a 50% cash cushion and a high savings rate to protect me.

As long as I remain in work, then I can always ease the pain by diverting monthly income not needed for essentials. That cash cushion should increase and I can always sell the equities if things get desperate.

Again, let’s acknowledge that equities are about as steadfast as a celebrity’s entourage once they can only get bookings at Butlins. The stock market is liable to be hammered when interest rates spiral so I could be forced to take agonising losses if things really go awry.

Is it worth it?

If I have seven years of bad luck and the markets decline then I’ll forever lambast myself: “You should have sold the trackers, paid the mortgage and invested future cash streams at ever cheaper prices.” Or words to that effect.

Psychologically I could rue this day for the rest of my life.

And there will be scares along the way. Scares that could last for months or years. I don’t think I’ll panic. I believe I’ll keep on paying down the mortgage like everyone else while waiting for equities to come back.

Still, you can’t be sure.

Lining up the negatives like this is another way of testing my resolve and I must admit the “No” camp looks strong.

Especially when you consider that any triumph is likely to be small in comparison to the potential for failure. That’s humans for you. Hardwired to hate loss more than we love gain.

But I don’t take many risks. This is one I understand and am well prepared for. The satisfaction of being mortgage-free is not as important to me as knowing I have the resolve to get there.

I can be patient a little longer because the real win is achieving financial independence as soon as possible. That’s something I’m ready to throw the dice for.

Take it steady,

The Accumulator

  1. I have a lifetime tracker: 0.74 over base. []
  2. Sure I can rent a spare room, but you get my liquidity point. []
  3. My mortgage is interest only. []

Receive my articles for free in your inbox. Type your email and press submit:

Comments on this entry are closed.

  • 101 The Investor March 19, 2016, 9:54 am

    @Ian — P.S. Apologies for intemperate use of “grown-up” in the last sentence. Haven’t had a coffee yet! 🙂 Have changed to “nuanced”.

  • 102 Michael March 19, 2016, 11:08 am

    The Investor,

    Don’t make the mistake of confusing The Bank of England Base Rate with mortgage rates per se. Most lenders charge approximately 2% above base rate on average. So, by your own admission, “rates of 5%+ are very normal”. Add on an extra 2% for the lenders spread and you seem to be pretty close to agreement with Paul.

  • 103 The Investor March 19, 2016, 11:14 am

    @Michael — Yes, I obviously understand that. Sure, we can get to 6-7% for mortgage rates. But “Normal” doesn’t mean “persistent”. It would be “normal” to have some sunny days this summer in London. If only they would be persistent.

    Saying something can happen in the future and has in the past is very different from saying it’s “bad advice” to do something now with interest rates near-zero (you can get a 5-year fixed rate, for example, cost just 2.29%, and a ten-year rate at barely 3%).

  • 104 Michael March 19, 2016, 11:33 am

    The Investor,

    I think you have somewhere along the line lost track of Paul’s original point. He made a remark that “over your mortgage’s lifetime, chances are that the interest rate you pay is going to exceed an AVERAGE of 8%”. You (almost) agree with him by making the point that a base rate of 5% and morgage rates of 6-7% are normal. Fair enough.

    Going on to point put RIGHT NOW (with a Bank of England Base Rate at near-zero) you can get a 5-year fixed rate, for example, costing just 2.29%, and a ten-year rate at barely 3%), and making speculative investments on that basis is a different issue altogether.

  • 105 The Investor March 19, 2016, 11:37 am

    This is just a frustrating Internet-style debate now: I try to add some wider context to the debate, and it gets picked over in micro-detail that doesn’t apply to the original comment maker. My quick non-exhaustive comments are put under the microscope; Paul’s aren’t. Etc.

    A ten-year fixed rate mortgage of 3% is 40% of the life of a mortgage. It’s very significant. It also gives you ten years to change course if for some reason mortgage rates leap to 8%, which absolutely nobody thinks remotely credible. (The 10-year gilt yield is currently near 1.5%, and the market still fears deflation).

    We’ve all had our say for now.

  • 106 The Accumulator March 19, 2016, 1:01 pm

    I haven’t had my say! And I’m sure I will regret pitching in but…

    This piece was not advice. It was an exposition of my own particular situation and thought process.

    I clearly outlined the risks and am not arrogant enough to think I know the future. Risks if taken must be lived with.

    Most importantly, we’re not talking a 25-year gameplan here. As mentioned, I’d be de-risking over the next 7 – 8 years (starting 2 years ago). In particular, the historically low rate of interest, the fact that I’m on a tracker mortgage and my own abnormally high savings rates were all big factors in the decision.

    To repeat, this is not generalist advice along the lines of “Hey losers, why don’t you man-up and bet the farm on the stock market instead of paying off that mortgage? Ya wimps!”

    Good to debate the wisdom or otherwise but let’s keep it social.