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Pay off the mortgage or invest?

Pay off mortgage or invest

When interest rates are high or rising, a tricky question for private investors comes to the fore: “Should I pay off my mortgage or invest?”

Most of the time, paying off the mortgage is a compelling option. But low mortgage rates such as we saw in 2009 and 2010 – coupled with the stock market buying opportunity of a lifetime – turned conventional wisdom on its head.

Borrowing to invest is usually a bad idea. Mortgage debt is the cheapest and safest debt available to private investors, but even then there’s still a good case for paying off your mortgage early before investing. I’ll get to why in a moment.

However, when you can get a ten-year fixed mortgage rate charging less than 5% – and you still can, as I write – then the decision is not so clear cut.

The long-term returns from the UK stock market have averaged around 10% a year1, but you can’t get a cheap mortgage to buy shares. By running a 5% mortgage on your house and using any spare cash you could have used to reduce your mortgage to buy shares that might earn 10% over the long-term instead, you can theoretically pocket the difference.

And remember, 10% a year is the average nominal return from UK equities. In the first half of 2009, the odds of superior returns (i.e. >10%) over the medium term looked pretty good. As I wrote in May 2009, a decade of 20% a year returns seemed possible, given the huge slump in shares we’d seen.

It was a profitable call, and a great time to invest: In the two years since the March 2009 lows, the UK FTSE 100 has risen around 70%. Emerging markets have done even better. So if you bought shares with the money you saved through lower mortgage payments, then you deserve applause – or your own hedge fund!

But were the many who have instead been paying off their mortgages in record numbers all chumps?

Not a bit of it. There are powerful reasons why paying off your mortgage early is never a bad idea, even if in hindsight you could have made more money elsewhere by being bolder.

So let’s look at the pros and cons, to help with your decision.

First things first: Non-mortgage debts must go

If you’ve got any credit card debt, store card debt, personal loans, or similar – anything at all except a student loan or a mortgage – then you should get out of that debt first.

The interest rates on these debts typically range between 9-29%. The risk vs reward ratio of trying to grow your money at a higher rate than you’re paying in interest on this expensive debt is abysmal.

  • Running a 25% credit card debt while hoping to earn 10% from shares is akin to trying to cross the channel in a rowing boat made from chicken wire, while bailing out the rising waters with an ice cream tub.

At 5% or even 6% debt interest, the maths might work. At 24% (or even 7% or 8%, after your hoped for 10% returns are reduced by  taxes and costs) it doesn’t.

You should also have an emergency fund in place before you start investing or making over-payments on your mortgage,  in case you need cash in a hurry. (An alternative is to use a flexible offset mortgage, but the rates on these are often higher).

Pay off mortgage: A good, safe option

If you can pay off your mortgage early, you’re potentially in a great place financially. There is no law of smart investing that says you should do anything riskier than getting rid of the mortgage first. Many people would kill to pay off their mortgage early.

Absolutely crucial point alert: Paying off a mortgage is the equivalent of saving! It doesn’t feel like it, but it is. If you’re paying 6% on a mortgage, and you pay off £10,000 of your outstanding mortgage with a cash lump sum, that’s the equivalent of earning 6% on £10,000 in a savings account.

In fact, the 6% you ‘earn’ from paying off a mortgage is much better than earning 6% from savings. That’s because outside of an ISA or pension you’ll be taxed on the 6% from savings, reducing your returns. But by paying off a 6% mortgage debt, you’re getting the whole 6% on your money.

  • Paying off a 6% mortgage is equivalent to earning 7.5% if you’re a basic rate tax payer, or 10% if you’re taxed at the higher rate of 40%.

Besides being tax efficient, paying off a mortgage early dramatically shortens the years you’ll spend in debt. For example, let’s say you borrow £200,000 at a rate of 6% over 25 years.

  • According to the Monevator mortgage calculator, you’d pay £1,289 a month, give or take a Mars Bar.
  • The calculator also works out over-payments. Let’s say you can round your monthly payment up to £1,500 by overpaying just £211 a month.
  • You’ll save £56,101 and cut nearly seven years off the life of your mortgage.

Now, I’m ignoring various things here, like the time value of money – £211 today is worth a lot more than it will be in 25 years time. But the same would be true if you invested it in cash or a tracker fund, instead of spending it now.

Paying off a mortgage early is a great middle-class aspiration, and for good reason. Being debt-free is mentally liberating. You’ll find wealthy people who’ll tell you it’s madness to pay off your mortgage, but they invariably have massive assets elsewhere. For the average office wage slave, being free of the mortgage is nirvana – I’ve never met a single soul who regretted paying it off.

More reasons to murder your mortgage

  • It’s a guaranteed return – you’ll effectively ‘earn’ whatever interest rate you save, unlike the variable returns from the stock market.
  • It reduces ‘big picture’ risk, too – the smaller your mortgage, the less chance of a financial upset like unemployment, illness, or divorce sending your finances spiralling out of control.
  • It’s very simple. There’s no fussing about with funds or shares or anything else. Just direct spare money at your outstanding mortgage and go at it!
  • Along the way, you may be able to re-mortgage to a cheaper rate when you have built up more equity in your home, which saves you still more money over the long-term.
  • You may be more confident about investing in volatile shares if you know you’ve no mortgage hanging over your head – and you’ll have plenty of spare cash to do so.
  • Selling your home is capital gains tax-free. If you decide to sell up and go wandering in your sandals with a rucksack, you’ll not have to pay tax on any profit on selling.

Seriously, you can be too clever in life. Paying off the mortgage early is hard to beat.

Invest instead: Risk and reward

There’s only really one reason why you would choose to invest instead of making overpayments on your mortgage, and that’s because you hope it will leave you richer!

We’ve seen you’ll need to make an average net return of at least your mortgage rate for investing to be more profitable than paying off your mortgage. Generally, that will mean investing in risky assets – possibly corporate bonds or preference shares, but most likely shares.

Shares are very volatile, which means your investment will fluctuate in value. You’ll need to have the stomach to tough out bear markets, where your shares may halve in value or more – over the average 25-year life of a mortgage, you’re certain to see two or three stock market scares.

This is in sharp contrast to paying off your mortgage early, where the return on the reduction in debt is guaranteed.

Note: House prices are volatile but your mortgage isn’t. That’s why paying off your mortgage is so attractive. It’s irrelevant if your house fluctuates in value when it comes to the returns you’ll make – the same fluctuations would happen if you ran the mortgage and invested in shares instead. Reducing the debt is the guaranteed return.

To have any chance of beating the return on paying off your mortgage, you’ll need to keep investing steadily through stock market turbulence, and you’ll need to keep costs low. Regularly investing into index funds, perhaps tilted more aggressively towards emerging markets and small caps in the early years when your time horizon is the longest, will be the best approach for most.

Remember, there’s no guarantee you’ll do better by investing. But historical market returns suggest that over a long period like 25 years, you’d be very unlucky to lose out, provided you invest regularly in equities and stick with it through the tough times.

Also note that if shares do very well for a decade, say, you might want to rethink your strategy and start paying off your mortgage instead, rather than push your luck in what might by then be a stock market bubble.

You wouldn’t have to sell out of your equities – instead you could simply direct your fresh savings towards paying down the mortgage.

More reasons to run a mortgage and invest

  • Investing in equities is for the long-term. If you wait until you’ve fully paid off your home loan before investing, you’ll have a shorter time horizon to benefit from the long-term smoothing of the return from shares.
  • It takes a while to get used to volatility in risky assets. Starting young can help.
  • Diversification: There’s a lot more to the economy than house prices, though it doesn’t always feel like it in property-mad Britain. Do you want all your eggs in one basket?

Personally, while interest rates are low I’d run a (manageable, affordable!) mortgage and invest in equities, at least for as long as I judged shares looked good value. I’d possibly even consider using an interest-only mortgage to do so, which really ramps up the risk factor.

But that will not be the right decision for a lot of people, so do weigh up the pros and cons of paying off the mortgage instead.

It partly comes down to taxes

Finally, because you can’t afford to give up any of your returns if you’re going to beat the guaranteed ‘tax-free’ return from making mortgage overpayments, you can’t afford to pay tax on your investments.

This generally means you’ll need to invest in ISAs or a pension to shield your investment from taxes.

Of course, most employed people take out a home loan while investing in a pension all their working life – whether they realise it or not, they’re partly funding their pension via the mortgage debt, as we’ve discussed above. And it makes a lot of sense to do so, since both mortgages and pensions are long-term commitments.

For those who don’t like pensions or who are locking away enough in them already, ISAs are a great alternative. If you earn enough to have the choice, then filling up your annual ISA allowance and using any extra spare cash to overpay on your mortgage could be an ideal compromise.

Note that everything I’ve written above is in the context of historically low interest rates. If mortgage rates rise to 8-10%, for instance, then making over-payments becomes far more attractive than investing (assuming we’re not in some period of hyperinflation at the time).

  1. In nominal terms, which is also how your mortgage rate is calculated, of course. []

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{ 45 comments… add one }
  • 1 teamdave April 14, 2011, 10:39 am

    Great article. I’m facing this dilemma at the moment myself and had a crack at figuring out what to do on my site:

    http://simpleinvestingadvice.blogspot.com/2011/02/pay-off-mortgage-early-or-invest-more.html

    Couldn’t come to any decent conclusions myself. Paying off the mortgage early seems madness while I only pay 1.39% interest. Putting the money into my Stocks & Shares ISA and giving it the chance to earn 4% + seems more sensible. Yet, I know that the low interest rate scenario is a short-term thing and that mortgage payments will rise massively soon. So any money overpaid on the mortgage now will make repayments easier later.

    But stock market investing is so much fun! And that’s the hardest part about putting money into the mortgage. It’s dull city.

    So many other factors to figure too – housing market crash?, effect of inflation on prices (will the mortgage seem so much in 10 years time?), living today rather than tomorrow (you know, maybe it would be nice to have a holiday while you’re young enough to enjoy it properly), etc.

    Still, not have a mortgage would be great…

  • 2 Moneyman April 14, 2011, 10:39 am

    Well said – although we need to recognise that this property ownership thing is a particularly anglo-saxon bias. For Brits and Yanks (as opposed to many Europeans), buying a house and getting a mortgage is a *big thing* and it a first real major investment in their ‘place in society’.

    Paying off the mortgage is a financial and psychologic challenge – because it usually means changing your mind-set about spending money: most people are shocked by the thought of adopting a more frugal lifestyle, as it is bound up with a different philosophy of life.

    But the basic message is sound, I think (for the reasons you have stated) – get rid of debt before you start investing.

  • 3 stuart April 14, 2011, 12:01 pm

    paying off mortgage early dull city?

    not when you can now see your mortgage account on-line and see interest debt payments fall each month or day as well as capital balance.

    im on track to clear in 4 years

    the disposible income i will have will make me comfortably off–now—-not in 25 years time.

  • 4 Moneycone April 14, 2011, 1:47 pm

    Not the most widely accepted idea, but very sensible in my opinion *and* you back it up with facts!

    Enjoyed this post thoroughly!

  • 5 George April 14, 2011, 7:03 pm

    By investing (when you have a low mortgage rate), you are increasing your liquidity. It is much easier to meet mortgage payments if you suddenly lose your job when you have a year’s worth of mortgage payments available.

    Another time not to rush paying off the mortgage is when you’re in the last few years of a fixed mortgage. Due to amortization, you’ve already paid the interest and now your payments are just primarily going to principal, so there’s no rush now.

  • 6 Lemondy April 14, 2011, 11:14 pm

    Great article! Very well balanced. I have recently switched from investing to paying down the mortgage so this is a very comforting read.

    @George The danger in considering your portfolio as a (backup) “emergency fund” is that its value is likely to be strongly correlated with your job security; i.e. a recession is the time when you are most likely to both need to cash it in, and to find it has lost a lot of value.

    I think there is a something to be said for attempting a kind of counter-cyclical investment strategy: pay off mortgage when equity market PE is high, buy equities when PE is low. (Substituting PE for PE10 or whatever is to your taste)

  • 7 George April 15, 2011, 4:49 pm

    @Lemondy – If one has a year’s worth of mortgage payments stored up in the investment account and the market loses 50%, then one still has 6 months worht of mortgage payments available.

    Additionally, I use stop losses, so in an economic downturn, the stop losses are triggered before much capital has been lost. My account is currently worth 3 years of ALL my expenses. This is the security that liquidity offers and I would not have it if I had put the money towards the mortgage.

  • 8 Matthew April 15, 2011, 5:15 pm

    Personally I fill up my Stocks and Shares ISA each year rather than pay down my BTL mortgages so that I;

    a) keep a liquid reserve fund to pay emergency mortgage payments if I lose tenants

    b) I *think* I’ll be able to make more than 3% on the stock market (which is my combined mortgage rate)

    c) I don’t want to make both my BTL properties any more profitable so if I put the money into an ISA I essentially avoid the tax I would pay on making a profit.

  • 9 ermine April 15, 2011, 9:12 pm

    Didn’t we have ISA mortgages in the early 2000s which are pretty much this idea? Once upon a time you were expected to have a method of paying down the capital of a mortgage as well as servicing the interest (nowadays there seem to be crazies who just pay the interest). One of the alternatives to a repayment mortgage was an interest-only mortgage + a stocks and shares ISA.

    I like Lemondy’s idea of buying during low PEs and paying down during high PEs!

  • 10 Thomas Jones April 15, 2011, 10:19 pm

    There’s a small time bomb out there called “pension mortgages” i.e. using your pension to pay off your mortgage.

    I wouldn’t be surprised if they’re still being sold.

  • 11 The Investor April 16, 2011, 9:11 am

    Super comments everyone! 🙂

    I would just observe that we shouldn’t dismiss any strategy just because it’s not worked or it’s been linked to dubious products in the past. If we did we’d never invest or save in anything – even cash!

    It’s true, for instance, that many endowment mortgages failed, and that on some level they combined investment and mortgage lending. But providers wrapped everything up in an opaque product and opaque operation, and too many products extracted the bulk of the value for the provider, and/or were poorly balanced across customers (so winners were effectively paid for by losers, rather than by taking their chances in the wider market).

    There’s a big difference between doing that, and taking control of your own finances, driving down costs, assessing your risk against public benchmarks like the equity indices — and constantly re-assessing those risks (and also re-assessing the potential rewards, as Lemondy suggests).

    I agree that pension mortgages, ISA linked mortgages and so on have been poor investments for many people, either due to timing, insufficient saving, or them being shoddily constructed.

    But I’d also wager anyone who read the post above and our comments that have followed has done more research than 90% of people who took them out, at least in terms of understanding risk/reward, rather than just listening to an adviser tout dreams for his percentage of the fat.

    I think we need to at least consider all the tools at our disposal in this quixotic quest of ours for financial independence!

  • 12 Kathy April 22, 2011, 3:09 am

    Pay it off!! Thats what I say. I am no genius with investments but my 30 year will be paid off in 14. Once it is gone I can invest that money into savings areas that will allow me to retire with a portfolio that will actually keep me from being a pauper. Alos, it is freedom financially in a very special way that I am looking forward to.

  • 13 manw May 6, 2012, 3:57 pm

    Wow, I love this blog!
    I would love to see a blog post about buying a house outright vs buying a house with a mortgage. or what to do with 400k.
    Thanks!

  • 14 Gerry May 8, 2012, 4:40 pm

    Interesting article and follow on comments. I would be interested to explore the exit strategy using investments instead of simply paying off the mortgage. Do you use your investment lump sum and pay off when it reaches the mortgage value? Hopefully before the 25 year repayment mortgage period.
    Will the investments be on a high or low at that time? What happens if just before you get to your last few hundred quid to complete the market crashes? Early on with £10K saved a 30% fall, whilst not pleasant is less worrisome than a 30% fall when you have £200K and less time to recoup the loss. Arguably this might be the time to be investing! It might be a no brainer if markets have just quadrupled just after your £200K is saved making it 800K but where are we today ……. not so sure, will you be in 25 years time? So not knowing if the market is on a high or low (without hindsight) what is the plan?
    Do you use the “income” to start overpaying from, say, year 10 or from the beginning with overpayments becoming bigger and bigger as time goes on.
    Eventually it has to be repaid and what about the” wasted” ISA allowance if you take it all out as a lump. What would be the best way to exit this?

  • 15 The Investor February 14, 2013, 11:24 am

    @Gerry — Sorry, missed your comment. Personally I would not rely on the investment returns to repay the money you borrow. You’re doubling down on the risks like that, as currently there are no safe investments that are guaranteed to return more than the mortgage rate for 25 years. (It might be different if gilts were yielding 8%, say, and you could get a mortgage for 5%. But that’s very unlikely).

    Also, you don’t want to rely on the markets playing ball in the few years when your mortgage becomes due.

    Much better to make heavy cash repayments and slowly reduce your gearing and your risk as your time horizon shortens, I feel, if you decide to go down what is already a risky path.

    Having a £300,000 lump sum with £200,000 in investments to pay it off after 25 years (when maybe the later was £400,000 a few years before) will leave you feeling sick as parrot as well as far poorer to boot, and potentially at risk of losing your home.

  • 16 James Burn April 10, 2013, 8:25 pm

    I think the key variables are
    1. how much you currently have invested in high risk investments (equities)
    2. how much you currently have in low risk investments minus the mortgage value
    3. how much you expect to earn in future before retirement

    Most people are going to have 3. much bigger than 1. until around 20 years before retirement. So these people will just want to invest in equities and not pay off mortgage. But in the next 5 years, they are probably going to want to focus on paying off mortgage. After that they will want to invest in a combination of 1 and 2.

  • 17 manw July 16, 2013, 9:50 am

    Wow, I love this blog!
    I would love to see a blog post about buying a house outright vs buying a house with a mortgage.
    Also the post was written a couple of years ago, what do people think give current market performance and mortgage interest rates?

    I have 400k, looking to buy a place to live for 550k and cant decide what to do. (11k ISA allowance already used)
    #get a 5 year <3% mortgage and invest in S&S's
    #get a 5 year <3% offset mortgage and invest some in S&S's and some in the offset account
    #get a 10 year <5% mortgage and invest in S&S's
    #play it "safe", put all the money in the house and pay off the mortgage like "normal" people.

    Comments?

    Thanks!

  • 18 Andrew Hallam February 8, 2014, 4:09 pm

    Investor, if I were you, I would hammer down the mortgage instead of investing. Many people would disagree, with interest rates so low. But with mortgage interest rates as low as they are, you can hammer down on the principle owed far faster than you could if rates were high.

    Most people just get used to the idea of having a mortgage (almost) forever. But seeing your net worth increase with every extra payment would feel amazing.

    Yeah, I’m a wimp, but that’s what I would do. The stock market is never guaranteed, but the return from paying down your mortgage is. If you are paying 3.5% interest, then paying it down will be like making a 5% guaranteed pre-tax return. And with rates so low, you could really hammer that mortgage down before rates rise. They won’t stay this low forever.

    When I had a mortgage, I didn’t invest. Yeah…I’m old fashioned. But it works!

  • 19 kc May 13, 2014, 9:40 am

    I am just pondering this very same question having recently retired, partly mortgaged my house to buy a house to rent to be paid off in 6 years, and now having sold my deceased parents house have the ability to pay off the mortgage with no redemption fees.
    A few calculations showed that tax and risk are the two parameters for consideration. The interest on the mortgage is a deductable expense from the rent. The interest on any investment might be taxed in different ways. I do not have the opportunity to transfer into an ISA (as this would take many years of allowance) or SIPP (as that is now frozen for me). However, the capital gains allowance of £11000 per year could be utilised to provide an equivalent tax free income to the mortgage repayment. So any ideas on what growth investments are a sensible risk balance to keep the capital intact for 6 years and grow by 3% after transaction fees?

  • 20 pedro July 12, 2014, 9:18 am

    Personal loans are now cheaper than my 10 yr fixed mortgage deal taken out during the credit crunch. My mortgage 5.39% 10 years running out in 2019 reverting to standard variable, First Direct are advertising 4% Personal Loan seems a no brainer to take one out and shorter the mortgage. I suspect more people are in the same position.

  • 21 Brian July 16, 2014, 7:23 pm

    If you choose to invest instead of paying off your mortgage then consider this question – would you be willing to refinance the equity out of your mortgage (thus increasing your debt) to add to your investment accounts? If not, then you are logically inconsistent.

  • 22 kc July 17, 2014, 9:53 am

    Every businessman or woman borrows to invest. As I said in my previous post, that restarted this thread, profitability is about risk and tax , but I could add that it it also about the effort put in to make the capital work.
    In my case I decided to mortgage my house to buy another house that I now rent. This was not a simple investment decision as it was instigated by a family situation. But, even so, it was a profitable investment with rent easily paying the mortgage and capital gain accruing as well. Another family situation meant I was now able to pay off the mortgage or put the money into equity or bonds or even buy another property. This was the more complex decision as IHT, CGT, IT and risk in timing the stock market were all factors. In the end I decided to pay off the mortgage, but given a different perceived stock market situation , I might have moved the other way. The mortgage was due in only six years, but, if it had been longer, I might have moved the other way. If the BoE had not signalled a rate rise I might have moved the other way. Anyhow, I am now sleeping easier, but if I had been greedy or younger I might have moved the other way….

  • 23 Peter July 17, 2014, 12:37 pm

    kc,
    nobody expects to lose their job, have a major medical problem, become disabled, or invest in a fraud; yet, over the course of a 30 year mortgage the odds that you will experience one or more of these admittedly rare and unfortunate events are far greater than you would like to believe. When your home is paid off it is easier to weather these storms with a minimum of personal adversity. Plan for the unexpected because eventually it will happen.

  • 24 Paul July 31, 2014, 4:08 pm

    Investor,

    I am currently thinking about making overpayments to our mortgage but would like to double check something beforehand. I have one mortgage payment per month but in reality this is comprised of two loans. After initially borrowing 127k, we remortgaged a further 10k a few months later for furnishings. The total current mortgage is 122K at 4% SVR and current repayment £688. However the monthly payment is made up of £635 to account 1 and £53 to account 2. If I begin to overpay, to which account should I direct the overpayment? I’m guessing it doesn’t make much difference if they are both at 4%?

    Thanks in advance

  • 25 stuart July 31, 2014, 4:25 pm

    Id go for lower balance so you can snowball debt repayment ,once payed off

    but technicaly I think its higher balance

  • 26 The Investor July 31, 2014, 7:45 pm

    @Paul — I can’t really give you any personal advice about something specific like that, as I’m not your financial adviser etc.

    If it were me and I had two mortgages on the same rate, as a fan of simplicity I’d clear the smaller mortgage to get it out of the way. (And I’d try not to borrow to furnish in future, even at 4%! 🙂 )

  • 27 Paul August 1, 2014, 9:25 am

    Thanks investor and Stuart, enough said. At least I didn’t buy a new car, I can live with the furnishings mistake at 4% 🙂

  • 28 Matthew September 22, 2014, 3:23 pm

    You need to compare the expected investment returns against the interest rate on the debts. The average annual return from that is 11% a year. Never mind some years it will be less (like the crash a few years ago) and sometimes it will be much more (like this year). The AVERAGE annual gain over the long arc is all we care about, and that’s averaged about 11% a year since inception.

    Now, remove your inflation figure from that. The standard amount most people use is about 3% inflation per year. So now, adjusted for inflation, you can expect to make 7-8% “real money” on a total US stock market investment. Since 7-8% is greater than the 3% mortgage, it makes more sense to put your money towards the investment than towards the mortgage.

  • 29 Phil September 22, 2014, 3:25 pm

    There is a school of thought that says you should invest by mirroring the investments of the ultra-rich, eg Warren Buffett. There is some soundness to this approach – the ultra-rich have access to information we don’t, and by their very actions they can change the financial landscape.

    Let’s say I told you that Buffett has a 17 billion dollar mortgage. Because of various business decisions, he is actually increasing that mortgage value every year.

    What if I also told that Buffett had a magical power that could lower all mortgages at will. I wouldn’t have to tell you that Buffett doesn’t like losing money, and would rather use his magic power than paying back the full mortgage. Wouldn’t getting a mortgage and enjoying Buffett’s magic power when he used it be cool?

    As it happens, if you replace “Buffet” with “US Government”, replace “Billion” with “Trillion”, replace “mortgage” with “national debt” and replace “magic power” with “the ability to control inflation”, you have something pretty close to reality. Nominal debt at low interest (not to mention tax deductible interest) is a good thing if you use it for investing (patience and safety cushion may be required).

  • 30 Jodie September 22, 2014, 3:27 pm

    I am squarly in the investment camp, but i do recognize the choice is not for everyone and for some paying down the mortgage is a better option. To me, this is a simple math problem and there is a very high probability you will come out ahead in the long run by investing. But this assumes you have the self discipline to actually invest the extra money every month and not spend it. I also personally believe that inflation will eventually go higher. If so, your monthly mortgage payment will look like a greater and greater bargain, meanwhile your stocks/mutual funds are likely to keep pace with inflation and give you a stronger return.

    Bottom line, math says to invest but psychology is a factor and if you value the thought of owning a home free and clear you may want to do otherwise. From a math perspective just ask yourself why apple etc have been issuing debt lately even though they have no need for it? Cheap leverage can really juice returns. Your mortgage is cheap leverage.

  • 31 jaime September 22, 2014, 9:44 pm

    I don’t think it’s quite as straightforward as saying “math always wins” when the math isn’t always known. If you’re bearish on the market in the near-term and believe your $85k may be reduced by 40%, the math may be on your side to sell those investments now, lock in your return on those gains and then lock in an additional 2.75% gain by paying off the mortgage.

    You’re making assumptions either decision you make, which means there is definitely an emotional side to it. Being more conservative and pessimistic about the market and your future job prospects will influence your “math” one way while being aggressive and bullish will send you another direction.

    As has been mentioned in plenty of the threads, either way you look at it is a win-win. The important thing is that you’ve put yourself in a situation to make the decision, as long as you keep that up, you’re probably gonna be all right regardless of what happens with the stock or housing market.

  • 32 Steve September 22, 2014, 9:58 pm

    It’s not purely a financial decision.. It’s more about risk.

    Lets say the markets tank this year.. we all loose 40% of our investments and you both get laid off.. (it could happen). Wouldn’t you rather be free from having to find the mortgage payment each month?.. Of course you would.

    So the conservative approach is to pay off the mortgage.

    But your right.. looking back this last year.. if you’d know what the markets would be doing there is no way you would have paid it off.

    Now you have a pretty low rate so I’m fairly ambivilent which way you should go.

    But like the poster above, the sense that YOU own the roof over your head… Priceless…:)

  • 33 Gary September 22, 2014, 10:00 pm

    Keeping the mortgage and investing is the mathematically sound decision.

    You will very likely end up with more money in your pocket if you pay off that mortgage as slow as possible. If you’re okay with the extra added risk (and I’d say the market returning less than 2.75% long term is a pretty low risk, IMO – many high quality companies pay dividends higher than that, and that’s then not counting the stock price going up at all), I wouldn’t pay the thing off.

  • 34 James September 22, 2014, 10:04 pm

    It depends on the person.

    I have the money and choose not to.

    Heck, I choose not to pay off my student loans, which are now down to only £900, while holding six figures in cash.

    Some people like the warm fuzzies they get from being debt free, some like the warm fuzzies they get from optimizing their investments/debt mathematically. 🙂

  • 35 Bobby September 22, 2014, 10:07 pm

    A word of caution about that “math.”

    The “math” only works if the markets act the way you expect them to. And even then, it’s not as clear cut as some would have you believe (I won’t get into that can of worms, but a lot of the analyses I’ve seen that advocate keeping a mortgage are not very good).

    I paid off my mortgage (started in Feb. 1996) in 1999. The “math” said that was a bad decision. But the money wasn’t all that big a deal to me as I was already a millionaire, so I chose to just pay the darned thing off.

    As it turns out, from 1999 to Feb 2011, the stock market had essentially no growth. In the end, I did better by taking the money out of the stock market and paying off my loan early.

    The “math” was wrong.

    By keeping the mortgage and investing, you are assuming a level of risk, and you may not win if the expected returns don’t materialize.

    Pay it off early, and you know exactly what your rate of return is with no risk.

    Plus, of course, it feels GREAT to be completely debt free. You just can’t put a dollar value on the kind of freedom that brings.

  • 36 Ian September 22, 2014, 10:12 pm

    The maths can’t be known. But playing the odds, most of the time you’ll do far better and have more money in your pocket and more liquidity if you invest it. If you happen to hit the one wrong time period, yeah, paying it off could make more mathematical sense. But that is the minority of the time.

  • 37 Jackie September 23, 2014, 1:07 pm

    I’d pay it off, but that’s just me. My mortgage is a risk-free 3.5% investment with no tax liability, essentially. You can’t get that anywhere else right now. A good hedge against equities, in my opinion. It decreases your monthly expenses, too, which is invaluable peace of mind in my book.

  • 38 Max September 23, 2014, 1:09 pm

    I’d invest in the market. If history is our guide, chances are over the next 10+ years you will get more than 6%

    Of course, either strategy is a decent place to put your money. DO what is comfortable for you.

  • 39 Suzie September 23, 2014, 1:11 pm

    Given the market is overvalued right now and we are in a 5 year bull run the safe bet is to pay off your mortgage. Money is cheap to borrow right now and too many people are using borrowed money to play the market. History has shown when people over leverage themselves in the market the market yields often much lower during those periods.

    But the good thing playing the market is that if you receive dividends which are taxed at a lower rate than your rental income if you were to pay it off.

    Ultimately its a tough call. You could go both ways and it wouldn’t be the wrong choice.

    What I would do in your shoes? which I kinda am as well.
    I would pay 50% of the mortgage off, use 20% to buy another cheap property and then invest the last 30% in the market. Once there if a good market correction then put more money into the market from borrowing against your first rental. I feel the housing market will rebound in the next few years so now is a good time to buy I am thinking.

    best of luck!

  • 40 Hannah September 23, 2014, 1:13 pm

    Ignoring the effect of market timing (as in assuming neither stocks, bonds, or real estate have a significant bull run), you are *almost* equal regardless of what you decide to do.

    If you pay off the mortgage now, you will have a ton of cash flow each month… which you will then invest.

    If you keep the mortgage, you will have less cash flow each month, and you will slowly/consistently build equity until the mortgage term is over.

    Mathematically, there is a benefit to keeping the mortgage if you think you can beat the return on your investments in the market, however, you’re not really comparing apples to apples as a guaranteed 3.5% savings is NOT THE SAME as a 3.5% return at risk in the market.

    In theory, you can outperform by levering up at the bottom of the stock market (i.e. 2001, 2009) and investing the extra cash, but since we are not wizards, there is no guarantee you will be right… only time will tell.

    The opposite is also true, you will underperform if you lever up at the top of the stock market (i.e. 1999 and 2007).

  • 41 Pete November 20, 2014, 12:38 am

    Have an offset mortgage I can borrow up to £170k on.

    Borrowing on this mortgage is now £40k, which is totally offset by savings, so no interest charge on the mortgage.

    I continue to pay the mortgage down by £2k a month, so will be mortgage free in 20 months.

    I don’t invest apart from in ISA’s, savings accounts and the offset itself of course (effectively earning 3.69% net).

    Interested to know what folks would do in my situation.

    Thanks.

  • 42 David December 3, 2014, 11:43 pm

    Unfortunately we only get to see if the math wins in hindsight. For my personal situation, paying cash to build my house turned out to be the best decision in 2005/06. Interest rates were about 6% at the time. To use an easy round number, it cost me about $200k to build my house. (I bought the property a few years earlier, which had already doubled in value.) If I put that $200k into the stock market, it would have been worth about 40% less by early 2009 (down to $120k), plus I would have been making about $1200/mo payments on the mortgage at 6%. It would have taken until mid-2010 just to get back to breakeven, not including all the interest I would have been paying. My business also took a massive hit in early 2009 (economy + other business issues), which would have sent me into one hell of a panic if I had a mortgage at the time. Having no mortgage when the shit hit the fan? Priceless.

    But, shift my timeline ahead by four years and it would have been a lot better to take out a loan and dump all my money into the stock market. Or I could have bought Bitcoin in 2010 and been a multimillionaire (billionaire?) now. Good ol’ hindsight…

    Sadly, my crystal ball was broken at the time (and remains so). All I know is I was able to sleep well at night knowing I didn’t have a mortgage payment to make, and I could reduce my expenses to about $1200/mo at the time (including everything from food to property taxes).

    But yes, we are talking about “better” and “best” choices here. Either you get a free and clear house or you get a bigger investment account over the long run. Both outstanding options IMO

  • 43 Zoe December 4, 2014, 12:26 am

    Investing may earn you more based on oft-quoted long term averages but, consider this, if the market tanks by 50% in one year, it would take over 7 years of so called “average stock market returns of 10%” to return to the same position you were in just prior to the loss, and that is not even factoring in inflation.

    Consider also the possibility of experiencing a period of unemployment during this period whilst still having to meet your mortgage repayments. Suddenly, leveraging your mortgage to invest doesn’t seem so appealing after all.

    I believe someone once said “rule number 1: don’t lose money, Rule number 2: don’t forget rule number 1”. You have to admit he has a very good point.

  • 44 Lucas March 20, 2016, 10:37 am

    You made a great, even-handed case for paying off the mortgage early vs using the extra payment amounts for equities. I have one quibble with this quote, ” But historical market returns suggest that over a long period like 25 years, you’d be very unlucky to lose out, provided you invest regularly in equities and stick with it through the tough times.” We need to constantly keep in mind that studies have consistently shown that whatever the historical market returns, historical individual investors returns are far less. Studies show that very few investors have the willpower or stomach to invest regularly and stick with it through thick and thin. One of the biggest mistakes of individual investors is over-confidence and thinking everybody else lacks willpower and stomach.

  • 45 Steve October 23, 2016, 4:01 pm

    Any one have comments about a similar but reverse situation…..

    A rental property, fully paid off with no mortgage. Rental income provides sufficient income to live off, not flash cars and Maldives every year, but a decent existence.
    Said property took most spare cash to renovate.

    To remortgage this property is tough, best rate I’ve found is 3.4% for 2 yrs before reverting to the SVR (6.6%). However fees for this commercial type mortgage would be about £5500! (1.5% fee, broker fee, valuation + legals)

    So in my opinion, try and get a small(tax deductible) mortgage on the property is costly for only 2 yrs of “cheap” rates.

    The other option is to use the offset mortgage on the personal house to replenish the coffers. In essence borrowing to invest, which does fly in the face of common sense!

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