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.
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,