Should I pay off my mortgage early?

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  • Paying off the mortgage relieves stress and prevents having to maintain a high income
  • It’s a personal preferences to pay off one of the largest expenses
  • Paying off a mortgage also decreases other expenses such as mortgage insurance
  • When mortgage is paid in full, the additional payments can then be redirected to investment accounts

The freedom of not having to pay a mortgage or rent for the rest of your life is very appealing. It would definitely free us up, financially speaking and relieve the stress of having to cover that large expense. We would not have to worry about maintaining a high-income rate, as we would always have a place to live and give us that freedom of where we want to work instead of where we have to work. The mortgage bill is usually one of the highest expenses that we have. It also has the added mandatory mortgage insurance expense, which can add an extra 5%-6% to the monthly mortgage payment. Having made this discovery, should we not use all our financial resources to pay down the mortgage as quickly as possible?     

Using extra cash to pay off a mortgage early is a personal preference. I have a friend who is putting a large chunk of his savings into his mortgage. This is a personal decision, as he wants to pay off his mortgage as quickly as possible, it is the biggest expense that he has. He says that once the mortgage is paid-off in full then his expenses will be so small that it will be a lot easier to get to financial independence. We had many discussions around this, mainly about the loss of income, which he could have been making if he invested that extra money instead of sending it to the bank. Nevertheless, the appeal of not having a mortgage payment is a lot stronger than the appeal of extra income.

I have another friend who owned two houses in U.K, which he rented out; he had lived over there for many years and eventually moved back home. He sold the two houses over there and used that money along with his savings to build a house in this country. He now has a lovely single story detached house with a little land and he doesn’t have a mortgage. I am envious of his situation.

I get the appeal of this and I fight with myself on a regular basis whether I should start pushing all my savings and AVCs into the principle of my mortgage or should I keep investing. I find myself losing confidence in my investment strategies on regular basis and wondering if I am doing the right thing by investing and saving towards my pension. A lot of this indecisiveness comes from Ireland being a very investment unfriendly country due to high taxes and an untrustworthy Government. I often wonder whether the Government will start taxing our pensions in order to pay for those that do not have a pension. I find that, the investing and pension saving, model wins most of the time. However, the Utopian land of no mortgage payments is very enticing.    

An added benefit of life without a mortgage is that we don’t need to maintain mortgage insurance either. That would provide additional savings per month that can go into your investment pot.

On the other side of that coin, there is an argument that we can make more money from investments than we can make from paying a lowish interest mortgage.  

Apart from the emotionally standpoint of being mortgage-free, the logical point of view will tell us that we need to look at the interest rate that the mortgage company is charging vs the net growth that we can get from investing. If that mortgage rate is lower than what we could make in investments then it is logically beneficial to invest.

Investing the extra payments

An investment in an index based ETF should return on average 6% per year. Fees for these type of ETFs can range from 0.01% to 0.5%. Let’s take the worst case scenario of 0.5% fee, that would decrease the returns for 5.5% per year, then taxes will take about 50% of that so now we are at approximately 2.75% net profit. I say approximately because we start paying taxes on accumulated ETFs after year eight. Now, let’s take a look at what extra payments on our mortgages can do for us.   

Example of paying extra mortgage payments

€250,000 mortgage with an interest rate of 3.5% variable has a repayment of about €1,122 per month. If you increase that payment by €1,000 per month, you would pay off the mortgage in 11 years and 11 months instead of 30 years. The additional payments over this period would total €143,000.

Whereas the same amounts of €1,000 added each month to an investment ETF earning 6% gross per year will return a net balance of €172,480. This gives an additional income of €29,480 over the 11 year and 11 month period but you would still have another 18 years of mortgage payments on a 30 year mortgage.

Of course, mortgage interest rates increase and decrease on a regular basis unless you have a fixed rate. That does need to be taken into account. At the moment the rate is 3.5% and we can only go with what we know

Extra mortgage payments vs investing

Let’s take a look at both scenarios, 12 years after taking out a mortgage

Scenario 1: extra mortgage payments

The mortgage is paid off in full, yea! No more mortgage payments and we can also stop the mortgage insurance payments. Our mandatory expenses have decreased significantly. However, we don’t have any savings / investments.

Scenario 2: investing the additional payments

There is €172,480 in our investment account now due to consistent saving and growth. This includes a growth of €29,480 over the twelve-year period. That money is still there to keep on growing over the next 18 years as we pay off the rest of our mortgage. We must maintain a high enough income over the 18 years to be able to pay the mortgage each month.

Up to this point, 12 years after taking out the mortgage, logically it makes more sense to invest the additional money, as we would be €29,480 richer. However, emotionally we would still have to keep paying that mortgage.

Now let’s look at the next 18 years so that we can see the complete picture. Here are the scenarios after year 30.

Scenario 1: extra mortgage payments

For the next 18 years, we did not have any mortgage payments or mortgage insurance payments. However, we would still have had maintenance payments and property taxes. Our expenses had been significantly lower over the last 18 years. We were able to redirect the mortgage payments of €2,122 per month into an investment account over the last 18 years. This has now grown to €679,046 thanks to the 6% growth.

Scenario 2: investing the additional payments

After year 12, we had €172,480 in our investment account. We continued to invest €1,000 per month and at the end of the 30th year, it has now growing to €731,400. We have an extra €52,354 by investing the additional payments instead of paying off the mortgage.

I have been asked this question many times, should I pay off my mortgage or invest?, and I have also seen it multiple times in reddit, Facebook, and other boards. This is a hard question to answer because it depends on whether you look at it emotionally or logically. Emotionally, you would be a little less stressed in your life once the mortgage had been paid-off.

Logically, you would have more cash at the end of the mortgage term but you would have had to maintain the mortgage payments for the 30 years. So it does, very much, come down to personal preference, are you willing to exchange €50,000 after 30 years of investing for the lower stressed life after year 12.


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