Paying off your mortgage is often one of the biggest financial goals for most people out there, but it actually doesn’t make sense.
Your mortgage is cheap
In most circumstances a mortgage is probably the cheapest debt you’ll ever have. Interest rates on mortgages are way cheaper than standard loans due to their extremely long terms.
Cheap debt is always going to be better than more expensive debts.
Your money could be working harder elsewhere
The fact your mortgage interest rate is low isn’t enough of a reason not to pay it off.
It’s still costing you money just to have a mortgage and we want to try and avoid that where possible.
Investing your spare cash into assets that produce high returns should eclipse the interest rate you’re paying on your mortgage.
If you can make more interest on your investment than you’re paying on your mortgage then you’ll be better off financially.
Let’s take a look at an example and we’ll assume the following for our example:
- Outstanding mortgage £100,000
- Outstanding mortgage term 15 years
- Interest rate 1.75%
- Total amount payable £113,771
- Monthly repayment £632
Now let’s imagine you find yourself in the rather lovely situation of having a spare £100,000 just sitting around.
Option 1: Pay off the mortgage immediately and invest the payments that would have gone to the mortgage
You could pay off your mortgage instantly thus saving you a cool £13,771 (the interest charged on the mortgage).
Yes that’s right, you’ve saved yourself over £13,000 in interest.
Not to be sniffed at.
Now let’s take a look if we took our normal mortgage payment figure of £632/month and invested it with a modest growth of 4%.
At the end of our 15 year investment you’ll have a rather lovely pot valued at £155,529 (give or take a few pennies). Pretty good.
So in this scenario, our mortgage is paid off and at the end of the 15 years we’ve got £155,529 in invested money.
Option 2: Invest the £100,000 and continue to pay the mortgage off as normal
In this scenario we’re doing the opposite. We’re not making any regular investments at all, we’re simply taking the £100,000 and investing it, again assuming a growth rate of 4%.
At the end of the 15 year period our investment has grown to £182,030 (again give or take a few pennies). Our mortgage is still paid off because we continued as normal.
We’re left with a rather simple sum. We take the highest number from our two scenarios and subtract the remaining figure.
£182,030 (Option 2) – £155,529 (Option 1)
The difference is a total of £26,501.
You read that right, the difference is over £25,000.
The counter argument to this cold, hard, mathematical approach is that paying off your mortgage has other benefits. So let’s take a look at some of those now.
It’s More The Numbers
Many people will say that knowing you’ve paid off your mortgage has an emotional benefit. I can see that, it would be very freeing to know that you have no mortgage to pay.
I would say that does in itself hold some value, I’m just not sure it’s worth the amount it’s costing.
Paying off your mortgage unlocks new opportunities
Without the financial burden of a mortgage you’re free to make that career switch, take some time out and whatever else not paying your biggest debt on a monthly basis would open up for you.
Again, there’s merit to this. Often we can feel trapped in our careers because of our financial commitments.
Now let’s look at other reasons beyond the maths for not paying off your mortgage.
Having a large chunk of money opens up new opportunities
No doubt money brings opportunities. Having a large pot of money will always keep the door open on opportunities. Want to start a new business and need some capital to get it off the ground? You don’t need to borrow the cash.
There’s a truth to this but we have to factor in that using that money takes it out of the investment pot and the maths changes.
Property is a very illiquid asset
Houses can take a long time to sell. The market changes, property prices go up and down.
Cash will always be a more liquid asset than property and helps keep your options open. Should you need the money for an emergency, cash will always beat property.
Without doubt there are benefits to paying off your mortgage, but there are also considerable benefits to not paying off your mortgage. For me, the upside on investing the money instead is just too good to resist, and for that reason I won’t be paying off my mortgage early.