Poll: Paying off your mortgage early...
In today's world, a good idea
In today's world, a bad idea
Undecided
[Show Results]
Note: This is a public poll, other users will be able to see what you voted for.
What's your opinion on mortgages? Specifically paying them off early?
Post Reply
 
Thread Rating:
  • 0 Votes - 0 Average
  • 1
  • 2
  • 3
  • 4
  • 5
15-04-2015, 10:32 AM (This post was last modified: 15-04-2015 10:36 AM by Adrianime.)
RE: What's your opinion on mortgages? Specifically paying them off early?
I actually did several calculations months back. And if you do choose to invest, instead of paying off your mortgage early, you likely WILL be better off in the long run. The calculation was based on a couple scenarios. One was putting mostly all extra money for the mortgage, paying it off in 5 years, then heavily investing for 25 years. The objective was to see if that scenario yielded a significantly better return than putting no extra money towards the mortgage while moderately investing for 30 years. I obviously had to make assumptions, like having an average 5% growth on your investments per year. But in my scenarios, over the course of 30 years, the compound interest on the investments outstripped the money that would have been saved by avoiding interest payments on mortgage. (I don't remember all the specifics, and don't plan on redoing these again at the moment)

But even so, that scenario assumes too much. It assumes I can continue to work for 30 years and have no debilitating accidents or medical conditions. It assumes the market will continue to behave as it has historically. It assumes no negative change in salary, and the financial ability to continue to invest for decades. It also doesn't account for the purchase of other properties, obviously. I just don't feel comfortable putting myself in a situation where a pretty common thing, such as injury or layoff, could threaten my ability to keep my own home.

I prefer fantasy, but I have to live in reality.
Find all posts by this user
Like Post Quote this message in a reply
[+] 1 user Likes Adrianime's post
15-04-2015, 12:29 PM
RE: What's your opinion on mortgages? Specifically paying them off early?
Ultimately, you need to do what makes you comfortable. Historically, on average, people are better off investing the money vs. paying off their mortgage early. My parents paid their mortgage off over the 30 year term without ever refinancing, invested money, and did very well. But, not every person will have the same life experience. If you are more risk adverse and feel more comfortable paying the mortgage off early, then that is the right decision for you. It may not be for everyone but you live for you.

Shackle their minds when they're bent on the cross
When ignorance reigns, life is lost
Find all posts by this user
Like Post Quote this message in a reply
15-04-2015, 12:38 PM
RE: What's your opinion on mortgages? Specifically paying them off early?
(15-04-2015 10:32 AM)Adrianime Wrote:  I actually did several calculations months back. And if you do choose to invest, instead of paying off your mortgage early, you likely WILL be better off in the long run. The calculation was based on a couple scenarios. One was putting mostly all extra money for the mortgage, paying it off in 5 years, then heavily investing for 25 years. The objective was to see if that scenario yielded a significantly better return than putting no extra money towards the mortgage while moderately investing for 30 years. I obviously had to make assumptions, like having an average 5% growth on your investments per year. But in my scenarios, over the course of 30 years, the compound interest on the investments outstripped the money that would have been saved by avoiding interest payments on mortgage. (I don't remember all the specifics, and don't plan on redoing these again at the moment)

But even so, that scenario assumes too much. It assumes I can continue to work for 30 years and have no debilitating accidents or medical conditions. It assumes the market will continue to behave as it has historically. It assumes no negative change in salary, and the financial ability to continue to invest for decades. It also doesn't account for the purchase of other properties, obviously. I just don't feel comfortable putting myself in a situation where a pretty common thing, such as injury or layoff, could threaten my ability to keep my own home.

I think you have a firm grasp of finances based in what you write above. There are many good points already made so no need to rehash.

I've been in the real estate business and stock market most of my adult life, both can pay off handsomely and both can ruin you. Consider all possibilities as you are doing and always err on the side of caution. The older you get the less time you have to pick up the pieces.

You can always pm me if you want to discuss anything privately.
My creds:
Certfified General Contractor State of Florida
Licensed Real Estate agent
Pres. of a real estate holding company
Lifetime stock investor

“I am quite sure now that often, very often, in matters concerning religion and politics a man’s reasoning powers are not above the monkey’s.”~Mark Twain
“Ocean: A body of water occupying about two-thirds of a world made for man - who has no gills.”~ Ambrose Bierce
Find all posts by this user
Like Post Quote this message in a reply
[+] 1 user Likes Full Circle's post
15-04-2015, 01:20 PM
RE: What's your opinion on mortgages? Specifically paying them off early?
Thanks Full Circle, I appreciate it!

I prefer fantasy, but I have to live in reality.
Find all posts by this user
Like Post Quote this message in a reply
16-04-2015, 09:06 AM (This post was last modified: 16-04-2015 09:13 AM by Hafnof.)
RE: What's your opinion on mortgages? Specifically paying them off early?
Warning: I am not a banker or a financial planner. Consult a professional if you want financial advice.

In my country interest expenses are not tax deductible for a home loan, but are deductible for an investment loan... for example for shares or houses you rent out.

I would answer in two parts:
1. Yes, pay down your loans as fast as you can. Scrimp and save. If it's a choice between repaying loans and spending, repay your loans.
2. If you are deciding between repaying loans or investing the question is more complex. There can be such a thing as a comfortable level of debt.

First, make sure that all your loan interest is tax-deductable. If you have a loan whose interest is not tax deductible you're pretty likely to be better off by paying down that loan before considering your investment options.

Second, consider the classes of assets you are investing in. Any time you simultaneously have a debt and an asset you are in a leverage situation. Leverage means that compared to investing only with your own money you can make a lot more money should the value of your asset go up. However, you can lose a lot more money should the value of your asset go down:
- Let's say you have $1000 to invest. You invest your money and the asset value increases by 10% before you sell. $1000 + $100 = $1100. Yippee you have $1100.
- Now let's say it falls by 10% before you sell. $1000 - $100 = $900. Boohoo you have $900.
- Now let's say you borrow $9000 for a total of $10000 investing funds. It goes up to by 10% before you sell: $1000 + $9000 + $1000 = $11000 . Once you clear the debt ($11000 - 9000) you have $2000 minus interest expenses. That can be a huge upside.
- But what if it goes down by 10%? $1000 + $9000 - $1000 = $9000. Repay the $9000 debt and you're left with nothing. Plus you're out of pocket for the interest expense.
- But what if it goes down 20%? Then not only is your $1000 starting capital completely wiped out, you actually owe the bank an extra $1000.
- But what if the asset completely fails? Then you're out of pocket the full $9000, way more than your starting capital amount. Whereas if you were not borrowing at all you would only be out your original $1000.

So leverage amplifies the price movements of your investment. You must ensure your downside risks are adequately mitigated either by keeping your leverage to a manageable level, or by investing in very safe asset classes. Also in a sense you are betting against the bank. In theory if the bank through the asset you are buying is really worth more than its interest expenses it would have / could have bought it in your stead. Why doesn't the bank buy those shares directly? Why doesn't the bank buy that house directly? Why lend money to you for you to buy those things?

The simple answer is that you play two basic roles for the bank:
1. Finding assets they may not have thought of or may not have the expertise needed to acquire and own, and
2. You are the stooge covering the bank's downside risk.

Whenever you borrow money from the bank you are more or less making a wager with them that your asset will go up in value at a rate greater than the cost of interest. Whenever you win that bet you make money. Whenever you lose that bet the bank makes it's money at your expense.

Thirdly, you have to think about your overall investment strategy. If you have a large asset such as a house it can become a financial platform with which you can buy other investment assets with low rates of interest. Having one house nearly paid off is a good platform for buying an investment property or packages of shares at times that suit you.

Fourthly, consider your ratios. I won't rehash my second point too much but I think it worthwhile calculating and considering your financial ratios, such as debt/equity or debt/asset. It's hard to come up with a single number that is "good" for everyone but it can be something that you can get a feel for in your own finances to decide what you are comfortable with. If you are into share investing you would already know about a few ratios that are good simple indicators of company health. These can be applied to your own finances as well.

The basic accounting equation is: Assets = Capital + Liabilities, or assets = equity + debt.
If you know your asset value and you know your debt then your equity is assets - debt.
The debt/equity ratio is therefore debt / (assets - debt), and is a measure of how much money you have put into your pool of assets versus how much is borrowed.
Let's say you borrow your $9000 and combine it with $1000 savings to buy $10000 of assets. The debt to equity ratio would be $9000 / ($10000 - $9000) = 9:1. That's pretty high.
As your asset value changes so will your debt to equity ratio. A 10% increase in asset value results in $9000 / ($11000 - $9000) = 4.5:1, which could either be interpreted as a healthier position or as indicating that had you borrowed more you would have made more and therefore didn't take enough risk or should take some new risks. I prefer a conservative ratio.

Lastly, consider the structure of your offset or redraw accounts. Depending on your loan structure you may be able to pay down the loan now but draw back on the money you paid early to do other things. In that case the best thing is likely to be to keep putting money into the loan and then redrawing it when you have a package of assets you are ready to purchase.

So, TLDR:
- If you're deciding between saving and spending, save.
- If you're deciding whether to pay down debt or invest,
-- Pay off non-tax-deductible loans quickly
-- Consider your downside risk if the asset goes bad
-- Consider your debt to equity ratio and keep it at level you find comfortable
-- Keep a bit of slack in your balance book to take advantage of opportunities that may arise
-- Make the most of the loan product you have

Also, don't forget that your life and workforce participation can be insured - potentially cheaply through superannuation (/ 401k plans I guess?). Your most valuable asset is the working life you have ahead of you, so don't be too shy to insure against the loss of that asset.

Give me your argument in the form of a published paper, and then we can start to talk.
Find all posts by this user
Like Post Quote this message in a reply
16-04-2015, 11:05 PM
RE: What's your opinion on mortgages? Specifically paying them off early?
I'm of the opinion that no debt is "good" debt, and the less you spend on finance charges, the better. I'm just over a year away from paying off a house for the second time in My life (first one had to be sold and the proceeds split due to divorce).

Current mortgage, a refinance/consolidation that was set up to fund the construction of a new garage, was done with weekly payments and amortization of only 5 years, so that the payoff date from the original mortgage would stay the same. It's a bit hard on the cash flow, but next June the house is paid for.

The sweet spot for mortgages seems to be about 15 years. Payments are not dreadfully high (unless, of course, you buy too much house) and you make decent progress paying down the principal almost right away.
Visit this user's website Find all posts by this user
Like Post Quote this message in a reply
[+] 1 user Likes Astreja's post
17-04-2015, 08:38 AM
RE: What's your opinion on mortgages? Specifically paying them off early?
Looks like the answer's a heaping helping of it depends, OP.

Heck, I could've told you that without the thread.

... this is my signature!
Find all posts by this user
Like Post Quote this message in a reply
17-04-2015, 09:00 AM
RE: What's your opinion on mortgages? Specifically paying them off early?
(17-04-2015 08:38 AM)cjlr Wrote:  Looks like the answer's a heaping helping of it depends, OP.

Heck, I could've told you that without the thread.
I saw you responded to this, and thought to myself, "Ahh, I bet he will say it depends on the situation..." Then I read this. Tongue

I prefer fantasy, but I have to live in reality.
Find all posts by this user
Like Post Quote this message in a reply
[+] 1 user Likes Adrianime's post
17-04-2015, 09:04 AM
RE: What's your opinion on mortgages? Specifically paying them off early?
(17-04-2015 09:00 AM)Adrianime Wrote:  
(17-04-2015 08:38 AM)cjlr Wrote:  Looks like the answer's a heaping helping of it depends, OP.

Heck, I could've told you that without the thread.
I saw you responded to this, and thought to myself, "Ahh, I bet he will say it depends on the situation..." Then I read this. Tongue

Hey, "it depends" are some of my favourite words.

They're like a magic spell to break the minds of fanatic ideologues!
Big Grin

I don't have any personal experience with mortgages, but I can certainly tell you that debt isn't intrinsically good or bad - so, there's that.

... this is my signature!
Find all posts by this user
Like Post Quote this message in a reply
[+] 1 user Likes cjlr's post
17-04-2015, 10:28 AM
RE: What's your opinion on mortgages? Specifically paying them off early?
(17-04-2015 09:04 AM)cjlr Wrote:  Hey, "it depends" are some of my favourite words.

They're like a magic spell to break the minds of fanatic ideologues!
Big Grin

I don't have any personal experience with mortgages, but I can certainly tell you that debt isn't intrinsically good or bad - so, there's that.
Haha, well it's true that most of the time a general answer for a common problem really can't apply for all situations, or for all people. So in that sense I agree. It's interesting to hear "WWYD" stories though. Debt is interesting. It can bring about otherwise unobtainable opportunity, but it can also bring about easily avoidable ruin.

I prefer fantasy, but I have to live in reality.
Find all posts by this user
Like Post Quote this message in a reply
Post Reply
Forum Jump: