When should you pay off the mortgage, and when should you invest? - Darcy Ungaro

OPINION

Over the last few years, this question has rolled around frequently on social media. There often appear two opposite and rather extreme views on the matter.

1. Mortgages are financial death pledges, so do everything in your power to be rid of one as soon as you can. If your sole expectation with property is profit, eventually rising interest rates will catch you out. You’ll one day regret over-extending yourself in the good times. The faster you get rid of your mortgage, the faster you’ll be secure in your own home and in a position to invest for retirement. This is the way it worked in “my day”, and the future won’t be all that different.

And this view…

2. When former US president Richard Nixon took the US dollar (fully) off the gold standard in 1971, this triggered a shifting of gears with the debasement of the world’s reserve currency. No matter the country, we’re being robbed through the dollars we’re forced to use. Each generation is constantly forced to work harder and harder just to own a home and have a chance at not dying poor. How are we not slaves to a banking system? Rising property or share portfolios can’t be more important than human time and energy. So, we’re going to leverage off the “bug in the system” and borrow depreciating currency to acquire appreciating assets.

Now, after accounting for your own bias, consider the reasons why paying down your mortgage faster during this time is a wise move for you.

Advantage 1:

You eliminate the chance of being kicked out of home ownership by the bank.

Advantage 2:

Getting rid of the mortgage means you’re able to start investing larger amounts of money faster.

So why should you invest more instead, over faster mortgage reduction?

Advantage 1:

Instead of concentrating all that money into just one asset (your house), you can build up other investments to fund your retirement, without selling your home.

Advantage 2:

If the property and share markets really are gigantic Ponzi schemes, the rate of capital appreciation will only become stronger when (if) interest rates drop.

When mortgage rates are high, the benefits of mortgage reduction become obvious.

Getting rid of your mortgage sooner allows you to say your home really is your castle. No more worrying about interest rates! You get to keep more of your income when you’re mortgage-free too (which means you can start taking it easy!).

You could argue this both ways of course, but I prefer to keep my mortgage in place.

Here’s why: A mortgage structured correctly today can be used as a low-cost “reverse mortgage” later.

By setting up a revolving line of credit today, with the aim of repaying the balance at the time of retirement, you’ve created the option of being able to borrow up to the agreed limit at some stage in the future. (This may not work in all circumstances/is subject to lending criteria).

If you prefer the balanced approach to the question of “when to pay off the mortgage, and when to invest”, these “synthetic” reverse-mortgage-like revolving line of credit facilities can be a great middle ground. All it takes is a little planning before you start getting aggressive on those mortgage accounts. You avoid the “concentration risk” that comes along with putting all your money against the house, and you get to choose when to invest, and when to repay debt.

Ultimately, the money in your home isn’t really “working for you”. It’s saving you an interest rate, and yes, those savings can compound, but it’s a finite return. Investment returns can (in theory) be infinite.

Disclaimer: Paying off your mortgage faster, or using your money to invest elsewhere, is a complicated area and there are loads of other risks and benefits you should consider. Borrowers with longer timeframes to invest will have a better chance of getting a great investment return relative to the savings they can accumulate in their mortgage (but not in every case). Chasing benefits (like interest rate savings and investment returns) can come with the significant risk of getting caught out by timing the market. Avoid this risk by taking a long-term view with regard to all your monetary decisions. Reach out to a mortgage adviser or financial adviser for help.

Darcy Ungaro is an authorised financial adviser and the host of the NZ Everyday Investor podcast.