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Deciding Not To Pay Off My Mortgage Early: Don’t Look a Gift Horse In the Mouth

should you invest or pay off the mortgageThis is a guest post from Sov at Break 50. Enjoy!

Wouldn’t it be great if I paid off the mortgage? Remove those shackles – no more ball and chain – I could sit in the garden with a beer, no more worries – Financial Freedom – whoopee!

These were my initial thoughts back in 2006 when I set out my Road to Financial Freedom. I got very excited by the on-line mortgage repayment calculators – look how much I’d save by paying the mortgage off early!

‘Mortgage-free’ became my first big goal

I became obsessed. It took over my life. I cut expenditure wherever possible, focused on increasing my salary and bonuses, and stashed away any excess cash. She’s forgiven me now but I didn’t even tell my lovely wife about the secret mission.

It’s amazing what you can achieve if you have a dream (mine is Financial Freedom) and a decent goal (ie. pay off the mortgage). It took me just over 5 years to save enough money to pay off the mortgage – wow, did I really do that?

But was the ‘pay it off’ question really that straight forward? Unfortunately nothing in life is quite that simple! After 5 years of somewhat weird obsessive behaviour, I was sitting on a juicy pot of cash (£140,000) – all the fruits of my hard labour – I’d arrived at my goal!

Or had I?

Should I Really Pay Off My Mortgage Early?

Doubts starting rattling round my head…

  • How stable is my job – what would happen if I got made redundant?
  • Shouldn’t I have some emergency funds?  – ‘they’ say you should have 6 months of salary as a comfort blanket.
  • Would I ever get another mortgage as good as this one?
  • Should I invest my juicy pot of cash in a savings account paying 3%, or invest it in the stock market?
  • My next goal was to purchase a buy-to-let property – how would I get the deposit if the £140,000 had gone?

After much ‘chewing the cud’, I eventually made the decision NOT to rid myself of the mortgage shackles, not just yet anyway!

I’m not suggesting this decision is wise for everyone. I was fortunate enough to get a great mortgage deal before the financial crisis in 2008: an off-set mortgage only 0.5% above the Bank of England base rate (currently 0.5%). No exit penalties. Totally flexible. I’ll never get a deal like it again.

Why throw away this ‘low cost’ slush fund, this gift horse, especially when my spare cash is working harder elsewhere?

Investing Instead of Paying Off The Mortgage

Luckily I didn’t invest it (all) in the stock market and I’ve since achieved my second goal: purchasing a buy-to-let property – utilizing a chunk of the £140,000 as a deposit. And I won’t be paying off this second mortgage any time soon – (in the UK) the interest from a buy-to-let mortgage can be offset against rental income tax. As fate would have it, I was also made redundant in March and the slush fund is proving very handy.

I’m a great believer that debt is the devil and we should ideally live within our means. But I’m now benefiting from the one exception to this rule – where the borrowed money can work harder elsewhere (as long as you’re fully aware of the risks and plan for worst case scenarios).

One day I may reverse the ‘don’t pay it off’ decision, especially if mortgage interest rates rise quickly, but for the time being I’ve ended up with two mortgages – I’m still shackled – now dragging two balls and chain around with me.

But don’t look a gift horse in the mouth!

Onwards and upwards.

Sov

After many years in the Music and Telecoms industries, Sov is now a professional blogger from the UK. His Break50 blog tracks his personal journey: ‘Ten Steps to Financial Freedom’. Sov’s ultimate dream is to retire with net assets of £4 million – his current score is £1.6 million!

Kim’s Comments: That’s almost $2.7 million US Dollars! Sov is rocking it in the UK, where everything is expensive. I think it’s a wonderful goal to pay off the mortgage, but shelling out that huge amount of money is really hard for the reasons mentioned above, and it seems to have worked out well in this case. 

Image: Freedigitalphotos.net/Miles

 

About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.

17 comments

  1. I would much rather invest my money than pay off my mortgage. The nice thing about how the real estate market is set up – at least in the US – is that you can refinance if you have a high interest rate and get your mortgage down to a lower rate. I really see no reason to contribute extra to my mortgage when the debt can be leveraged to increase my overall net worth.

    • Hi DC,

      Many thanks for the reply! I agree with you – but this assumes investment returns are, on average, higher than the interest payments on the mortgage. In principle this works, but in the UK I’m personally a little nervous of the solidity of stock & property markets.

      Not sure I really need the risk / stress to squeeze an extra few percent from the borrowed money?

      But I’m with you (for the moment).

      Cheers

  2. It’s an interesting thing to ponder. My biggest concern is that I hate having debt and I really hate having to service it. Plus I would hate to have a mortgage to pay each month if I ever lost my job or something unfortunate happened.

    Having said all that – what you say makes sense and it is something I have thought about.

    • Thanks for your response Glen. I’m really 50:50 at the moment. Like you say, do I really want to service debt when my true dream is Financial Freedom?

  3. We were pretty serious about paying off our mortgage on our last house. Then we sold and moved and started over (with a small mortgage again). We’re still prepaying our mortgage but not with the vigor we did on our old house. I think it will be paid off in about 8 years at our current rate, which isn’t bad.

    • Sounds like you’re in a much better position than those in the UK with a 25 year mortgage at x4 times their salary. Good luck!

  4. I prefer to invest as well. My UK mortgage is at 2.29% which is really easy to beat in investing returns so while it is annoying to have debt it doesn’t make financial sense to pay it off.

  5. This reminds me of my car loan. I could have paid cash for it, but that would leave me with very little in my immediate savings in case of work slowing down or medical emergency. With interest rates so low, it made sense to me to hold on to the cash.

  6. I go back and forth on this myself. We’re working to pay our mortgage off early, but aren’t exactly rushing at it. While I’d love to be free of ours, we have so many other things we’re focusing on that it would be at the expense of those things.

  7. Totally agree with you! My mortgage right now is at 3.75%. I really wanted to get entirely out of debt, but after I ran the number on renting out our current house when we move out, I realized that it was totally foolish. The mortgage is fine as is, for us, as I now consider it a cost of doing business 🙂

  8. Many thanks for all your comments. As long as those investment returns out-weigh the mortgage interest payments then we’re all ‘quids-in’ (as we say in the UK).

    Fingers crossed interest rates don’t move too quickly, property markets don’t take a down-turn, or the stock market doesn’t take another tumble.

    On that cheery thought….

  9. Well, we recently paid off our mortgage this past February and it’s been a tremendous blessing. I think people discount the psychology behind paying off all debts. The peace that comes once all the debt is gone cannot be measured in dollars and cents. Once it’s gone so many options open up for the use of your money but also for other life changing decisions. Paying ours off has allowed me to become a stay at home dad and focus more on our children’s lives.

  10. Like others have said, we really desire the peace of mind that comes from owing no one, however, it sounds to me like you made some smart choices for your particular situation, Sov. Thanks for sharing your story; it’s inspiring!

  11. Thanks Laurie & Brian,

    For me, Financial Freedom = piece of mind.

    Just not there quite yet 🙂

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