Mathematically, it makes sense to earn a better rate of return by investing money in the markets instead of using that money to pay off your mortgage.
However, there are no guarantees that investments made outside of your mortgage will ever outweigh the benefits of paying it off.
An option is to pay off a mortgage as soon as possible and ONLY then, start investing more heavily in other vehicles.
Here are five reasons why this approach makes sense.
1. Reduced time to financial independence
Financial independence on the surface means that the annual cash flow generated from your investments will be enough to cover all your annual expenses.
Once you pay off your mortgage, you’ll have no more monthly mortgage repayments — meaning that you’ll actually need less invested to cover your cost of living.
2. Reduced Financial Risk
Most financial experts recommend that you have somewhere between three months to six months of basic living expenses in an emergency fund.
Sometimes that’s possible.
Often, it’s not.
No more monthly mortgage payments means that a rainy-day emergency fund can not only be built up quicker, but also goes a lot farther in case something happens.
3. Guaranteed rate of return
A mortgage interest rate is around 2-4% for most mortgages in Ireland. Even the newest mortgage provider Avant will only provide 1.95% to very select customers.
✅ Paying off your mortgage means guaranteed savings of 2-4%/year.
In the stock market…
📈 it’s possible to make 20%+ in a given year..
..or you could lose 20%+ in a given year 📉
The average rate of return since inception of the stock market has been 10%.
WARNING — this is PRE tax.
If you’re invested in ETFs in Ireland, take off 41% in exit taxes.
This leaves 5.9% or 4% after inflation (it’s not that simple as you have compounding and reinvestment of dividends but I’m trying to keep it high level).
After fees, inflation, taxes and charges are taken into account, paying off your mortgage guarantees you will save the interest rate of your mortgage, which is likely somewhere between 2-4%.
There are no taxes to consider. It’s a straight percentage savings.
4. Less reliance on market performance in early retirement
By paying off your mortgage before retirement, as mentioned earlier, you will need less in investments to cover your annual living expenses.
This removes a decent amount of performance and sequence of return risk from your portfolio. As you need to withdraw less from your portfolio to cover your expenses, you are less dependent on how the market performs.
5. Happier not having a mortgage
Ultimately my goal for my investments and financial freedom is not to have the most money but to have less stress and more options.
A goal for many is to ensure that any life decisions I make are not limited or influenced by the need for money.
Not having a mortgage, or having a lower mortgage makes me feel good and more financially secure.
The other benefit is you don’t have to worry about how you will react if the market tanks.
If you had money invested in the stock market and saw it losing value, would you really have the willpower to leave it invested for the long term?
If you aren’t sure or haven’t experienced a market drop yet, having the money paid off your mortgage is a guaranteed win, but investing in the market and selling at a loss when the market tank is a guaranteed loss.
All things to consider based on your own personal reaction to market volatility.
Paying off your mortgage early is not for everyone but If any of the above points ring true, you should start thinking about how to cut down risk.
One of the ways to do this is by consolidating old workplace pensions.
Pay Off Mortgage With A PRB 🏠
By tracking down and combining all the old pensions from all previous jobs, which you own and control, you can choose how to invest this money and when to draw on it. Our team of experts will help with this process and provide guidance throughout.
What makes this different is that it can be drawn from age 50 onwards – with 25% available as a tax-free lump sum that you can use to pay off the balance of mortgage.
Another valid option is to renegotiate your current mortgage rate.
Switch Your Mortgage To A Better Rate 🏡
Similar to energy and broadband, banks regularly undercut each other to get new customers.
Right now, people who took out a mortgage sometime ago, are switching to a much better interest rate to either:
✅ Reduce your monthly repayments
✅ Reduce their mortgage term
Many lenders also offer cash back bonuses towards switchers which makes it even more attractive.
Moving into 2021, a lot of people are looking for fast and easy ways to save money and right now, in Ireland there are over 300,000 eligible homeowners on high standard mortgage rates.
Are you able to pay off your mortgage early? Could you swap to a lower interest rate mortgage? Is your pension eligible for early release?