Paying down your mortgage; for most, that’s the goal. Pile every spare dollar onto it and get it gone as soon as possible. I have to say that in today’s financial world, when mortgage rates are so low, I couldn’t disagree more.
I don’t consider my mortgage to be “debt”. I actually see my mortgage as a valuable tool for helping me increase my wealth! Using the equity in my mortgage to add to my nest egg is part of my long-term strategy for getting ahead.
The math is simple, really: My mortgage costs me 3% (or less, these days), but if that equity was invested, I could be making anywhere from 6% to 25% or more on it in the stock market.
I think the people who are opposed have this to say: “But once my mortgage is paid off, I can invest the amount of my mortgage payment each month instead.”
All right. Let’s run the numbers:
Using the following facts for each scenario:
- a house worth $300,000
- a fixed rate mortgage at 2.99% renewed every 5 years
- a 20 year amortization
- bi-weekly payments on the mortgage
- 6% return on investments
- Scenario A: you pay off your mortgage at 50 years old and thereafter invest your $765.94 bi-weekly for the next 15 years. You end up with about $480,000 in your investment account at 65 years old.
- Scenario B: starting at 30 years old, you take the equity available to you each 5 years when you renew your mortgage (about $60,000 every 5 years) and invest it. You would have about $1.1 Million in your investment account at 65 years old. Go ahead at that point and pay off your mortgage all at once (about $240,000 owing), and you’ll still have about $860,000 invested.
Another opposition I hear is: “You shouldn’t retire with a mortgage still owing.”
Oh wait, I just solved that problem too.
Add to this the facts that:
- In both scenarios you paid about the same amount out of your pocket over the 35 year period (in scenario A you pay the bi-weekly payment to the mortgage and then into your investments, and in scenario B you pay the bi-weekly payments into the mortgage for the entire 35 year period).
- You and a spouse could almost put that entire $60,000 into TFSA’s ($5,500 each allowable per year), so now, when you withdraw the entire amount to pay the mortgage down when you’re 65, there are no tax implications.
- In Canada, when you borrow for the purpose of investing, the interest on the loan is a tax deduction.
- The value of your house will increase regularly, making the amount of equity available to you more and more each time you renew the mortgage.
- Since you paid the mortgage down at 65, you now have an extra $765.94 bi-weekly burning a whole in your pocket from that point forward.
Of course, the fundamentals are what make this work; i.e: the fact that the amount of interest you can reasonably expect to make on investments is about twice what you’ll pay for a mortgage. When these stats change, so do the end results. But until then, I won’t be paying off my mortgage!