Why paying off your mortgage is an investment
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Yes, that’s right…investment.
Now admittedly, paying off your mortgage is really paying off a debt – a big mother of a debt. It’s not, strictly speaking, an investment.
But I see it as an investment. Interestingly, so does my hero, multi-billionaire Warren Buffett, who has said a few times that the best and safest investment ordinary people can make is to pay off their mortgage.
Why pay off your mortgage now?
So, I’ve been saying for years, that you should pay off your mortgage pronto.
So it’s not like it’s a new message from me or from MoneyMagpie.
However, I’m urging you to do it now because:
- There are murmurings among ‘people who know’ that the stock market is overvalued and is likely to crash some time soon, possibly triggering another big downturn in the economy. In my view, this is not a time to increase your debt, but a time to bring it down where possible. The less debt you have the less vulnerable you are to economic, and other, shocks around you.
- It’s better than keeping your money in savings – even at these low mortgage rates. A lot of people have mortgages at very low interest which is excellent…except that apart from those who managed to bag a 0.5% over base rate tracker mortgage (well done you!), even those low interest rates are not as low as savings rates right now. You might think that it’s not worth over-paying your mortgage when your mortgage interest is so low, but if you compare them with the rates you’re getting on your savings – after tax – you would still be better off using the money to pay down more of your mortgage than to let it languish in these accounts.
- It’s a tax-free investment. When you pay off your mortgage, you’re paying off a debt so HMRC doesn’t tax you on it. They see it as paying off a debt, not investing. So you’re generally better off paying off your mortgage than you are putting that money into a Cash Isa. Particularly given the pathetic rates we now get on Cash Isas.
- It’s safe. I’m a big fan of investing in the stock market and do it regularly myself, but it’s nothing if not uncertain. I do think that as time moves on the stock market gradually goes up – at least it has in the past – but nothing is safe. Even savings accounts aren’t safe (above the first £85,000 at least). But when you pay off your mortgage you pay off your mortgage. That’s it. You own your own home. End of. Lovely feeling!
- It’s an achievable goal. I like goals. I work well to them and paying off your mortgage seems more achievable than most financial goals because it’s concrete. It’s big enough to get excited about, yet tangible enough that you can wrap your head around it. I certainly found it easier to pay off my mortgage than to build up investments elsewhere
- It’s your home. This is not just a financial decision, it’s an emotional one too. There are loads of discussions on the net about whether you should pay off your mortgage or put the money into other wealth-building products instead. People are arguing it out with graphs, statistics and calculations. But at the end of the day, you’re talking about your home here, where you want to feel safe and secure. Paying off your mortgage really helps you get to that.
- Retirement planning. If you’re coming up to retirement with a fixed income – State Pension, savings accounts, annuity – then it can be a real benefit to pay off all your debts first. It takes the stress off you and enables you to spend money on other nice things instead of the boring mortgage.
- The mortgage companies really hate it. Haha, ooh yes they do! Think about it, the interest you pay on your mortgage is how they make their money. The longer you have your mortgage, the more lovely money you’re giving them. Paying your loan off in double-quick time saves you thousands and, therefore, deprives them of those thousands. If for no other reason than wanting to annoy your bank, go pay it off!
How to pay off your mortgage quicker than you thought
Mortgages are usually such huge sums of money it can seem an impossible dream to pay them off early. Not so. Try some of these ideas:
- Add a bit extra to your monthly payments. Assuming your mortgage is out of its fixed period, the simplest early payoff strategy is to just add some extra to your monthly payment. If you get a lump of money from selling something or from an inheritance, put that in to bring the amount down big-time. Don’t let the mortgage company reduce the amount you pay each month after that though. If you keep paying the same as you were before you’ll be paying off a lot more of the loan itself, much less of the interest and you will automatically pay it off earlier and cheaper.
- Switch to a cheaper mortgage. Obvious really but do keep an eye on the charges if you find a much cheaper deal. There are some amazing rates around so it’s quite possible that if you have had your mortgage for three years or more you will find something cheaper than the one you have right now.
- Switch to an offset mortgage. These don’t work for everyone but if you have savings or there are two of you paying in who are both on salaries, it can work well to have an offset where you keep all your savings and current account money in the same place as your mortgage. That way all the money you have is ‘offset’ against your mortgage for interest purposes. You pay the same amount every month but if you have a lot of cash in your savings you will automatically pay off more of the principle (the loan itself) rather than the interest.
- Reduce the term of your mortgage. If you’re finding your current mortgage payments pretty manageable, phone up your lenders and ask them how much you would pay if you reduced the term to 20 years, how much for 15 years, how much for 10 years. Go for the shortest period you can comfortably manage each month (by comfortably I mean you might have to sacrifice fun things but you wouldn’t be worried about paying bills). It will mean you spend more on the mortgage each month, which is a bore, but boy will you pay it off quickly!
- Downsize to a cheaper home. Obvious really but we don’t always want to do it. But if the mortgage is a major burden it’s something to consider seriously. It’s particularly helpful if you’re coming up to retirement or going freelance as it reduces the burden on you. If you can downsize to a place that you don’t have to have a mortgage on at all then it’s happy days! Keep it in mind.
So, have a think about it and get your mortgage statements out to see how much you’re currently paying, what the interest rate is, how much you’ve left to pay and whether you could find a cheaper deal.
Then give yourself a goal of, say, 12 years to pay the lot off. How much would you have to overpay and would you be able to do it?
There’s some handy, sensible advice in this Forbes article about why paying off your mortgage is such a great investment, particularly in times, like now, when very few safe investments are giving us much back.
Have you paid off your mortgage? How long did it take you? Let us know in the comments section below.