In our January 2019 Financials and Networth Update, we mentioned that we are paying our mortgage off quickly. We have chosen to focus all of our efforts over 2019 towards this venture. If you’ve been following along with us, you’ll know about our Merc The Mortgage (MTM) fund. Every penny outside of our emergency fund goes into our MTM so, once we have more saved than principal remaining on the house, we’ll pay it off and be officially, 100% debt free.
But there is a lot of sentiment out there against this general idea. Basically, the principle is that if you have a low interest mortgage, you are better off to put a minimal amount down on the house (i.e. enough to avoid mortgage insurance, which is 20%+ in Canada) and invest the rest. The average gains you can receive (corrected for inflation) will offset the interest you have to pay on the mortgage balance. The result is a net positive for you, and if you’re better off financially in the long-term by paying a mortgage slowly and maximizing your investing, why wouldn’t you do it?
There are 3 specific reasons why we decided to pay our house off quickly rather than put a minimal amount down and invest the remainder:
1. We ran the numbers and it didn’t affect our FI date appreciably. We put 76% down on our house and hope to have it all paid off in 2019. That’s a maximum 15 months with a mortgage. Paying it off will free up $464/month for increased investment because we will no longer have a mortgage payment. We used multiple different calculators and the difference between paying the mortgage off quickly or taking the mortgage to term and making no extra payments was up to 1 year. Even at 1 year, we didn’t interpret that as a big delay to FI, and frankly, since we don’t plan to quit employment cold turkey at our FI amount and enter retirement right away, an extra year is a no-brainer to us. No appreciable difference.
2. There’s added risk with investing. If you are highly-leveraged on your home and investing in your retirement (RRSPs, TFSAs, 401Ks, ROTH IRAs, …whatever the vehicles), you are adding risk to your portfolio. The market is out of your control and if the bulk of your assets are in long-term retirement savings, you have put the bulk of your assets essentially in the control of other powers. The markets fluctuate, and a substantial correction, or long-term bear market are potential hazards you might have to navigate while paying off your house. In addition, with mortgage rates increasing, the longer you hold a mortgage, the higher your average interest rate will be over the amortization period. You’ll likely have to renew on another 5-year term, for example, at a rate higher than current. Higher rates over the long-term can slowly whittle off those higher gains you received at the start of your mortgage. Paying off your house may not have the potential reward of greater gains, but it is a guaranteed return of whatever your mortgage interest rate is.
3. Calm wants the security of a paid-for home. We discussed this early on in our relationship. Calm’s upbringing wasn’t lavish by any stretch. Her parents split when she was 7 and from that point onward, she had never lived in a home which her mother owned. She moved around a lot and sought a certain degree of stability she didn’t have for many of her formative years. She wanted to own her first home and wanted to discard the risk associated with holding a mortgage, regardless of the potential financial benefit.
Numbers are great. Arguably, FI is mostly based on numbers so looking at things objectively from a quantitative perspective is completely rational. But sometimes, you can’t put numbers to certain variables, and your upbringing and how it influences your choices and priorities in later years is one of those intangibles. We’ll have our mortgage paid off this year. We’ll have more stability by doing so and if it adds a few extra months to the journey, well, we’ve got no problem with that.
~Calm ‘n Cents