The Globe’s John Heinzl says “paying off your mortgage is the best investment you could make. Period.”
He writes, “It's almost impossible to find an investment that is guaranteed to yield a higher after-tax return than you'd get by paying your mortgage down.” Moreover, he says, “I don't think interest rates are going to be this cheap for that long, I really don't.”
For someone in a 40% tax bracket, pre-paying a 4% mortgage is like earning 6.7% on a GIC, with zero risk.
So why don’t more people do it? Heinzl says it’s because wealth managers don’t get paid when people make mortgage pre-payments, so advisors don’t push them.
Of course, there’s often a case to be made for diversifying your assets and/or investing in higher-returning alternative investments (if you can accept more risk). So, speak with your financial advisor for their take. Just make sure they’re open-minded about allocating at least a portion of your money to debt pre-payment.
Read more of: The best investment? Paying off your mortgage
Last modified: April 28, 2014
I like this thinking, but I have trouble modeling the effects for Variable Rate Mortgages.
If you have a variable rate mortgage with a fixed payment set at a higher-rate, then is your “investment” the variable interest rate, or is it the fixed rate?
For example. If my VRM is currently Prime-0.6 (1.65%), but my payments are set at 6%, am I making a 1.65% after tax “investment” or a 6% after tax “investment”? The latter is obviously a pretty nice use of your money, the former not quite as nice (other than paying down a tonne of principle, saving interest, etc.).
Hi Teddy,
Here’s my attempt at a reply, if I may..
If the prime rate decreases, more of your payment will go towards paying off your principal. Likewise, if our prime rate increases, more of your payment will go towards interest costs. Having said that (as you probably know) your monthly payment remains fixed even if interest rates rise, ….as long as the amount is sufficient to cover the interest cost.
In the case of the VRM, the proxy to measure your comparable investment return from paying down your mortgage earlier, is the average after-tax variable rate over the term in question.
Having said all that, it would be wise to consider the reply from the resident mortgage experts, Melanie and Rob.
p.s. keep up the great work on the blog.
What I got from the Heinzl article was less about investing, per se, and more about investing (in the broadest sense) in your future standard of living. He was just illustrating the opportunity costs on common terms.
If you can be mortgage free by the time you retire, it significantly increases your cashflow and quality of life. In this sense, the actual value of your house and whether it goes up or down is almost irrelevant, unless you’re planning on eventually relying on your home for income (i.e. destroying equity with a reverse mortgage).
If my wife and I own a comfortable house/condo outright that we can live in during our golden years, we can easily live off our pensions without taking any risk in the equity/bond markets.
Hopefully when we finally meet our makers the house will be worth a ridiculous amount of money for our kids, but it will make zero difference to our cashflow later in life.
My $0.02.
Al R
Hi Al,
That is certainly part of it, be he is also talking about “true” investing. That is, he points out that the *actual guaranteed return* on your dollars is often higher via a mortgage payment than almost any other type of investment you could have used that dollar for. Your mortgage rate is generally higher than any GIC and, while potentially lower than equities, are guaranteed.
Thanks Carl for the round-up. I suspect you are right that it the average VRM over the term of interest is probably a decent proxy measure.
I have nothing to contribute to this thread. I just want to be adopted by Al R. The guy who is leaving a ridiculous valued house to his kids! :)
The problem with John’s advice is does not assume a few things:
1. What happens if you get laid off?
2. What happens if you get sick or disabled?
Answer: you rack up new debt(credit cards) and spend the next year or more paying it off! John’s idea of using a LOC as an emergency is great until the bank wants to get paid.
Almost all of the advice is pay off your mortgage (which is good) but the other points are rarely talked about. I have raised this point with a “business reporter” who recently wrote a book about retirement and zero was talked about risk management! The reason they don’t talk about it is because they don’t understand it.