Updated: Feb 12
Pay down against the principle of your mortgage.
While mathematically it can make more sense to invest in higher earning investments instead of using that money to pay down your mortgage, there is no guarantees that your investments outside of the mortgage will outweigh the benefits of paying down the mortgage. Personally, my latest investment approach is to pay off our mortgage as soon as possible and only then start investing more heavily in other vehicles.
My reasons are five fold
1. Reduced time to financial independence
My calculations show paying down our mortgage before investing will allow us to reach our financial independence goal in slightly less time than investing alongside paying down the mortgage. Financial independence means that the annual cashflow from our investments will be enough to cover our annual expenses. By paying off our mortgage this reduces our expenses meaning we need less invested to cover the remainder.
2. Reduced Financial Risk
By paying down the mortgage we reduce our mortgage repayments as well as our ongoing expenses along the way to financial independence. This means our emergency fund goes a lot farther in case we lose our employment income. It also gives us elements of financial freedom now as we can get by on less money. For example: we’ve gone down to one part-time income to simplify our lives while our son is small and still allows us to save towards financial independence.
3. Guaranteed rate of return
Personally I have had a rocky road in investing. Over the past 10 or so years, I’ve had investments with actively managed extremely high fee retirement funds, an investment property in Canada and more recently in self-directed funds. None of these boasted the average historical 10% rate of return the long term stock market trends seem to show. Actually no where close, after fees, inflation and taxes were taken into account. Paying down 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 dependant 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. To ensure that any life decisions I make are not limited or influenced by the need for money. To be happy. 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 markets tank. 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 markets tank is a guaranteed loss. All things to consider based on your own personal reaction to market volatility.
If you’re interested in the detailed calculation comparison behind paying down your mortgage vs investing at the same time, you can read more in this blog post.
Mrs. Money Hacker is a Canadian living in Ireland who struggled to find Irish specific content on investing and working towards financial independence following the popular passive investing approach through exchange-traded funds (ETFs). Her blog was started to share her research in plain English as well as her journey to financial independence and ultimately help others look at money differently and live a simple, more purposeful life.
Check out more information on her site here.
Please note that investing involves risk of loss and that the above does not constitute advice. Please do your own independent research before making any investing decisions..