Mortgages, lots of people have them and the always ongoing discussion is to pay off or not to pay off. Since my husband and I are into the whole investing and FIRE (Financial Independence, Retire Early) thing, we definitely don’t pay off our mortgage early. There are a couple of reasons why.
Reason 1: A mortgage is cheap money
Last year we bought a new house. We took a mortgage for 100% of the value of the house instead of using money we had in our savings account. We did this because of the low interest rates that we currently have in the Netherlands.
The interest rate of our mortgage is 2.2%, excluding tax benefits in the Netherlands. So depending on our income from work, it is effectively even lower. We have set this rate for 10 years, so it won’t change for another 9 years.
By keeping our money in our pockets, we can do lots of other things with the money, instead of it being stuck in the house.
Note: If you have a high interest rate on your mortgage and the rates are lower at the moment, you can look into the option of refinancing your house. You can also look for another house and have a brand new mortgage with a low interest rate on the new house.
Reason 2: Emergency Fund
When you put all of your extra cash towards your mortgage, without having an emergency fund, you will possibly run into problems some day.
In the event that you are faced with an unexpected problem and you don’t have money to fix it, you have to borrow money with probably a high interest rate. Plus you might not even be able to pay the normal monthly payment on the mortgage for one or more months. You don’t want to get yourself into that spot!
If you keep your money in your pocket, you can build up your own emergency fund. This fund helps you to stay out of debt, because you can use his money in case unexpected things happen to you. For example: you might lose your job or the car breaks down.
It’s advised to start with an emergency fund of at least € 1,000. You should keep building your fund after that to at least 3-6 months of your expenses. Some people even advice to build it up to 12 months of expenses, that’s up to you.
When you can cover several month with your savings, you will be fine if you or your spouse loses his/her job. You have time to find another job, without putting yourself in debt and facing high interest rates.
Reason 3: Other debt
Other debts than your mortgage usually come with a much higher interest rate. In that case, paying off the mortgage isn’t a smart thing to do.
Make a list of all of your debts and start paying off the one with the highest interest rate first (the avalanche method). This can save you tons of money on interest.
Reason 4: Put your money to work by investing it
For a couple of years now, my husband and I are investing in peer-to-peer lending. Our returns are way higher than the 2.2% of the mortgage. Our average is above 10% actually.
This means that we gain a lot of money by investing it instead of paying off the mortgage. So we never make extra payments on top of the normal monthly payments of the mortgage.
To give you an example:
- Option 1: We put € 20.000 into the house, so the mortgage will lower with € 20.000. This means that we pay € 20.000 x 2.2% = € 440 less on interest per year.
- Option 2: We put € 20.000 into investments with an interest rate of 10% (most of our investments have even higher returns than that). This way we make € 20.000 x 10% = € 2,000 per year.
Concluding: We make € 1,560 per year by investing our money instead of paying off our mortgage.
Even investments with a lower overall interest rate, like stocks, are a good option for investing. Everything above the interest rate of your mortgage will be a good option instead of paying off the mortgage.
Of course you have to consider the risks. Paying off the mortgage is risk free, while investing always comes with a risk.
Another option is to do both. Put a part of your savings into your house and another part into investing. This is a pretty save solution and it’s good for diversification.
Putting everything in your house means having too much of your capital tied up in a single asset. Balance is always important in finance!
Reason 5: Tax benefits
In the Netherlands, there is a tax benefit on your mortgage. While the interest rate of our mortgage is already low at 2,2%, the tax benefit makes it even lower.
It depends on the height of our income from work. If you don’t have a mortgage, you don’t get the benefits of course. This means even more profit when you invest the money instead of putting it in your house.
Reason 6: Inflation
The payment on a mortgage usually stays the same for a couple of years or even the whole duration, depending on what you chose.
In that case, your mortgage becomes cheaper over time because of inflation. Looking at the last couple of years, the average inflation is about 1%. So your payment of € 1000 today, is actually valued at € 905 in 10 years time!
So, this means that your mortgage payment is actually going down.
There are a number of reason that we don’t pay off our mortgage:
- A mortgage is cheap money
- Emergency fund
- Other debt
- Put your money to work by investing it
- Tax benefits
In the end it all comes down to what is best in your situation. If you lost your spouse for example, you may have trouble paying the mortgage each month on your own.
In that case it’s a good option to use your savings to pay off the mortgage to a level that matches your income.
Always use your head when money is involved. Think things trough and do research before acting. Everyone has a different opinion on anything that is money related.
Read different opinions and form your own. Do what feels best in your situation. You are the only one who can decide what’s best for you.
To pay or not to pay?
Let me know in the comments!