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Suzie and I are visiting family and enjoying the Victorian grandeur of the coastal towns of southern England, in particular near Brighton where my brother-in-law recently purchased his first home. He’s been expressing nervousness about the new experience of having a mortgage. While chatting during the evening I’ve tried to soothe his mind with a version of this, I admit, slightly left-field argument. It seemed to help him and I thought I’d share my thoughts.
When my wife Suzie retired in June last year, she was adamant that we pay off our mortgage immediately. I was not in agreement with this idea, as our rate was only 1.35% and there would definitely be a large opportunity cost in doing so. But, as we know, a wife can be very persuasive, and the mortgage was duly repaid, luckily with no early redemption fees.
The oddest thing happened afterwards. I found myself surprised to feel a great sense of relief being mortgage-free, even though carrying the extremely low-rate debt hadn’t bothered me at the time. My friends were quite envious of my good fortune, and I admit, I took great satisfaction in reminding them about it, continually. I can only assume this speaks volumes about the psychology of money. It seems making a poor investment choice brought peace of mind.
But I didn’t tell my brother-in-law this during our chat, I wove another reality that paradoxically is just as true…We generally see a mortgage as a monthly burden, a necessary evil. It’s essentially a financial instrument that allows us to bring future income into the present so we can enjoy homeownership right now.
However, it’s worth balancing this common perspective by looking at the positives of a mortgage. For one, your mortgage can be seen as an enforced savings vehicle. Unlike voluntary savings, mortgage payments are a non-negotiable expense. This makes us allocate a portion of our income towards building an asset.
A large part of your mortgage payment goes towards paying down the principal. Over time, as this principal balance decreases, you build equity in your property. This equity is, in essence, accumulated wealth that can be accessed later through a home equity loan or the sale of the property. Myself for instance used the equity as a springboard to initially finance my business. We might even be lucky enough to see the value of our home increase over the term of our mortgage, turning it into a savings account that also exhibits some of the characteristics of an equity return.
Our mortgage allows us to enjoy the benefits of homeownership at an earlier stage than if we had to save the full amount. Can you imagine the difficulty of also paying rent while trying to save for a home? For many, this would be an incredibly hard ask. While we are undoubtedly taking on a large and scaringly daunting debt, keeping our future selves chained to the grindstone, the current and future benefits of homeownership—both personal and financial—make it a truly valuable product deserving of our praise.
So, the next time your mortgage payment comes due, consider yourself a bit of a financial whiz-kid for pulling off such a strategic investment in your future, and a genuine reason to be proud of your savvy financial ability.
Although, for the sake of my counter-narrative on mortgages, I’ve highlighted the positives, it would be wrong of me not to highlight the risks, like interest rate risk. At one point, in the early 90’s, I was paying north of 13%. The possibility of foreclosure, due to unforeseen illness or unemployment, is another area to consider. But I believe the many positives far outweigh the risks and my brother-in-law along with many others will be best served by this often disliked financial product.
When I think about it, this little thought experiment with mortgages reveals how easily financial products can be reframed and given a positive spin. It’s a useful perspective to keep in mind the next time a brochure from an asset management firm lands in your mailbox, trumpeting the latest financial ‘must-have’. On this occasion the reframing was to help my brother-in-law but the technique could have a darker use.
The median U.S. home price-to-income ratio has risen from 3.5 in 1985 to 5.0 in 2025. On the other hand, the interest rate for a 30-year fixed home mortgage has fallen from 12.4% to 6.8%.
I suspect that one of the issues facing first time home buyers is their level of indebtedness. When I purchased my first home in 1978 I had no other debt, although my spouse did have a small college loan (which I paid off). I owned the automobile outright as I had bought it with cash. Credit cards were used as an alternative to carrying cash, not as high interest loans for vacations, funding “experiences”, to buy groceries, “toys” or whatever.
I was in a similar position myself. In fact, I didn’t even have a credit card at the time. I wonder how the mortgage company managed to run a credit report on me then; I had absolutely no credit footprint.
As I recall, in 1978 I had to provide pay stubs and employment history data to the bank to prove my credit worthiness. They verified my information with the “personnel department” of that company. The credit card (American Express) was stipulated to be paid off each month; there was no credit balance, per se. I was also required to make a minimum 20% down payment to get the loan.
These things influenced our lifestyle choices. Everything from dining out to any vacations (which were local and frugal). We were saving for that down payment and living on cash flow with no credit balance. The current system rewards banks, credit card companies and other lenders, to the detriment of the borrower. BTW I do not fault these lenders. They are providing an optional service.
Thanks Mark for your insight about mortgages, pluses and minuses. I chose long ago to pay it off sooner, rather than later, and as such when we retired, we had NO mortgage, just the way we envisioned it. Never like paying those interest rates, and yes, in the 1970’s, the rate were like 12% and more. Our final rate in the 1978 was 9.75% and 8% in 1995, my kids had rate in the 4% range in the 2020’s. The whole idea to me is, know all the pluses and minuses then make your decision.
Why would you pay off a mortgage with a 1.35% interest rate??? Your money would be better off in the stock market earning @10% or a Treasury note. I have a mortgage at 3% but I add extra money each month.
Well Mike, when I finally retired, I got away from the ‘get ahead’ mentality of my working years. I’m doing very well with my retirement incomes and don’t need the concern of accruing more. So, part of my previous ‘get ahead’ strategy was secure my housing ASAP and save the principal-Interest payments. I consider that my ROI from paying off the loans early.
I do have a mortgage on a home recently bought for my trust and when it’s paid for, the exodus of P-I and amount I’ve allotted for the extra payment will provide just over $2,200 per month in extra spending power. Rather than on the mortgage, I could put the extra principal payment in some investment, and assume risk and possible loss.
But, why?
We all have different situations in life, and different points of view and that’s the beauty of this great site!
Mike, as an individual, I wouldn’t have paid off the mortgage. But as a partner in a marriage of equals, an accommodation has to be reached. My wife’s feelings about having no debt were much stronger than my need for extra cash flow. A harmonious marriage is far more important than extra money you don’t need.
I just asked Google Gemini to run an analysis on our house, which we bought in 2007. For simplicity’s sake I assumed a 30-year fixed mortgage, which we actually didn’t do, so we benefited from several refi’s into 5-year ARM’s along the way, landing on our current 10-year fixed at 2%.
Here’s the results:
Scenario 1: Option A (Actual)In this scenario, you put a substantial down payment on your home and took on a smaller mortgage. While this is often a safe and conservative approach, the opportunity cost of not investing the extra cash was high.
Scenario 2: Option B (Hypothetical)In this scenario, you put down a smaller down payment and invested the remaining $450,000. Despite a slightly higher interest rate on the jumbo mortgage and the volatility of the stock market, the returns from the investment portfolio far exceeded the interest payments on the larger loan.
Wow – never ran that before.
It’s an interesting analysis, but I’m not going to cry in my beer about it. We were able to do a lot of things while we were working that we may not have felt comfortable doing do to the cost; and also might not have been able to deal with one of us out of work several times over that time and having to live on one income.
Nevertheless, this is an important lesson that people just starting out should be aware of – I wish I had been.
The most interesting aspect of this is that anyone who can write a prompt can get these results. No spreadsheet knowledge required! One would think that with these tools available young people will make fantastic financial decisions. No more excuses!
Interesting analysis. I agree with the comparison and opportunity costs may be severe and of course sensitive to investment returns.
As a related scenario, we opted to rent rather than buying a house for cash. Mostly due to the environmental situation (hurricane, floods etc.) as well as our age (maintenance, travel etc.)
In our situation, the invested principal has appreciated enough to set aside what the same house would cost today, while paying an “effective rent” that is actually about tenth of actual rent over the entire period (2018-2025.). Disclaimer of course is that S&P has done well during the period and results could be quite different in other scenarios.
Debt is an acceptable financial tool when used properly.
The richest among us have debt. Renting money can be an effective way to make more money assuming the rental cost is below the investment returns.
Borrowing against a portfolio is generally the
cheapest loan we can get.
What messes us up is emotions and greed.
For a long time, the cost of money was very cheap. We got used to really low interest mortgages. Most of us still remember sky high interest rates in the early 80’s.
IMO, 6-7% mortgage is normal. We got spoiled.
A Harvard study I’m reading now states they found the problem is not a lack of housing units, but “in 1990, the median home cost less than 3x the median income in more than 70% of the largest metro areas. Today, there’s virtually nowhere that’s true. “
Per AI the average 30 mortgage rate since 1971 was 7.71 %, so actually your estimate was slightly low. The Federal Reserve’s interest rate cuts during the COVID-19 pandemic led to the lowest recorded rates, with the average falling below 3% in 2020 and 2021.The highest 30-year mortgage rate on record was 18.63% in October 1981. Current 30 year APR is 6.7%.
We bought our first house in ‘84 and our interest rate was 13.5%.
I considered interest rates from the mid-70s to mid-80s to be an aberration.
Absolutely correct, just like the super low mortgages in the early 20s were the low aberration. My son’s 30 year mortgage is below 4%. I have told him he better hope that he will never find a refinance rate which is significantly lower as it will be the result of some worldwide calamity.
For me, it’s a no-brainer. I’ve never been able to buy a house without a mortgage — never had the scratch.
Today, yes, I could pay mine off with no penalty, but at 3.25% fixed, I don’t want to. I’d rather have that money available and growing for me in my funds than stuck in the illiquid walls of my house, which is not currently increasing much in value.
For me, peace of mind is knowing that if something happens to those walls, like a wildfire or an earthquake, my family’s financial solidity isn’t dependent on a check from a slow, unresponsive and sometimes bad-faith insurance company inundated with claims. Half the Florida claims from hurricanes Milton and Helene remained unpaid six months later, and thousands of homeowners are still unpaid from Ian three years ago, living in trailers.
I’m happy having a mortgage — paying it off in cheaper dollars every year — and a heftier IRA balance.
Same, Mike. Our mortgage is 3.149%, and I’m much happier having cash reserves and don’t want to be house poor (again).
BTW, I saw your letter to the editor published in the latest AARP magazine! 👍
Thank you! I knew the magazine had a significant circulation, but I have been startled by the number of responses I have gotten from people who saw it.
Couldn’t agree more. I have two more years on my mortgage at 2,75 %
A mortgage as a proxy for forced self investment is a horrible idea. It’s an illiquid asset and almost certainly grows far slower than being invested.
I have peace of mind knowing that the sum I would need to pay off my mortgage now, is invested and earning far more than 2.75% for me.
But what if the market goes down ? The majority of mortgages in the US are probably for 30 years, Per Ben Carlson, there are NO rolling 20 year periods where the market ended down, let alone rolling 30 year periods.
Mortgage debt is also an investment in an asset you believe will appreciate at least as fast as inflation. So the interest payments are the cost of owning an asset that is beyond your cash payment capacity.
I’m curious if in your country the govt also restricts development and tampers with the rental market?
I would definitely say yes. We have building control regulations that can be pretty hard to navigate, and then there’s the additional Green Belt legislation that restricts building outward from urban areas to preserve the countryside. A by-product of these development difficulties is inflated house prices. As for rentals, other than the recent strengthening of tenancy rights, there hasn’t been much intervention, although recent tax legislation has made it much less attractive to own and manage rental properties.
I agree with the value of the peace of mind that comes from owning our home mortgage free. One other (albeit minor) supporting fact is that I happen to live in a state with a $1M limit on IRA protections from creditors (which is less than our current account totals). But the state has a $600K of equity protection exemption on homesteads from creditors. So in addition to the general good feeling from living mortgage free, when we paid off our mortgage (since our home is under $600K in value and we homesteaded it) it substantially increased the percentage of our assets that are protected from a lawsuit/creditors. Not a big deal since the likelihood of a lawsuit isn’t high and we do have an umbrella policy, but nevertheless an added bonus to living mortgage free. Those same funds (especially in a non-retirement account) would enjoy no such protection. I freely admit being subject to a lawsuit is unlikely, but not impossible. But in a worst case scenario we still have our home to live in and substantially more assets than we would otherwise retain.
When we began shopping for a new home in 2022 the interest rates were under 4% and we probably would have borrowed. By the time we contracted with the builder later in the year, rates were nearly 7%.
I was kind of relieved by the high rates because I really didn’t want to have a mortgage at age 70. It feels so good to be mortgage free.
Mark, I don’t think your explanation is out of left field at all. if I may ask, how did you get a 1.35% mortgage? I’ve never seen anything that low. With a rate that low I might have been tempted to put the payoff funds into a high yield account and have the mortgage directly withdrawn. This example of mental accounting could provide the psychological reward of paying it off, without the opportunity cost. Without knowing the payoff amount we can’t know if that would produce a “meaningful” return, or only enough for a few pints. But your story is a good example of what I call “everyday arbitrage” – identifying a financial opportunity.
Your post also points at the important financial concept of leverage. The other more nuanced financial concept is imputed income. Some part of each mortgage payment is rent you are paying your self. While we are paying off that mortgage we get to live in a (we hope) safe, comfortable home, raise a family, make friends. and build a life. That has tremendous value that isn’t usually consider in a ROI calculation.
Over the 12 years before COVID-19, I was on a floating mortgage rate, set at 0.9% above the Bank of England’s base rate. Then, during the pandemic, I made the decision in November 2021 to lock in a five-year fixed rate of 1.35%.
Because of the timing of the Global Financial Crisis (GFC) and my subsequent decision to fix my rate during COVID, I estimate that for a period of nearly 16 years, I never paid more than 1.65% on my mortgage.
During our conversation about paying off the mortgage, I did suggest your savings account concept to Suzie, but alas, to no avail.
Well done! Bravo!
It was never intentional; in fact, at the start, it was the opposite. During the Global Financial Crisis (GFC), my fixed-rate mortgage came to an end. Because banks were so risk-averse, and because I was self-employed, I couldn’t get anything other than a floating-rate mortgage. And, believe me, even that was difficult to get. It was a tough time. My business lines of credit were also canceled by the same banks. In hindsight, it all worked out well, but it certainly didn’t feel like it at the time.
Great job managing your mortgage rate. The lowest I recall seeing in the US was about 2.875% . I understand the peace of mind aspect. Paying off our mortgage was a very big deal psychologically.
I had a 2.875% mortgage in Oregon a few years ago, at a time when inflation was over 7%. I was very happy to have it.
My 15-yr fixed rate (originated in early 2013) is 2.625%. I had a chance to refinance at 1.99% in late 2013 +/-, but the out-of-pocket cost to refi was ~$750 and I was stubborn, waiting for a true “no-cost” refi at less than 2%. Never happened, so here I am. I’ll be mortgage free in 30 more months!
Mortgages are a necessary tool and have been for well over 50 years.
I think care is needed to ensure people understand the pros and cons of leverage and there is a fair bit of accompanying personal psychology.
For the normal case – take out a necessary but not excessive mortgage, plan to pay down over time and aim to clear by retirement seems a reasonable strategy.
For those who leverage into the biggest possible home and remortgage to release equity at every opportunity I think it is more problematic. Yes people can do very well on property gains particularly without any capital gains taxation on private residences. But in order to benefit from that they have to ultimately be prepared to downsize.
And yes there is a case for renting and alternately investing. A property is a lot of concentration in an overall “wealth” portfolio and may not be the best fit for everyone. Particularly those who may be relocating often.
For most, owning a house requires a mortgage, no decision necessary, at least in the years we are starting out.
But I agree with Suzie, all math and financial logic aside, no mortgage in retirement. And as you said, you now know why.
We bought our last house (that we lived in) in 1975 for $59,000 and sold it in 2018 for $530,000. Of course, that was not profit, likely not technically a good investment, but it was a form of forced savings and since there was no mortgage when we sold, that cash allowed us to buy our condo with just $70,000 out of pocket so still no mortgage in retirement.
I also made sure our vacation home, purchased in 1987, was mortgage free several years before retirement. We paid $159,000 and it’s now assessed at $900,000.
All the logical financial calculations in the world can’t give you the peace of mind of being debt free, especially in retirement, at least in my opinion.
I now totally agree with you and we also cleared the one on our holiday home before I retired.
As you say, debt is a two-edged sword, which we can wield to help us advance in our personal or business life. But there are also risks, and it could turn to bite us. Your super-low interest rate would be tempting to keep, but I have to give Suzie a cheer for removing a risk as you seek as peaceful retirement.
Your post started an early-morning conversation with my wife about her year at the University of Sussex near Brighton. She has good memories of her time there.
I don’t know if you remember me mentioning the girl who asked me to walk her down the aisle. I drove her to the University of East Sussex when she started her degree in physiology. She packed so much stuff into my car, I’m sure it was a danger to other road users 😂
Our granddaughter just started college and it took two SUVs to get all her stuff to school.
Three years later when she was returning home it took my car and her brother’s car to bring it back…we start accumulating “stuff” at an early age!
“Your super-low interest rate would be tempting to keep”.
Two other arguments for keeping the mortgage:
1) The money they spent to pay off the mortgage most likely would have earned much more than the interest rate they were paying. I believe most European mortgages are floating rate not fixed as most in the US are. If the rate became unpalatable in the future they would still have the option of paying off at that time.
2) With current inflation (at least in the US) each dollar they pay is worth less each year.
I’m not saying they are wrong in paying off the mortgage, just pointing out two other benefits of not paying it off that others should think of before pulling the string.