Askaboutmoney seems to lean heavily towards recommending early mortgage repayments rather than after-tax equity investing. I'd like to get a better feel for why. I know the answer to this question in any particular case will depend on personal circumstances, tax situation, salary, mortgage rates, pension arrangements, family etc ...
To me, clearing off your mortgage early for your PPR seems like a "go big or go home" kind of investment decision. It's essentially a lifestyle choice. By paying off your mortgage early you're minimising risk, reducing leverage and in the end reducing the amount of money it costs you to live a normal life. It's a guaranteed return on investment. A strong overpayment strategy also opens up a range of alternative lifestyle options e.g. part time working, early retirement, spending more time with the kids etc ... Sounds great.
Then my brain thinks:
1. Unless you have an extreme overpayment strategy, the investment horizon for receiving the full benefits of overpayment is likely to be 20-25 years. Any non-silly, after-tax investment in equities over a similar period is likely to outgrow the returns made by paying off your mortgage early, assuming current interest rates do not spike significantly. The longer the time period, and the longer interest rates remain low, the better return you're likely to see from investing.
2. If interest rates do rise, there's always the option to pull your money away from after-tax investments and then put that towards a lump sum overpayment or shift it towards monthly overpayments later on. Swings in the market might not make this feasible for a few years at a time, but it's ultimately an option. If you're euro-cost averaging you're unlikely to be in a position where you get stung too badly.
3. Better interest rates can be secured by remaining on fixed rates, which tend to restrict the amount of money that you can overpay. Current cashback offers on the market reward you for keeping your principal high. This offsets the lower interest rates you might get with a lower LTV.
4. Early mortgage repayments don't buy you additional equity in your house. They reduce a cost in the event of a sale. You gain the full benefits of any increases in the value of your house over time by doing nothing, while your debt always remains static.
5. Your PPR is ultimately an expense that should be minimised. The capital you lock away by making early repayments is money that's paying for something you already have the full use of. Other than reducing future interest payments, it's dead money that's locked in your house and isn't giving you any benefit you don't already have access to.
6. Money paid towards early mortgage repayments is not easily accessible, like money paid into a pension. Despite volatility in equity markets, money put towards equities is ultimately more accessible, particularly where you've euro-cost averaged. This would be money available if you: decide to go back to university; end up having to pay for a court case; have huge medical expenses or become unemployed for a year during your mortgage term.
7. Even if at the end of a thirty or thirty-five year mortgage making early repayments would have left you with a larger aggregate amount of money, the investment route would have provided you with more money when you needed it over the course of your life.
8. Over a long period time, assuming your wages rise with inflation, the real cost of your mortgage payments declines significantly as money loses its value.
9. Could the tax situation for after-tax equity investments in Ireland really get any worse than it is now? With the prominence of ISAs etc in the UK ... I feel like better options for equity funds is something that will eventually come along.
Some of the thinking outlined above is underpinned by my current life situation, and I could understand how it might be inappropriate if was in a more precarious position. I'm in a couple, able to support each other if times get tough, both decent paying and secure jobs, have salary protection insurance, mortgage protection insurance, have a house we're fairly confident is going to do us for at least the next 15 years babies or no babies etc ...
What am I missing?
To me, clearing off your mortgage early for your PPR seems like a "go big or go home" kind of investment decision. It's essentially a lifestyle choice. By paying off your mortgage early you're minimising risk, reducing leverage and in the end reducing the amount of money it costs you to live a normal life. It's a guaranteed return on investment. A strong overpayment strategy also opens up a range of alternative lifestyle options e.g. part time working, early retirement, spending more time with the kids etc ... Sounds great.
Then my brain thinks:
1. Unless you have an extreme overpayment strategy, the investment horizon for receiving the full benefits of overpayment is likely to be 20-25 years. Any non-silly, after-tax investment in equities over a similar period is likely to outgrow the returns made by paying off your mortgage early, assuming current interest rates do not spike significantly. The longer the time period, and the longer interest rates remain low, the better return you're likely to see from investing.
2. If interest rates do rise, there's always the option to pull your money away from after-tax investments and then put that towards a lump sum overpayment or shift it towards monthly overpayments later on. Swings in the market might not make this feasible for a few years at a time, but it's ultimately an option. If you're euro-cost averaging you're unlikely to be in a position where you get stung too badly.
3. Better interest rates can be secured by remaining on fixed rates, which tend to restrict the amount of money that you can overpay. Current cashback offers on the market reward you for keeping your principal high. This offsets the lower interest rates you might get with a lower LTV.
4. Early mortgage repayments don't buy you additional equity in your house. They reduce a cost in the event of a sale. You gain the full benefits of any increases in the value of your house over time by doing nothing, while your debt always remains static.
5. Your PPR is ultimately an expense that should be minimised. The capital you lock away by making early repayments is money that's paying for something you already have the full use of. Other than reducing future interest payments, it's dead money that's locked in your house and isn't giving you any benefit you don't already have access to.
6. Money paid towards early mortgage repayments is not easily accessible, like money paid into a pension. Despite volatility in equity markets, money put towards equities is ultimately more accessible, particularly where you've euro-cost averaged. This would be money available if you: decide to go back to university; end up having to pay for a court case; have huge medical expenses or become unemployed for a year during your mortgage term.
7. Even if at the end of a thirty or thirty-five year mortgage making early repayments would have left you with a larger aggregate amount of money, the investment route would have provided you with more money when you needed it over the course of your life.
8. Over a long period time, assuming your wages rise with inflation, the real cost of your mortgage payments declines significantly as money loses its value.
9. Could the tax situation for after-tax equity investments in Ireland really get any worse than it is now? With the prominence of ISAs etc in the UK ... I feel like better options for equity funds is something that will eventually come along.
Some of the thinking outlined above is underpinned by my current life situation, and I could understand how it might be inappropriate if was in a more precarious position. I'm in a couple, able to support each other if times get tough, both decent paying and secure jobs, have salary protection insurance, mortgage protection insurance, have a house we're fairly confident is going to do us for at least the next 15 years babies or no babies etc ...
What am I missing?
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