Eoin McGee: "It doesn't make financial sense to pay off your mortgage."

[SPC100]

I also like that you highlight the future return from paying down mortgage is not known as it depends on interest rates.

 

[fungie20]

Nice article, I follow the mantra of paying off mortgage before out of pension investing but I've a few questions about some of the figures:

1) I would argue that an emergency fund isn't earning you interest at 14%. This would only be the case if an actual emergency happens and you couldn't pay it all off straight away. So unless an emergency is 'realised', it isn't really true, and most the time emergency funds don't get raided, thankfully. I like to think about an emergency fund as a form of insurance, I'm paying a premium to keep that money in cash, potentially losing value over time but buys security.

2) While you say nobody has a crystal ball, but looking at past interest rates, they were much higher and the money you pay off it are at the lifetime average interest rate. This is completely true statement but I would argue looking backwards to say interest was higher and therefore has a high likelihood of happening again isn't that likely. I would argue that we are more likely to see a 'Japanification' of interest rates staying low as populations age than 1970's Ireland rates.

3) I like the idea about thinking of gross roll up as the true rate but I don't agree with the calculations, nobody pays 52% tax in this country. Someone earning 100K pays 38.5% tax and this assumes they make no pension contributions, which is unlikely on a salary that high.

 

[Gordon Gekko]

It’s a decent piece of work.

The slight criticism I’d have relates to the 52%.

I don’t think it’s relevant.

It’s the tax rate applicable to the investment that’s relevant.

 

[galway_blow_in]

Here on aam, the advice seems to be to pay it off to get a guaranteed risk free return.

I have heard advice from Paul Merriman of ask_paul on instagram promote the same thing. In one scenario he suggests if the rate is 3 or 3.5% then it might be worthwhile paying it off but if it's lower than that you should invest your money and try to make it work harder for you.

Different strategies I suppose.

If you have 20 years left on a mortgage, would the money not work harder for you in an investment account over a long period like that than being used to pay off the mortgage. Also, its available to access if there was an emergency whereas when you pay the mortgage its gone.

depends on how conservative someone is i guess , plenty of contributors on this forum who take a very conservative attitude to debt

 

[RedOnion]

It’s a decent piece of work.

The slight criticism I’d have relates to the 52%.

I don’t think it’s relevant.

It’s the tax rate applicable to the investment that’s relevant.

Yes, reading it looks like there's a bit of double counting of the tax going on by both grossing up the mortgage interest rate, and comparing to the net after tax return of investing. Calculating the net, after tax, investment return and comparing to interest rate should be sufficient.

Otherwise it's a very clear article.

 

[ATC110]

I invested in the Green Effects fund in 2006 when I had an ECB+0.5% tracker mortgage .

The fund value has increased by 180% net in that time.

 

[money_man]

It's been mentioned a few times that its only worth investing outside a pension if you have a low interest rate. What is the rate we're aiming for. Cheapest rate currently available is 1.95% with Avant Money. Global ETFs have returned greater than 10% over the last 10 years and I think about 8% over the last 20 with fees of a fraction of a percent. There's obviously a personal risk tolerance here but what's the consensus?

 

[fungie20]

It's been mentioned a few times that its only worth investing outside a pension if you have a low interest rate. What is the rate we're aiming for. Cheapest rate currently available is 1.95% with Avant Money. Global ETFs have returned greater than 10% over the last 10 years and I think about 8% over the last 20 with fees of a fraction of a percent. There's obviously a personal risk tolerance here but what's the consensus?

When you take the tax on etfs into account, it isn't really worth the risk.

 

[noproblem]

Nice article. I like the graph for grossing up interest rates. Would be nice if you pushed the article a bit further at the end and created a table showing the difference in return after taxes for the two strategies using various tax rates that could apply on pension drawdown (dependent on pension earnings), and subtracted the extra interest paid.

(dependent on pension earnings) In brackets but very very important in this whole scenario.

 

[money_man]

When you take the tax on etfs into account, it isn't really worth the risk.

After 8 years in the vangaurd all world fund Id have made an annualised 5.22% after tax, still retained access to my money and my mortgage would be costing 1.95?

Assuming the 20 year average return of 8%.

I'm not trying to be argumentative, just trying to get the thought process straight in my mind. There must be a line after which it makes sense or a way to figure out that cut off point. But maybe I'm just not giving the guaranteed nature of the mortgage return enough credit (past performance not a guide to future returns etc. but over many decades it seems you still come out ahead from a low fee index?)

 

[50andOut]

After 8 years in the vangaurd all world fund Id have made an annualised 5.22% after tax, still retained access to my money and my mortgage would be costing 1.95?

Assuming the 20 year average return of 8%.

I'm not trying to be argumentative, just trying to get the thought process straight in my mind. There must be a line after which it makes sense or a way to figure out that cut off point. But maybe I'm just not giving the guaranteed nature of the mortgage return enough credit (past performance not a guide to future returns etc. but over many decades it seems you still come out ahead from a low fee index?)

Did you read the report Marc posted 1 page back?

 

[zephyro]

After 8 years in the vangaurd all world fund Id have made an annualised 5.22% after tax, still retained access to my money and my mortgage would be costing 1.95?

Assuming the 20 year average return of 8%.

What was the mortgage rate 8 years ago though when you made this hypothetical investment? If you think 8% returns from this point are likely when the risk-free rate is 0, you're living in fantasy-land!

 

[Cruzer123]

Just a real world example of how this strategy has paid off.

Back in 2006 I had a 30 year .5% tracker interest only mortgage of 900k, mad stuff for both me and the bank. I lost my job in '09 but continued to make payments and got myself back up and running. I've had some pretty bleak times with debt this hanging over me but luckily I had a really low monthly mortgage.

About 5 years ago realising I would never own the family home I invested my redundancy/savings into some high growth stocks. I also drip fed between 1.5/2K pm into the markets (+ some Crypto). I kept this up more or less since.

The basis for my investing targets was content from a few YouTubers and subscribing to a stock picking service (€17 pm). I chose not to invest in ETFs due to the punitive Irish tax situation compared to individual stocks, more information gleaned from an Irish blog at the time.

Lately I've been investing in SPAC's and EV stocks, doubling and trebling my money each time.

I've made some ridiculous gains and can easily pay down the mortgage (after CGT) which has 12 years left to run ( I refinanced with another bank on an LTV in 2008).

It's not for everyone and could have easily have gone wrong, just pointing out it can be done.

 

[RedOnion]

It's not for everyone and could have easily have gone wrong, just pointing out it can be done.

Well done.

There's a difference between realising you took an investment risk that paid off with a 0.5% cost of borrowing, and promoting the same strategy as being the best thing for everyone, regardless of their interest rate. And then to double down by suggesting a 40% investment in bonds!

 

[SPC100]

Congratulations!

Consider taking and keeping enough off the table to cover the mortgage/make you comfortable. It sounds like you are taking high risk and it has paid off, but it may not continue....