I'm around 10 years into my mortgage, and I have the ability to contribute a lump sum to pay off part of the principal early.
My mortgage interest rate is around 5.50% (I'm in Canada). I would like to pay it off for the peace of mind, but I do realize that 5.50% borrowing rate is an "ok" rate to borrow the money, and the money could be invested doing other things. Because of this, I am conflicted. Thoughts?
Paying off a mortgage early for the peace of mind. Thoughts?
byu/FinancialDaniel inpersonalfinance
Posted by FinancialDaniel
30 Comments
Most people in here can’t relate, do it
Maybe you can make more in the market, but it’s just maybe. The 5.5% is guaranteed.
Absolutely pay it off. This shouldn’t even be a question. If your rate was below 4% then maybe consider investing it elsewhere .
Peace of mind is important. Follow a couple on IG that just did this. Their rate was 3% but it was really important to them to not have a mortgage anymore. Some people will say it’s better to invest it. If paying it off will help you sleep better at night and you have a separate emergency fund go for it.
All I can say is we paid off our mortgage at 12 years and being truly debt free is amazing.
If it gives you peace of mind, I’d do it regardless of what anyone thinks or says.
I think this question is probably more complicated than you think it is, and I think the answer ends up being much more straightforward.
I don’t know how interest or growth is taxed in Canada, and I also don’t know how the interest payments are usable as a tax deduction. I’m going to assume for the moment that your interest payments are not text deductible but your growth is taxable at a 20% rate.
That means that in order to beat your 5.5% mortgage interest rate, you actually have to invest at something higher than 6.875% in order to beat the 5.5% mortgage interest.
How certain are you that you can beat 6.875% growth? Obviously the stock market does it on average, but there are bad years.
On that basis it seems trivially obvious to me that you should put the money towards your mortgage. However, if mortgage interest is tax deductible, that may change the calculation the other way. This calculation also changes if your growth is taxable at more or less than 20%. The most important point is that you need to consider the reduction due to taxes of the potential growth.
https://www.reddit.com/r/PersonalFinanceCanada/
In general, this depends on how well funded you are in your retirement investments, emergency fund, etc. If everything else is well funded and you’re on track, then paying off your mortgage can make sense.
5.5% guaranteed rate of return isn’t bad. If it makes you feel better paying it off early, then I’d say go for it.
4-6% is my gray area and depends on what the rest of your finances look like. Can you provide any more details?
I paid off my mortgage 16 years early (4 years in) and have 0 regrets. The peace of mind is priceless and comparative rates in the market are always at a risk.
Image you have you house paid off. Would you take a HELOC for 5.5% to invest it in something else?
At 5.5% I would pay it off and take piece of mind as my winning feeling.
I absolutely would, then divert all those payments into retirement vehicles.
I was paying down mine somewhat aggressively but dialed it back for other investments.
The TI of the PITI is what’s tough, and those won’t go anywhere after an early payoff. (bought pre-’21 in FL)
Paid off my mortgage early and dont regret it at all. I dont like having debt of any kind and it felt great to not have to think about or worry about my mortgage. Now I invest all that extra money. I get that I could have made more money, but the peace of mind for me outweighed everything else. I hear people complaining about their mortgage and I just can’t relate.
It’s perhaps not financially optimal but it’s not a mistake, especially if it gives you peace of mind.
I did the same and will pay my mortgage off in full by December.
Very happy with my choice.
I’m gonna go against the grain of the replies, there’s value of investing it elsewhere in that paying your mortgage is not really liquid if you ever need it. If you truly don’t need it going forward then the difference between the average long term stock market return even being taxed and your guaranteed rate is negligible IMO.
I’m at 2.75% and I still want to pay it off. I get it. Do what makes sense but do what makes you happy/less stressed as well
Beats bonds. Pay it off bro, congrats. *edit* just read that as “part” of the principal… how much would you have left after the lump sum? Pennies or still $200k?
I sleep so much better under the roof of a house I own. How much is good sleep worth to you?
Another way to look at it is to pick a number for investment return that you wouldn’t refuse. Let’s say you could guarantee yourself 50% return in market, you’d be a fool not to take that, and defer paying off the mortgage. What about 25% return? How about 12.5%? Keep going until you find the lowest number you wouldn’t skip investing for, and stop there, and compare to available market rates.
For me it was 7%. I couldn’t get that in the market, so I paid down my mortgage instead.
I paid off my house 15 years ago and I haven’t regretted it.
It allowed me to quit my job without fearing the mortgage payment and focus on starting a business.
And it has allowed me to pay cash for the two houses I have bought since then, since I can sell the old house to pay for the new one. Which means I can negotiate a lower purchase price and also make an offer more appealing to the seller.
It also means no dealing with escrow issues or mis-applied payments or any of the other little annoyances of mortgage servicers. And I can choose how much insurance coverage I want to buy.
I wouldn’t.
The money is gonna make you more money long-term if you invested it in a mutual fund or an index fund.
You could certainly take a portion of it to pay off maybe 20 to 30% of the Mortgage if you want to lower the payments, but at the end of the day paying off your house and fully is usually not worth it unless you have an extra extraordinarily high interest rate.
In some aspects of finance the personal exceeds the mathematics… this is one them. Pay it off.
If I were you, I would pay it off. But I’m just some internet stranger… that hates debt.
As someone who paid off my house early, don’t over think it.
You can play the financial min/max game, but peace of mind is peace of mind.
Years ago I was mostly out of work, and I had my 6 months emergency fund. I did the math and if I cut out things like cable internet my cell phone never ate out etc, I could turn 6 months into 6.75 months, cause I still had a car payment and a mortgage.
Without a mortgage or car payment that 6 months immediately became 12, and cutting out those luxuries could help me stretch it to 18+.
With your house paid off your ability to weather bad times skyrockets, and sure if nothing goes sideways average market returns SHOULD beat your mortgage, but that security is worth something and it’s not a small thing in my opinion.
There is nothing I’m more motivated to do then to pay off my house. I would pay it off. My rate is lower than yours, and I don’t care… I’m throwing money at it all the time.
It makes no mathematical sense but there is peace of mind that comes knowing “ no matter what else happens. I will not be homeless.” I have 3.25% mortgage if I pay 135$/week extra for 8 years my house will be paid off. Let’s say market returns 7%..that’s roughly 76k but the mindset of not having a mortgage is worth more than that.