What do personal debts and cancer have in common?

Few people in their prime of life worry about cancer.

Eleven months ago, when I was diagnosed with bone cancer, I could count myself as one of those “head in the sand” sorts. Sure, sometimes you can eat as healthily as you want, exercise well, sleep plenty, but still get kicked in the ass by mother-nature’s evil doppelganger. Maybe that was me—a guy who never should have had 3 ribs removed, along with a robust chunk of his spine and lung lining.

I ate well. I lived well.

But there were plenty of things I could have been doing differently. Modern research suggests that most of us are poorly nourished, and we happily gorge on carcinogenic products, instead of protecting ourselves. That’s one of the reasons cancer is on the rise for young people.

Don’t think, “It won’t happen to me.” Instead, validate a reason for it not to happen to you—and act on that. If you’re a living, breathing human being, read this book before delving into anything else:

I’m serious about that. If you haven’t read it, order it today.

But how is debt like cancer?

Debt is one of those things people rarely think about when they’re young. There’s no such thing as a “good cancer” and there’s really no such thing as “good debt” either.

Who thinks there’s such a thing as good debt? Those who are smart and lucky—and those who are seriously inexperienced.

If we were all fortunate enough to live 200 years, few people would talk about “good debt”.

During economic prosperity, with low interest rates, many people talk about debt (on “appreciating assets”) as something good. It isn’t. When interest rates rise (and they always, eventually do) those leveraging to buy investment assets get hammered harder than a vintage Mike Tyson haymaker to the chin.

If I wrote this a few years ago, most Americans would be shaking their heads. “No way,” they’d say, “leverage is good.” But few of them are saying that today as house prices continue to plunge in the U.S., and interest rates threaten to creep upwards.

Who thinks debt is good today? Rookie Australians, mostly.

Lulled into a fallacy of house prices rising forever, Australians are leveraging themselves to the hilt, suggesting that it’s OK, thanks to their Canadian-esque tax breaks on loaned money for investment purposes.

Most of them will eventually pay heavily for that. Debt is bad.

When inflation does rear its ugly head (don’t suggest that high inflation will never come again) people who owe money on assets and liabilities will see those payments soar. If they can’t service those payments, they’ll be forced to sell. We all know what that will do to the economy.

Some people suggest that it’s better to invest money while their mortgage interest rates are low, instead of paying down their housing debt.

If given 12 hours to summit a mountain before nightfall, those same people would dilly dally around on the lower slopes with a daypack, only to start huffing it against daylight once a massive pack gets dropped on their shoulders.

Insane? I think so. Make up ground when the going is good. With low interest rates (a light daypack) you can ascend quickly before eventually getting hit with higher mortgage rates. Get up that hill as fast as you can—and don’t look around. Low interest rates are great for paying off your house.

Call me a wimp, but I no longer eat red meat, non organic spinach, sweet processed food of any kind, and I take a daily bath in organic green tea.

And if I owed money on a house—or on anything else—I wouldn’t invest a penny. I’d be paying that down as aggressively as I could.

There’s no such thing as good debt—or good cancer. So if you haven’t done it already, avoid the distractions of sugary foods, gold, stocks, and rapidly rising real estate….until you’re 100% debt free.

You’ll sleep better at night if you’re giving yourself the best fighting chance you can.







Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

You may also like...

61 Responses

  1. I'm going to add a single exception to this: employee matching U.S. 401K contributions. But when they're maxed out, I really think people should hammer down their mortages to zero. Investing is a lot more fun, but being debt free feels great, especially considering how much you can invest when you (and not your bank) really own your home.

  2. larry macdonald says:

    Andrew

    You have my deepest sympathies. I sincerely hope you are doing well now.

  3. @larry macdonald

    Thanks Larry,

    I'm actually doing really well. In rehab, I'm as obsessed about the work I'm doing as I once was about debt elimination.

    Last Sunday I finished second in a 5km cross country running race. And yesterday, I did 27 pullups. My back might be a bit dented, but the fire in the belly is what counts. And I'm really fired up about what I can do—considering that I couldn't walk 11 months ago.

    Cheers,

    Andrew

  4. Mike says:

    Hey Andrew,

    Hope all is well with you. I "so agree" with your perspective on debt. I was waiting for you to say "with the exception of a mortgage" but you didn't. That's a rarity these days!

    The part about debt that very few realize is the simple fact that when you go into debt, you are giving away your future earnings and more importantly time…in essence, you're selling your freedom. But many people only see what they can get here and now. The food analogy works well in this regard because we're talking about instant gratification vs. discipline.

    Once I became completely debt free, every aspect of my life improved dramatically.

  5. @Mike

    Hey Mike,

    To be honest, I'm relieved to read that you're in my corner with this philosophy. I have a feeling I'm going to get blasted by a few people who might not jive with my thoughts on this. Investing feels good. And paying off debt is less exciting. But I used to love seeing how every extra mortgage payment I made immediately affected my net worth right away. With investing, it's not always like that, is it?

    When interest rates hit their historical averages again, loads of people are going to regret the wimpy payments they were making when rates were cheap. Compounding works in a couple of different directions, as you're fully aware.

  6. Andrew,

    First, I am also glad that you are doing better. What a poorer place the world would be with one less fiery spirit such as yourself.

    Is there anything in particular that precipitated this post? I am not so sure about putting every penny into paying down the mortgage instead of investing, but I do recognize that one cannot exit the rat race so long as they have debt (unless they have a HUGE amount of assets). I will scale my payments up to double speed, since I do not doubt that rate will rise. I do, however, want to keep up the RRSP and TFSA investments.

    In the end, debt is all about rate of return. "Is my rate of return higher if I pay down the debt or if I invest this cash?" — this is what businesses ask themselves every day. However, I totally understand where you are coming from. In fact, were we using sound money, most people would not even bother with debt.

    Under a sound money regime, debt can only be used if it leads to a greater economic return than the natural rate of growth. By definition, most debt will not be productive under said regime. It is only the results of QE, currency depreciation, and rate fixing that is fooling people into giving debt less respect than it deserves.

    "When interest rates hit their historical averages again, loads of people are going to regret the wimpy payments they were making when rates were cheap. Compounding works in a couple of different directions, as you’re fully aware."

    To conclude… that is a very nice point.

  7. @Kevin@InvestItWisely

    Hey Kevin,

    I was actually having a MRI scan on Monday when I thought about this. But I was, instead, going to write about how coming back from illness could be similar to coming back from an investment gone sour or clawing your way out of debt.

    Then I started to write and it went down a different road. I thought back to when I had a mortgage. I didn't sell my investments to pay it off, but I didn't invest a fresh penny during those few years.

    I wanted to invest. I researched stocks, still, constantly. And it was like torture. And I came up with every rational reason not to pay the mortgage down with every penny, but in the end, I put every penny on the mortgage. The thought of having debt was more oppressive than anything. A friend of mine once said, "Andrew, if you fully own your home, it doesn't matter what kind of financial armaggedon may hit—you can live off what you grow in a greenhouse" He was only half-joking, but he lived by that and he paid off his house in his 30s (he's an engineer) And it made sense to me. He also hated debt and threw money at his mortgage like a madman. But today, with a couple of young kids, he finds himself able to invest about $36,000 a year–thanks to no mortgage liability. I think what a person chooses to do will always come down to their personal comfort level. If I bought a house today, I would buy with cash. I know that this would oppose the logic you presented (and it is good logic) but I don't ever want to owe money to anyone again. I think most people have become too comfortable doing that, and they rationalize reasons for it.

    That said, there can be a happy medium, and you're probably in that happy medium. But by now, you likely realize that I'm a man of extremes!

  8. Jean says:

    Andrew,
    First of all, I'm happy that all continues well with your recovery, and the results of this week's MRI are more proof of that. You are an inspiration to us all! Being "a man of extremes" seems to be working to your benefit in many good ways these days.

    Secondly, so glad to have read your post today – aside from raising my interest in the suggested book – since I was hemming and hawing about what to do with a sum of cash sitting in the bank (drawing less than 1% interest, as we all know). Should I invest it in my portfolio of index funds, contribute to the investment club share purchases, or pay down on our mortgage? While tempted to consider the investment club contribution, my hubby, having read your blog post earlier in the week, didn't hesitate to say we should put it toward the mortgage. I don't like the idea of paying interest over any period of time, regardless of how 'low' the interest rate currently is, so I'm writing out a check today to pay down on the mortgage principal. I'll still continue the monthly contributions to the investment portfolio of index funds, but I want that feeling of true financial freedom . . . and it couldn't happen soon enough. Thanks for reminding me of that!

  9. @Jean

    Hey Jean,

    Thanks for the words of encouragement–and thanks for the comment.

    I'm glad to hear that you're keen to get rid of your mortgage. I think that many people just accept that their mortgages are going to take a long time to pay off, and few bother to "fast track" them. I'm not someone who puts any weight in economic forecasts, but for those who do, "inflation is coming" is the word on the street.

    Of course, "the street" has always been far more wrong than right (that's what makes me giggle) but with low, historical interest rates, it's somewhat crazy not to hammer away at mortgages–especially now. And you can't put a price on peace of mind. You're going to LOVE being debt free.

    The money you had in the bank will now, once applied to your mortgage, give you a tax free rate of return (guaranteed) that's equivalent to the percentage of interest you were paying on your mortgage. That's probably a guaranteed pre-tax rate of 5%+, if your mortgage is charging 4% interest. Paying off money that's being charged 4% interest is a tax free gain of 4%. To make the equivalent of that in an investment, you'll need to find a guaranteed return of about 5% pre-tax. Nobody can guarantee that anywhere else. And it's going to be about 400% better (1% pre-tax vs 5% pre-tax) than where it was. Nice work Jean!

  10. Andrew,

    Glad to hear your recovery is going well. I've been debt free for several years and have no intention of ever taking on large sums of debt again. I got tired of making the banks rich.

  11. @The Biz of Life

    Hey Biz,

    We're definitely together on this one. Being debt free is its own form of wealth.

  12. The Accumulator says:

    Andrew, your viewpoint is totally reasonable and would be the right choice for many people. However, I would argue that it is better for a sophisticated investor like myself to split my cash 50:50 between paying down the mortgage and investing. The invested component is now effectively going towards my pension. As my pension funds increase then I’ll decrease the invested component in my ‘mortgage jar’ and use the proceeds to chip another chunk off the mortgage. Effectively, this is the same as taking any new income I have and splitting it between mortgage repayments and pension contributions.

    Are you suggesting that a person shouldn’t invest into a pension until their mortgage is paid off? I think that all or nothing approach to debt is likely to mean giving up on the benefit of long-term equity returns and tax breaks, given it takes 20 – 25 years to clear a mortgage on average.

    I seem to remember from your book that you were investing from an early age? Did you buy your first house outright with those proceeds? Apologies if I’m misremembering, I don’t have your book to hand. I gave it to a young member of the Accumulator clan who is now furiously saving for their first house and pension and is generally on the right track. Cheers for that!

    • Wow Accumulator, that is an old post. I wrote that nearly four years ago. I’ll admit that I’m still an investment wimp. If I had a defined benefit pension, of course, I wouldn’t defer contributing to it—not when my employer was matching contributions, providing (hopefully) income for life in the future. But if I had a mortgage, I wouldn’t invest beyond that. I would pay it all off first. That’s just me, a very conservative investor. If you recall, from my book, I borrowed money to buy real estate, but stopped investing until I had cleared the mortgage. I’m an investment wimp, guilty as charged.

      Cheers,
      Andrew

  13. The Accumulator says:

    Though I applaud your success, your personal prescription was tough. Especially the early years. I remember reading what you went through and thinking, “Bloody hell, that’s hardcore.”

    It would have been too tough for me, even if I’d been that far-sighted at a similar age. Also, Mrs Accumulator was around at the time and I don’t think she’d be here today if living without central heating during the winter had been on the agenda And I say that as a couple who live on less than 50% of our income.

    Nonetheless I hugely enjoyed the book and can see how an uncompromising attitude can pay-off, if you can take the pain.

  14. The Investor says:

    Andrew,

    A mortgage is the only good debt. The term mortgage comes from the French for “death contract”, but for decades mortgages have enabled people to enhance their lives by buying their own home without saving a six-figure sum beforehand. Over the long-term, that house can be expected to increase in value.

    Some old wolf will come along and tell us that mortgages are terrible if there’s a big recession and you lose your job and interest rates rise, and you can’t keep up the repayments. Wise and true.

    Fact is though, nearly everyone reading this will at some point have a mortgage. Better to get them when they’re cheap, and around here we’re smart people who only take on mortgages we can easily afford.

    Don’t think that because mortgages are okay, you can feel fine about a five-figure credit card bill. No way. All other debts are toxic and poisonous – with the arguable exception of student loans – and must be purged before you take another holiday, eat at another restaurant, or buy another Superdry windcheater.

    I was challenged the other day by a commentator who thought my view that debt is a form of protection against high inflation was reckless. Fair enough, he or she was not a regular, and may not know I have a Berserker attitude towards all debt other than mortgages.

    But anyone who thinks a mortgage is bad news when inflation is running high is wrong.

    An affordable mortgage secured on a real asset – a house – is an excellent thing to have at times of high inflation.

    Times, as it happens, like now.

    • Investor,

      I can’t imagine someone buying a house without a mortgage. But I would rather pay it off as quickly as possible, rather than have it linger. With low interest rates, much more of an aggressive payment schedule can go towards paying down the principle.

      I’ve listened to Dave Ramsey’s “pay cash for houses” with fascination, because I think he gives poor advice on that front. I’m not sure if you know this, but he advocates people save up cash until they have enough money to buy a house outright. So many of the Americans following this advice (and he has a huge following) are never going to end up with a home. As home prices increase, they’ll be chasing something they never catch up to. U.S. home prices are still cheap. And mortgage rates down there are set for the duration of a loan. In Canada, there are five year terms. Down there, you can get a mortgage for 30 years at 4%. That, in itself, baffles me. When interest rates rise (and at some point, they will) it’s going to be a perfect storm for American banks, receiving a pittance in payments when global rates everywhere rise.

  15. The Investor says:

    Andrew,

    The US is a an incredibly generous place to buy a house with a mortgage. You can fix your mortgage rate at any time at the prevailing low rate, and then if rates fall lower you can re-finance without penalty. (In the UK you pay a “redemption fee” which can be several whole percentage points of your outstanding balance!)

    And as if that wasn’t enough, in many US States you can still walk away from a house and leave the bank with the debt and property without penalty. Here in the UK, you remain liable until the debt is paid off or until some very long period (at least a decade from memory) has passed.

    To cap it all there are modest tax benefits.

    In such circumstances Ramsey’s advice seems to me as you say especially questionable. There’s basically no downside to buying with a mortgage with those criteria unless house prices are definitely too high and so very uncompetitive with paying rent. (Remember, you can walk away from your debt if prices simply fall!)

  16. KC says:

    Every businessman or woman borrows to invest. Profitability is about risk and tax , but I could add that it it also about the effort put in to make the capital work.

    In my case I decided to mortgage my house to buy another house that I now rent. This was not a simple investment decision as it was instigated by a family situation. But, even so, it was a profitable investment with rent easily paying the mortgage and capital gain accruing as well. Another family situation meant I was now able to pay off the mortgage or put the money into equity or bonds or even buy another property. This was the more complex decision as IHT, CGT, IT and risk in timing the stock market were all factors. In the end I decided to pay off the mortgage, but given a different perceived stock market situation , I might have moved the other way. The mortgage was due in only six years, but, if it had been longer, I might have moved the other way. If the BoE had not signalled a rate rise I might have moved the other way. Anyhow, I am now sleeping easier, but if I had been greedy or younger I might have moved the other way….

  17. Brian says:

    If you choose to invest instead of paying off your mortgage then consider this question – would you be willing to refinance the equity out of your mortgage (thus increasing your debt) to add to your investment accounts? If not, then you are logically inconsistent.

  18. Peter says:

    One thing is for sure – Paying down your mortgage is certainly the safer option and the most certain to provide permanent increased net wealth.

    Most investors however accept the higher risk of putting their money into the markets.

    I’m always one who like to find a happy median and I believe inroads could probably be made by employing a mix of both methods.

    Everyone’s circumstances are different and certainly for myself, my primary aim isn’t to neccesarily increase net wealth but provide me with an income that allows me to retire earlier than I might otherwise expect to.

  19. Terry says:

    Another thing to bear in mind that most reader of this site may not realise is that, if the market tanks by 50% in one year, it would take over 7 years of, so called, “average stock market returns of 10%” to return to the same position you were in just prior to the loss, and that’s even factoring in inflation.

  20. Martin says:

    Note that I’m not a financial adviser and this isn’t advice, only what I would do. Depends on your time horizon, risk appetite and a bunch of other things, but were it my choice I would definitely invest in the market. In fact, I would argue that purely from an investment standpoint my 2.875% mortgage is probably one of the worst investments you can make since the price of your house may take a hit when interest rates finally go up. I don’t expect stocks to return less than 2.875% over 12 years. Even accounting for the 2008 crash, the stock market (as measured by VTI) has doubled over the last 10 years. If it’s mean reversion you’re worried about (i.e. we had a great year last year so expected returns in the future will be lower), I would argue that we’re still mean returning to the upside as we recover from the recession. Another way to think about it is this: best case scenario in the “invest in your mortgage” category is you pay off your mortgage tomorrow, in which case you’ve bought yourself a 12 year $350k bond returning 2.875%, maybe less if the value of your house goes down, and increased your tax liability (no more mortgage deduction). The 10 year government bond rate is 2.75%, so you’re probably better off buying even just Uncle Sam’s debt than paying down your mortgage, since you’d be diversified away from your house and still getting a mortgage interest deduction.

    So I think it’s highly unlikely that paying off you’re mortgage will outperform stocks. That said, this is a highly personal decision that hinges on your situation, goals, etc and performance isn’t everything. If paying off the house will get you FI faster or let you sleep at night, maybe it’s the best thing for you to do.

  21. Jeff Kowalsky says:

    Hi Andrew, and anyone else with an opinion.

    My personal home is mortgage free. I have a condo with a mortgage (2.9%) the payment is covered by the rent.
    Would you put any extra money on this debt or continue put it into my etf’s?

    Thanks

    Jeff

  22. Jeff Kowalsky says:

    Thanks Martin, Terry, Peter and Brian,

    You all make what appears to be valid arguments.

    Sorry Maritin I didn’t mention I am a Canadian, we can’t claim the mortgage just the interest.

    Not sure what I’ll do now……….. food for thought

  23. Simon says:

    I like your argument, and although your property exposure is fixed, it’s not a binary decision between cash and equities. As long as you maintain the mortgage (which seems to be a no-brainer), you could go 25%cash, 75%trackers, or any other combination if you thought 50% tracker was too risky for your personal situation.

  24. Hakan says:

    Borrowing to invest even over the long term is riskier than it looks, and it’s less rewarding, too.

  25. Billy says:

    At first glance, I’ll grant you it looks attractive. Who wouldn’t want to take other people’s money, compound it at 10% for 20 years, and end up with a fortune?

    Exactly — who wouldn’t? There’s your first clue life isn’t so simple.

    In reality:

    1.The money you will borrow is expensive
    2.Tax and other costs will eat up your returns
    3.Market returns are unpredictable, even over 20 years
    4.Your investment will probably be marked to market
    5.If you want to borrow to invest, it’s most likely a bad time to do so

  26. jimmy says:

    I agree with you on the unpredictability of the markets but I think most investors accept that risk in the hope of a better return. The investments would be tax free.

    However, when interest rates rise obviously the return over mortgage rates would narrow and could even turn negative which would defeat the whole point of the exercise. Hence the much greater risk.

    The alternatives that I didn’t explore in my last entry were not to borrow any extra against the house and either;
    a. Overpay the mortgage as much as possible and clear that mortgage debt asap or
    b. Feed all surplus income into the high yield fund ISA that I’ve already started with a view to taking tax free income from it at the planned retirement age.

    There are several articles on the pros and cons of both of these courses of action on this and other websites. I must admit that I’m more inclined to take the route of investing especially as I believe that interest rates will stay at below average levels for at least the next 5-8 years and over the long term quality stocks should provide a decent return.

  27. joel says:

    A 3% mortgage rate is extremely low. I would not pay anything extra on the mortgage, and instead invest that money. You are almost guaranteed a return greater than 3% over the duration of the mortgage.

  28. ian says:

    Don’t even consider it. You can never borrow money that cheap. Any additional payments should be made in other areas as investments. Keep it simple and look at purchasing your retirement house and lease it out until you move in while you depreciate it. If your on a five or six your plan you will recover 1/5 of the value of the property.

  29. Matthew says:

    You need to compare the expected investment returns against the interest rate on the debts. The average annual return from that is 11% a year. Never mind some years it will be less (like the crash a few years ago) and sometimes it will be much more (like this year). The AVERAGE annual gain over the long arc is all we care about, and that’s averaged about 11% a year since inception.

    Now, remove your inflation figure from that. The standard amount most people use is about 3% inflation per year. So now, adjusted for inflation, you can expect to make 7-8% “real money” on a total US stock market investment. Since 7-8% is greater than the 3% mortgage, it makes more sense to put your money towards the investment than towards the mortgage.

  30. Andy says:

    I wouldn’t expect 7% real from the stock market going forward, but you will almost certainly do better than 3% over the long term.

  31. Phil says:

    There is a school of thought that says you should invest by mirroring the investments of the ultra-rich, eg Warren Buffett. There is some soundness to this approach – the ultra-rich have access to information we don’t, and by their very actions they can change the financial landscape.

    Let’s say I told you that Buffett has a 17 billion dollar mortgage. Because of various business decisions, he is actually increasing that mortgage value every year.
    What if I also told that Buffett had a magical power that could lower all mortgages at will. I wouldn’t have to tell you that Buffett doesn’t like losing money, and would rather use his magic power than paying back the full mortgage. Wouldn’t getting a mortgage and enjoying Buffett’s magic power when he used it be cool?

    As it happens, if you replace “Buffet” with “US Government”, replace “Billion” with “Trillion”, replace “mortgage” with “national debt” and replace “magic power” with “the ability to control inflation”, you have something pretty close to reality. Nominal debt at low interest (not to mention tax deductible interest) is a good thing if you use it for investing (patience and safety cushion may be required).

  32. Jodie says:

    I am squarly in the investment camp, but i do recognize the choice is not for everyone and for some paying down the mortgage is a better option. To me, this is a simple math problem and there is a very high probability you will come out ahead in the long run by investing. But this assumes you have the self discipline to actually invest the extra money every month and not spend it. I also personally believe that inflation will eventually go higher. If so, your monthly mortgage payment will look like a greater and greater bargain, meanwhile your stocks/mutual funds are likely to keep pace with inflation and give you a stronger return.

    Bottom line, math says to invest but psychology is a factor and if you value the thought of owning a home free and clear you may want to do otherwise. From a math perspective just ask yourself why apple etc have been issuing debt lately even though they have no need for it? Cheap leverage can really juice returns. Your mortgage is cheap leverage.

  33. jaime says:

    I guess the bank who sold the mortgage will soon get out of business. Why lend anyone money at 3% since they can generate a guaranteed 11% on the stock market with a no-brainer vanguard index ? They must be out of their mind.

  34. albert says:

    Keeping the mortgage and investing is the mathematically sound decision.

    You will very likely end up with more money in your pocket if you pay off that mortgage as slow as possible. If you’re okay with the extra added risk (and I’d say the market returning less than 2.75% long term is a pretty low risk, IMO – many high quality companies pay dividends higher than that, and that’s then not counting the stock price going up at all), I wouldn’t pay the thing off.

  35. huw says:

    My ratre is 2.75%, that is almost a free (inflation adjusted) loan.

    pay it as slowly as they will let you.

    in fact, borrow another $ few hundred thousand fixed at 2.75%, and invest that in index funds. The dividends will more than pay the interest.

  36. gary says:

    It depends on the person.

    I have the money and choose not to.

    Heck, I choose not to pay off my student loans, which are now down to only $900, while holding six figures in cash.

    Some people like the warm fuzzies they get from being debt free, some like the warm fuzzies they get from optimizing their investments/debt mathematically. 🙂

  37. james says:

    I don’t think it’s quite as straightforward as saying “math always wins” when the math isn’t always known. If you’re bearish on the market in the near-term and believe your $85k may be reduced by 40%, the math may be on your side to sell those investments now, lock in your return on those gains and then lock in an additional 2.75% gain by paying off the mortgage.

    You’re making assumptions either decision you make, which means there is definitely an emotional side to it. Being more conservative and pessimistic about the market and your future job prospects will influence your “math” one way while being aggressive and bullish will send you another direction.

    As has been mentioned in plenty of the threads, either way you look at it is a win-win. The important thing is that you’ve put yourself in a situation to make the decision, as long as you keep that up, you’re probably gonna be all right regardless of what happens with the stock or housing market.

  38. nick says:

    Unfortunately we only get to see if the math wins in hindsight. For my personal situation, paying cash to build my house turned out to be the best decision in 2005/06. Interest rates were about 6% at the time. To use an easy round number, it cost me about $200k to build my house. (I bought the property a few years earlier, which had already doubled in value.) If I put that $200k into the stock market, it would have been worth about 40% less by early 2009 (down to $120k), plus I would have been making about $1200/mo payments on the mortgage at 6%. It would have taken until mid-2010 just to get back to breakeven, not including all the interest I would have been paying. My business also took a massive hit in early 2009 (economy + other business issues), which would have sent me into one hell of a panic if I had a mortgage at the time. Having no mortgage when the shit hit the fan? Priceless.

    But, shift my timeline ahead by four years and it would have been a lot better to take out a loan and dump all my money into the stock market. Or I could have bought Bitcoin in 2010 and been a multimillionaire (billionaire?) now. Good ol’ hindsight…

    Sadly, my crystal ball was broken at the time (and remains so). All I know is I was able to sleep well at night knowing I didn’t have a mortgage payment to make, and I could reduce my expenses to about $1200/mo at the time (including everything from food to property taxes).

    But yes, we are talking about “better” and “best” choices here. Either you get a free and clear house or you get a bigger investment account over the long run. Both outstanding options IMO.

  39. nick says:

    Over the long-term (113 years to end of 2013) UK equities have returned a nominal geometric mean return of 9% a year / an arithmetic mean return of 11.3%. By the same measure bonds have returned 5.4%/6%.

    If you can lock in a fixed rate mortgage for around 4% today for a decade, say, then I personally like those odds. Even better a mortgage is not marked-to-market (so you don’t face margin calls if house prices oscillate) and most enable some measure of flexible repayments (so you can overpay if the prospective return from equities looks poor).

    Moreover there are different ways to effectively borrow to invest via a mortgage. Using an interest-only mortgage is riskier (because you will face sequence of returns risk on the repayment date, although this can be mitigated as above with earlier repayments) versus a repayment mortgage, where you believe you can safely pay off the 25-year term from salary etc, and save on the side into equities (which is what most people actually do in reality with a pension).

    There’s nothing wrong at all with paying off a mortgage first, but there’s a risk/reward justification for other strategies, too.

  40. di says:

    Investing may earn you more based on oft-quoted long term averages but, consider this, if the market tanks by 50% in one year, it would take over 7 years of so called “average stock market returns of 10%” to return to the same position you were in just prior to the loss, and that is not even factoring in inflation.

    Consider also the possibility of experiencing a period of unemployment during this period whilst still having to meet your mortgage repayments. Suddenly, leveraging your mortgage to invest doesn’t seem so appealing after all.

    I believe someone once said “rule number 1: don’t lose money, Rule number 2: don’t forget rule number 1?. You have to admit he has a very good point.

  41. The Investor says:

    Andrew,

    Over the long-term (113 years to end of 2013) UK equities have returned a nominal geometric mean return of 9% a year / an arithmetic mean return of 11.3%. By the same measure bonds have returned 5.4%/6%.

    If you can lock in a fixed rate mortgage for around 4% today for a decade, say, then I personally like those odds. Even better a mortgage is not marked-to-market (so you don’t face margin calls if house prices oscillate) and most enable some measure of flexible repayments (so you can overpay if the prospective return from equities looks poor).

    Moreover there are different ways to effectively borrow to invest via a mortgage. Using an interest-only mortgage is riskier (because you will face sequence of returns risk on the repayment date, although this can be mitigated as above with earlier repayments) versus a repayment mortgage, where you believe you can safely pay off the 25-year term from salary etc, and save on the side into equities (which is what most people actually do in reality with a pension).

    There’s nothing wrong at all with paying off a mortgage first, but there’s a risk/reward justification for other strategies, too.

  42. jane says:

    I just have to say I have watched my parents suffer by not paying off their mortgage, and I am determined to avoid meeting their fate. I am going to tell a story that shows the value of paying off your home ASAP – their story.

    I grew up wealthy. Not multimillionaire wealthy, but my daddy makes $250k/year in a low cost of living state wealthy. My parents only paid the minimum on their mortgage because they enjoyed deducting the interest, and I suppose it did save them money at the time. Then, my father’s company moved to Mexico when he was in his 50s and he decided to stay in the United States. Due to other pride-related shenanigans, he did not get severance pay. Then, we had to pay off the $500k lake house that we had bought AGAINST COMPANY STOCK instead of paying for in cash, when the stock went almost to zero overnight. This is a level of stupid all its own – 1. If the stock you own goes to 2 mil, at least sell enough of it to pay off your houses, or 2. just go ahead and sell it all and RETIRE ON 2 MILLION DOLLARS! My dad is damn lucky my mom didn’t divorce him over this one.

    Then, my dad was job hunting in his 50s and overqualified for just about anything you could possibly imagine. No dice. He even had to have surgery without health insurance at one point, so you can imagine the money was just gone after a while, even though they had decent savings to begin with. Finally after years of unemployment, he got a ridiculously low paying part-time substitute teacher for special needs kids job where the behaviorally and intellectually stunted kids liked to punch him in the face, and he was only two years away from getting a pension for that when wham! He had a stroke and couldn’t work anymore. My mom was working a $9/hr retail job at the time to make ends meet, but she also quit when she got breast cancer and had to take care of my dad at the same time.

    I say all this to point out that NO ONE is safe while you still owe money on things. You may be making a killing and have a ton of money in the bank, but if you make bad investment decisions, or get laid off in your 50s when no one else is going to want to hire you, you are going to be screwed if your housing is not paid for. It is heartbreaking watching my parents try to get rid of things and get the house organized so they can sell it. They just can’t afford the mortgage + equity line payment on two Social Security-only incomes, so now they’re going to have to get rid of their custom built house that they thought would be their forever home. They say it’s “too much to keep up with,” but the truth is that if they weren’t paying their mortgage, they would be making more than enough to live comfortably AND pay people to take care of the house/yard for them.

    Not paying off your mortgage so you can have more money in the bank now is NOT worth the potential risk you are taking of having more expenses than you can afford if your financial status changes.

    • Jane,

      Thank you for sharing this. It’s an incredible story. And it’s similar to that of a friend of mine, who lives in Lake Chapala. He was a multimillionaire. And he lost his house. It wasn’t paid for. And a business deal went south in a hurry.

  43. Gary says:

    Leverage is not for me. I can contemplate the idea of putting money borrowed in a high-yield saving account, CDs or treasury bills, but not in the stock market. I firmly believe that the money you invest in stocks should be money you can afford to lose. Not necessarily want to lose or like to lose, just afford to lose without being wiped out. I don’t buy stocks on margin either. If you have to repay your loan, you don’t have 20 years to wait until stock market goes back up. The only exception I can contemplate is if you have the same amount of money you are borrowing somewhere, just not immediately available. For example, if you have enough money in a CD that matures before your loan interest goes up, then it may be OK to borrow. In the worst case, you can just take the money from the CD. But you should really be able to afford to lose the money.

    Still haven’t gotten back some of the money I lost when the internet bubble birst. Maybe I didn’t invest in the right stocks, maybe I have too much in my company’s stock, maybe I didn’t sell in the right time. But you cannot expect to always guess right. Nor can you count on the index performance – just look at 20 years preceding 1987 crash.

  44. Tim says:

    Andrew,

    You mention that your only exception to paying off all debt before investing is paying into a employee matching 401k up to the maximum employer match. Is the rationale for this that, if you don’t make use of it, you are turning down a guaranteed 100% return on your investment? But what about the postitive tax implications of further pension contributions? Do you not think that these outweigh overpaying debt, too.

    • Tim, I prefer to pay off debt, unless somebody is going to double my money in a year with a matching contribution. But we’re all different, in terms of our comfort level. And because we can’t see the future returns of the markets, nobody will have an answer in the crystal ball.

      Cheers,
      Andrew

  45. Tim says:

    Thanks for your speedy response Andrew that was my thinking too. To turn down the free money of an employer match would be insane, but everything else if a risk, and the mortgage is a guaranteed bird in the hand today and in the future.

    I think the pension industry and, to some extent governments, overplay the tax incentives of pensions when paying in, but overlook the potential tax disincentives when we want to claim our pensions later on, let alone the poor value of annuties, high fees for drawdrown, and the inability to access funds at will and pass the assets on to our heirs.

  46. Peter says:

    As I understand it, when you bought a property, you bought in Canada. But note that things are different here in the US: mortgage rates are generally fixed for the entire 30-year period here. You can refinance at any time to lock in lower rates, but they can never raise the rates on YOU. Kind of a borrower’s paradise (for better or for worse).

  47. Brian says:

    Andrew,

    As you have said many times yourself, the stock market returns 10% on average a year. You also said that over your mortgage’s lifetime, chances are that the interest rate you pay is going to exceed an average of 8%. By my reckoning, at worst, this is a great opportunity to leverage.

    What’s more, very high interest rates (above 8% or so) only really occurred in the 1970s and 1980s.

    Of course rates of 5%+ are very normal. If I was stress testing the idea of paying back a mortgage in the current climate and foreseeable future in, I would think 5% Bank Rate would be a reasonable measure to use.

    Happily one doesn’t have to lock oneself into a plan for the rest of your life. If/when interest rates do start to rise, the risk/reward will of course become less favourable and the attractions of foregoing mortgage payments will diminish.

    Each to their own, but I happen to find your advice to pay off a low rate mortgage ASAP a little dogmatic and scaremongering. I prefer to be a bit more nuanced and rounded.

    The standard variable rate UK mortgage rates haven’t been 8% since the late 1990s. So that’s 15-years ago, and when base rates were far higher. That’s 15 years of a 25-year mortgage right there. Yet you talk about rates going up.

    Meanwhile, we currently exist in a world of near-zero interest rates, and have done for seven years. The only way mortgage rates are going to 8% in the next 10 years or so (and probably beyond) will be if the Central Banks lose track of inflation, at which point *having* a big mortgage would be desirable (because hyper-inflation erodes debt fast).

    Don’t get me wrong, I think there is NOTHING wrong with paying off a mortgage as fast as you can. It is one of the safest investment you can make in terms of guaranteed return, though it does have disadvantages — in particular woeful diversification (all your investment eggs are in one basket — residential property, and just one residential property at that).

    And I fully agree there are greater risks with continuing to invest when you could be paying off the mortgage instead, especially outside of employer-matching pensions and the like

    But in return, there are potentially greater rewards. It’s a decision. That’s what investing is about.

    Sure, we can get to 6-7% for mortgage rates. But “Normal” doesn’t mean “persistent”. It would be “normal” to have some sunny days this summer in London. If only they would be persistent.

    Saying something can happen in the future and has in the past is very different from saying it’s wrong to maximise returns on investments now with interest rates near-zero (you can get a 5-year fixed rate, for example, cost just 2.29%, and a ten-year rate at barely 3%).

    A ten-year fixed rate mortgage of 3% is 40% of the life of a mortgage. It’s very significant. It also gives you ten years to change course if for some reason mortgage rates leap to 8%, which absolutely nobody thinks remotely credible. (The 10-year gilt yield is currently near 1.5%, and the market still fears deflation).

    There’s no need to over-egg the pudding with fantasy interest rates.

  48. The Accumulator says:

    Andrew,

    Two and a half years ago I’d saved enough in cash and index funds to pay off my mortgage.

    I didn’t do it.

    Instead I cooked up a clever-clever plan to slowly pull out of equities over the next eight years – hoping to squeeze a little more from the upside along the way.

    I’d won the game but I kept on playing anyway.

    What happened was that I found out a lot about myself – especially my ability to tolerate risk

    Half of my mortgage repayment fund was sat in cash, half in equities. The idea was that instead of wholesale withdrawal, I’d stage an orderly retreat that would put me 100% in cash by 2021.

    But no plan survives contact with the enemy. Especially when the enemy is me.

    When I sketched out my scheme, I thought the enemy was a remote nightmare scenario where Mrs Accumulator and I both lost our jobs while equities crashed like a meteor to Earth and interest rates plumed like so much radioactive dust.

    And in 2013, the recovery from financial Armageddon 2008-style felt like it had some way to run.

    I didn’t want to miss out on the boost that staying strong in equities could give me as I pushed towards my next summit: financial independence.

    It was a calculated risk, and many warned me against it. Their concerns mostly related to a deep personal hatred of debt.

    If you have it, get rid of it. Don’t take chances. Cut your chains as quickly as you can and get the hell out of there. Don’t saw halfway through the manacles then hang about pulling victory poses in your cell while the guards play cards next door.

    It was good advice. However I felt that time and financial wiggle room was on my side.

    Change of plan:

    The markets climbed. My portfolio was up 20% by the end of 2013. The rise continued as I made my first annual withdrawal early in 2014.

    The sun kept shining. News bulletins proclaimed record stock market highs.

    It was like watching a rich kid open yet another present: “What have you got me? Oh yeah, another record high is it? Thanks.” (Tosses away).

    But I get nervous when things go too well.

    And the stock market is a see-saw: As valuations soar, expected returns fall.

    With expectations diminished by those record highs, it was time to rethink. Time to rebalance out of equities.

    Time to take money off the table faster than a poker cheat in a Yakuza den.

    By the time my 2015 withdrawal came along, my allocation to cash was already one year ahead of schedule.

    There’d been a sharp, downward jolt September to October 2014. Call it a warning. I didn’t know what was going to happen next but salad days seemed less likely.

    Equities marched on to new highs in May 2015. That was the last high they hit.

    I pulled out another year’s cash in April.

    My equities were now worth about one quarter of my mortgage.

    Turmoil hit in June, August and September.

    On my bike ride to work, I didn’t look at the rolling fields and trees. I kept playing my risk tolerance game

    What if I lost half of everything from here?

    A 50% loss would wipe out 12.5% of the mortgage fund. I could make that up in savings in less than a year. Rationally-speaking, there wasn’t a problem.

    But there was.

    I’d crossed an emotional Rubicon. I was taking risk I didn’t need to take. But it took the recent 15% losses to make me realise it.

    What did the downside look like?

    Painful.

    What did the likely upside look like?

    Meaningless. A few extra grand or so.
    Investor know thyself

    My risk tolerance had shriveled away now my original objective was achieved.

    I was much less brave in the face of losses that I had no business taking.

    I sold out the next week.

    That was back in November. Six years early. The mortgage fund is now 100% in cash. No one can take that away from me now.

    Not even myself.

    It was one of the best decisions I’ve ever made. Like popping a pill marked ‘worry begone’. Now I’m back to gazing at the rolling fields and trees (/grizzling over some other aspect of life).

    I got lucky. Large losses could have punched a hole in my assets and the wind from my gut. That would have been fine if my risk tolerance hadn’t changed once I’d mentally ticked the mortgage off as ‘done’, but it had.

    Since then I’ve taken much bigger losses on my financial independence fund and not felt a thing. Because that’s risk I need to take and the day of reckoning is years away.

    Hopefully this earlier skirmish is a lesson I’ll remember when the time comes to take that money off the table, too.

    At the very least, I know myself much better than I did. The markets tend to force truth on a person.

  49. Gwynster says:

    I have liked reading these posts and individual stories. It would appear to me though that if the house you have a mortgage on is an investment property, this would change things- especially if the country where it is, charges tax on any portion of the rent that pays down the capital- in the case of Australia 32.5% for non- tax residents. I of course see the benefits of insuring against a rate hike, an illness or a job loss, but any extra benefits (other than piece of mind) would be subject to a huge bite being taken by the tax man. That is my dilemma.

    Anyone with a similar situation?

  50. Zoe says:

    Asking a “financial advisor” if a person should put their money to work for them rather than go completely debt free (including mortgage) is like asking the wolf to keep an eye on the chickens. Seriously. As a real estate broker I know the “party line” on the huge advantages of the mortgage interest deduction but that “savings” still comes at a cost. My husband and I have been debt-free for 5 years now and with what we have saved by that, we have been able to reinvest in ways that secure our retirement. Going debt free was the best thing we ever did.

  51. Vicky says:

    Seeing as investing 100% in shares is sheer madness in terms of risk, and you would need to purchase bonds as well anyway, it is much better to pay off your mortgage, at least at this point in time because interest rates are so low. Ask yourself this question, would you borrow money to invest in bonds. Your answer should of course be, “Of course Not!” Well, this is exactly what you are doing if you forgo paying off your mortgage and instead invest in bonds. This makes absolutely no sense.

    When you pay off your mortgage, you are getting a 100% risk free return with no volatility. Remember, bonds are still volatile and you are probably getting the same return as your mortgage. The only difference is now you have volatility and the opportunity to lose money in the bond.

    Paying off the mortgage is the right answer in this case. It’s even not worth investing in stocks. If your mortgage rate is 4% or 5%, and stocks traditionally return 7% over the long term, is it really worth all of that risk and volatility for an extra 2% points??? Then you still need to pay fees and taxes on those gains. It’s totally not worth it.

    Pay off your house but, don’t go crazy. You need to keep a big cash rainy day fund.

  52. Raj says:

    Andrew,

    For the purposes of asset allocation, should I really view the mortgage as a negative bond figure, as it is someone lending to me as opposed to me lending to someone else? I.e. someone else’s asset. not mine.

    I find it fascinating that some people proudly announce they have a “balanced asset allocation” of 60/40, yet they have credit card debt at 20 odd %, an auto loan at 5%, a home loan of 4% etc. Surely their actual asset allocation of “bonds” is deeply in the negative and they are too exposed to market downturns?

  53. Raj says:

    Andrew,

    For the purposes of asset allocation, should I really view the mortgage as a negative bond figure, as it is someone lending to me as opposed to me lending to someone else? I.e. someone else’s asset. not mine.

    I find it fascinating that some people proudly announce they have a “balanced asset allocation” of 60/40, yet they have credit card debt at 20 odd %, an auto loan at 5%, a home loan of 4% etc. Surely their actual asset allocation of “bonds” is deeply in the negative and they are too exposed to market downturns?

  54. Andrew says:

    A question: I understand many people consider the mortgage to be considered a negative bond and alter their AA accordingly. I’m just curious if they are then forced to include their home equity as part of their portfolio or if they simply subtract their mortgage (all?) debt from their bond holdings AA?

    Example: A house “worth” 400k has 200k mortgage but 200k equity. Call it a wash? A debt is debt and always needs to be considered a negative bond? How about school loans? Negative bond as well? THANKS!!!

    I’ve always kept my home equity as part of net worth but never part of my portfolio. Just curious what everyone thinks? Thanks

  55. Alex says:

    This one question will give you the answer: “Would you ever borrow money from a bank to invest in the stock market.” I’m sure your answer is hell no as it should be. Well, this is what you are doing if you don’t pay off your mortgage and invest the difference. 9 out of 10 people make money on their houses. 9 out of 10 people lose money on the stock market. How would you feel if you retire only to have the market correct 60%. You will be kicking yourself for not paying of the house earlier. Anyone who calls themselves a retirement advisor is selling snake oil. You don’t tell people to give up a 5% (mortgage rate) risk free return so they can make 7% (average stock market return) in some insanely volatile stock market. This is lunacy. It’s not worth the few extra percentage points investing in stocks. The volatility will just make you sell at the bottom, thus making it a worse off proposition than paying off the house. Advisors never talk about the psychological component to investing.?

Leave a Reply