The question of whether to pay off your mortgage faster or invest commonly comes up in financial independence circles.
In a perfect world, everyone would have enough money to max out their retirement savings accounts and pay off their mortgage faster. Unfortunately, this is not realistic, at least not for our household.
When we bought our first home in 2009 we were young and although we thought we knew things about money and finances we really didn’t. We were naïve to our lack of knowledge. We didn’t know what we didn’t know.
Maybe this was due to arrogance. Or it might have been due to the fact that we were young and buying a house, something that our friends weren’t really doing yet. At the time we felt like we knew more than our friends about finances, which meant that we knew everything right?
Ha! We could not have been more wrong.
Whatever the reason, when we bought our first home we were overconfident. Without giving it much thought we made a plan to pay off our mortgage early.
Once we made the decision to pay off our mortgage and set the goal to do it, it was our focus. I am a very goal-oriented person and once I set my mind to something I go all in. The same was true for paying off our mortgage faster.
I vividly remember sitting down with our mortgage broker and crunching the numbers on our soon to be mortgage. We learned that if we did biweekly payments we would pay it off faster than if we just stuck to monthly payments.
At no point was an amortization period less than 25 years ever discussed. We just had a plan to do accelerated bi-weekly payments to pay off our mortgage in less than 25 years. At first, we thought, we could do it in 20, then 17, then 12. And then all of a sudden we had it paid off in 4 years eleven months.
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Looking back on that decision there were a few factors that played into why we decided to pay off our mortgage early.
The Only Investment
I was 25 when we bought our first home. The only thing that I knew how to invest in was real estate. And my knowledge was not very much at the time – heck I didn’t even know you needed a lawyer to buy a property.
For as little as I knew about real estate, I knew even less about the stock market or any other forms of investment. Up until buying our home, the only other investments I had were Canada Savings Bonds and a few thousand dollars in mutual funds in my RRSP.
Related Post – A Complete Guide to your RRSP
Compared to those investments, our home seemed like a good thing to sock money into.
Paying off a Mortgage Faster – a Good Investment
We both grew up hearing about how paying off your mortgage fast was a good investment. We never considered if we should pay off our mortgage or invest. Both of our parents had paid off their mortgages and those were the role models we had.
As a young 20 something we often heard about the benefits of homeownership. At the time I don’t think that I could articulate what those benefits were, just that there were benefits. We were too naïve to ever consider other options.
The advice of our parents was never questioned. We are not part of Generation Z and didn’t have the benefit of the current OK Boomer trend. Had we read Money After Graduation’s guidance as to why we shouldn’t take financial advice from our parents maybe we would have made a different decision. (Strangely enough, now a decade later, our parents are coming to us for financial advice – oh how the times have changed.)
In reality, paying off your mortgage faster than 25 or 30 years does have its benefits. You will save tens of thousands of dollars on interest, if not more depending on the interest rate, throughout the course of the loan.
Opportunity Cost of Paying off a Mortgage Faster
When we finished paying off our mortgage, we calculated that doing so saved us over $146,000 in interest payments. That is not a small number.
We never paused to consider the opportunity cost of the money we were putting towards paying off our mortgage faster. There is no easy way to calculate this opportunity cost as the extra mortgage payments that could have been allocated to the market were not consistent.
It is also impossible to know what the stock markets will do in any given time frame in the future. But we did know how much we could save on interest by paying off our mortgage faster. In that small way, paying off our mortgage was a “sure thing.”
When to pay off a mortgage faster
At the time our parents were paying off their mortgages, interest rates were much higher than they are now. At that point, paying off your mortgage may have been a better decision than investing.
According to RateHub, 5-year fixed-rate mortgages in the ’80s hit a high of 22.75%. I’m not an expert in the stock market but I think you would be hard-pressed to get anywhere close to that return if you were investing in that same period. So paying off their mortgages fast was a smart decision for our parents.
Worst Case Scenario
The number one reason we decided to pay off our mortgage faster was that I never wanted to lose our home. I knew that without my husband’s income, I would never be able to afford our home. It was not that the mortgage was too much, just too much for one income.
One way we protected ourselves against this worst-case scenario was to get life insurance policies for both of us. We did not go with mortgage insurance because neither of us thought it was the right product for us.
But what if one of us lost our jobs, or couldn’t work? I wanted to protect ourselves from this worst-case scenario. Paying off our mortgage meant one less bill we had to pay. Our lifestyles would become that much more affordable. Especially on one income.
Cash Flow Options
Paying off our mortgage meant more cash flow every month. Imagine if you had no rent or mortgage payment, how much more disposable income would you have every month?
Without a mortgage payment, we had options every month. As our incomes continued to increase as long as we avoided lifestyle inflation we could get ahead. If we had a family and one of us wanted to stay home with our little one, we could do that.
The extra cash flow we had after we paid off our mortgage is one of the factors in our desire to pursue financial independence. Early on we realized that if we could live off of one of our wages, we could save and invest the other.
It wasn’t until we had paid off our mortgage in full that I felt comfortable buying investment properties. The extra cash flow we had every month helped us buy 9 properties in 4 years. Not only did we have cash flow from not having a mortgage, we now were generating cash flow from our rental properties.
Reflecting back on our decision to pay off our mortgage faster, at the time I’m not really sure why we did it. I don’t think we really had a lot of reasons, just that it was all we knew.
At the time we were highly influenced by our parents (whose decisions were based on different market conditions). We knew that paying off our mortgage faster would give us options, maybe not in the short term, but definitely once it was paid off.
There was also a lot of stubbornness involved in paying off our mortgage faster. Once we made the decision to pay off our mortgage faster, nothing was going to stop me from achieving that goal.
Financially paying off our mortgage faster instead of investing may not have been the best decision. But psychologically it was the best decision for us. The peace of mind we had when our mortgage was paid off was extremely valuable.
We lived mortgage free for 5 years and it was awesome. It honestly felt like we were printing money every month because we weren’t putting a large portion of our budget to housing anymore.
Now we have moved to a new home and have a mortgage again. The decision to pay off our mortgage early isn’t coming as easy this time. With age, we have gotten wiser and now take a pause in trying to optimize this decision.
I’m not really sure what we will choose to do. For now, we will keep saving until we can crunch the numbers and figure it out. But to be honest, we might just go back to our old ways and pay off this mortgage faster too.
What’s your plan? Pay off your mortgage faster or invest?