A recurring debate in the personal finance world is the choice between paying off a mortgage vs investing in the market. The Modests Millionaires are of the point of view that, statistically speaking, investing in the market is financially more beneficial in the long run. However many psychological benefits of paying off your mortgage quickly convinced us to opt for that choice in the early days in our journey towards financial independence.
Here are the details of ‘’why’’ we chose to pay off our mortgage quickly. As for the ’’how’’, you can click on the following link to find out how we paid off our mortgage in 4 years.
Guarantee of a return of paying off your mortgage quickly:
Firstly, when you choose to pay off your mortgage, you know that you will have a guaranteed return, that is, that you will not have to pay the future interests on that loan. Furthermore, we know what we are getting for our money : a roof over our head! There is thus no question of timing of the market, the only bet is to wager that mortgage interest rates might increase over the life of the loan, an aspect that did not weigh much in our decision.
This guarantee of a return was important to us since, with the intention of leaving our jobs before the traditional age of retirement, our everyday expenses will no longer be covered by a paycheck deposited in our accounts every two weeks. Our spending will be financed from the dividend and gains of our investment funds and/or from the profit on our rental property.
It will therefore be beneficial, especially when the market is not performing so well, to need less liquidity to finance our expenses. When we eliminate a mortgage payment or the cost of rent, we greatly eliminate the need to liquidity.
Flexibility you get from paying off your mortgage quickly:
It will be important for us to maintain a low withdrawal rate from our investments during the first few years after leaving our jobs to ensure the long-term success of our financial independence.
Indeed, in the scenarios evaluating the success of the 4% safe withdrawal rate, the scenarios with poor outcome, that is, about 5% of the cases where the assets of the investment portfolio were depleted before the end of the 30 year period, were scenarios where market crashes occurred in the early years of withdrawal.
Therefore, if there is a stock market crash soon after leaving work, then we can decide to generate a bit of cash with contracts or part time work, or we can decide to lower our expenses, in order to withdraw the least amount of money from our investment for the time it takes the market to recover. Since our mortgage is paid off, we don’t need to generate as much money as a person who would also need to make a mortgage payment or rent payment.
When you choose to pay down a mortgage quickly, that mobilizes a lot of money that is no longer easily accessible. The accelerated repayment of our mortgage was done all the while taking into account our overall budget and ensuring that we still had enough liquidity to deal with unforeseen circumstances.
We had established a realistic budget allowing us to determine precisely the amount that we could allocate on a weekly basis as an additional mortgage payment, while choosing to invest part of that amount in our TFSAs so that it remained accessible. Another consequence of this strategy is that we became used to setting that amount of money aside on a weekly basis as an additional amount paid on the mortgage, and we continue to set aside the same amount now in order to grow our investments.
Since we don’t have a mortgage payment anymore, we have even more liquidity which allows us more flexibility in determining where to allocate our money.
This flexibility is very important to us for various reasons. For example, as our salaries are set to increase over the next years, it is important for us to maximize our RRSP contributions. Furthermore, this liquidity will allow us to enjoy the present on the way to financial independence by allowing us to take small sabbatical leaves and travel with our family. Finally, if recessions occur in the next few years, we will benefit by having more liquidity to invest in the market during these ‘’bear’’ periods.
As a plan B, we also applied for an home equity line of credit (HELOC) before paying off our mortgage, although we hope to never use it. It will simply ensure that we have access to a low-rate loan should we ever need it.
Other considerations in our situation:
The decision to pay off your mortgage quickly, is really a case by case, all depending on the situation and the goals of each person or family.
As for the Modests Millionaires family, we know that we will be living in our home for a long time. We chose a house in a neighborhood that we like a lot and where we see ourselves raising our kids. With two little ones at home, we also find it important to guarantee that they will always have a roof over their heads.
Furthermore, since we do not have the intention of selling our house anytime soon, we are not worried about real estate market fluctuations, especially since it will not affect our goal of being financially independent by 2025 as we do not count the value of our house in our net worth.
Another important consideration is that the real estate market in our city, at the time of our purchase, was rather advantageous for buyers. In addition, we bought our house in winter with a seller that was in a hurry to sell the house therefore we were able to negotiate a good buying price. If we would have been located in a market such as the one in Toronto where house prices are incredibly high, chances are we would have chosen to either rent or relocate to another town. In that situation, renting would have probably been the best option to assure that we reach financial independence by 2025.
A win-win situation:
Ultimately, the important thing is to make the choice that best suits your goal, personality and lifestyle. MMM explains it well in this article: Pay down the mortgage or invest more? A win-win question, one way or the the other, whether you end up investing more or paying off your mortgage faster, it is a winning situation.
In our case, based on our goal of achieving financial independence by 2025 and based on our lifestyle, we are convinced that paying off our mortgage quickly was the decision that would bring us the most from both the monetary and psychological perspectives.
It has now been over six months that we no longer need to make mortgage payment and I must say that this continues to sit very well with us. Especially when I review our monthly expenses and I add in a beautiful 0$ on the line reserved for mortgage payments.