Considerations You Should Make about Paying off your Mortgage Early | Investment Moats Skip to Content

Considerations You Should Make about Paying off your Mortgage Early

I have a colleague who likes the idea that he doesn’t have to borrow a single cent and can pay off his house in one shot.

To me that usually doesn’t happen very often unless your family is rather well off or that happens in later stage in your life when you have build up substantial cash flow.

Still what can happen is as such, suppose your cost on your flat is 400k, you foot a 10% down payment of $40,000 and then you need to pay off $360,000 plus interest.

You and your spouse diligently save and have manage to build up $100,000 within 10 years.

Should you reduce your mortgage?

Here are some of the general considerations to think about and work out the sums:

  • PRO – Paying off the mortgage will be considered “SAFE”. Credit becomes a difficult liability when you and your  spouse lose your job. Paying off early or reducing the burden reduces that future risk
  • CON – If you manage to secure the interest at an all time low right now, with interest rate likely to go up, then this becomes “good debt” and you should free up  that cash flow for other purpose
  • CON – The alternative to mortgage payoff is investment in equity and bonds or investment in starting a business. The rate of return of the 100k can be higher than that of not losing to future interest expense
  • CON – Your risks get concentrated if you pay off mortgage, as your net worth is tied to a single asset, whereas for equities and bonds they are much more diversified
  • CON – In the event of a financial fallout, you can sell  part of your equities or bonds. It is perhaps harder to liquidate part of your home. You can perhaps rent out a room, depending on the supply, which could mean you have difficulty finding a tenant
  • CON – Some banks penalize you for early repayments, so you really don’t have a choice (Contributed by Colin)
  • CON – By paying off early, you are still staying in the house. Should there be a liquidity issue, it is difficult to channel cash flow from this entity
  • Your spouse and your stability of employment will play a row in the decision you make. A stable civil servant would probably afford to not pay off at one shot and divert the money into other purpose without fearing in the future you have to worry about not being able to pay for your mortgage

Baring in mind these factors, what have your spouse and you have chosen? Are there other considerations not mention?

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Kyith

Wednesday 2nd of October 2013

well he is a high risk taker. somethign i dont advise everyone to do.

just try to dig deep and invest with some margin of safety with some good stocks.

Snoopy168

Wednesday 2nd of October 2013

yes. Risk vs rewards. I won't have the courage for what he did for CMZ as I wasn't sure whats really happening.

Still, I liked the model of cash flowing in from not doing much. Hence, I could devote my time to doing things that I liked to do (BUT still haven't done.

Seriously, you have any recommendations on good dividends stocks that pays 6 - 10% range ?

flinger2

Tuesday 1st of October 2013

I won't pay up my HDB concession rate debt fast and the following are my reasons . This is my view and appreciate your views if you see a flaw in it.

1. Net Worth - Like how Skai said, it does not add to you net worth it just reduces your debt.

2. Interest payment - It only make sense to pay off early if the interest rate is very high as that would be a better use of the money. If you are using the HDB concession rate, to me it seems to be better to keep the loan. You gain by:

1) in long run paying lesser as you will be paying in future dollars and thus paying lesser than what you borrowed. ( Inflation reversed)

2) The money can be used when a sudden opportunity turns up but if you had used it to pay of the debt, you cannot take advantage of that opportunity.

3) They money can used for unforeseen circumstances where there is a sudden need for high cash infusion.

4) It provides protection for the tenants of the household by enabling them to get the house without issues as the insurance is mandatory. and at the same time net worth is protected .

However, if you have enough cash to pay for the house and a healthy emergency fund to pay for unexpected circumstance, and a healthy investment that caters for your living expenses for now and future as well as retirement, THEN ONLY would I pay the debt down and use that cash to buy another property in a right market.

But some of us don't have that luck. Some do, so it depends on your situation.

For all the benefits it provides, I see it as a good debt and thus the reason why I am not paying it off.

Kyith

Tuesday 1st of October 2013

i would say this applies more to savvy folks. for those that arent the piece of mind of paying off could matter. however i really don't like the idea of wealth concentration

summer wind

Friday 27th of September 2013

For conservative folks with some spare cash on hand, paying off part or all of outstanding mortgage is a good move. Many may not be savvy enough to invest in the right products to get high returns. Then there are people who move from one property to another and start a new loan with each new purchase and then alas one day family has a "free" property but minus the husband and father. So sad.

Kyith

Friday 27th of September 2013

Hi summer wind,

I think for all mortgage loans there are a decreasing term insurance that in the event the insured passed away the house will be paid in full.

The risk here (just thought of) is that If u put all into the flat u lose ur job without savings (since all are going to be repaid) there is no way to have a liquidity stream

Snoopy168

Friday 27th of September 2013

HDB partial prepayment gives 2 option.

a. Reduce the monthly payment but maintain the loan duration

b. Reduce the loan duration but maintain the month payment.

I choose option B and before I knew it, the balance tenure was like 4 months. ^-^ and I wrote a cheque to pay for it. No balloons or party at the HDB area office. But a sense of relieve, the same feeling that you have after exiting the exams hall of your finals paper.

In those days, I have to fill up a form and send it in. Costing me valuable postal & processing time on the interest rebate days. These days, you can do it online and via e-banking. Chop chop.

Kyith

Friday 27th of September 2013

Thanks for the info snoopy. Would both end up reducing ur interest expense in total?

Its different from cars right since for cars ur payment is on the final amount

Snoopy168

Friday 27th of September 2013

Most people I know have this thinking "let CPF pays for the loan" and "so as long as I dun have to fork out any cash". Plus, the CPF$ is not free exactly. There is an interest chargeable for it's use and deducted upon the sale of the flat. Logic was that had the $$ stays in the OA and compounded, this is the returns. Therefore this missing compounded interest is repayable back to OA.

Of course, 高手 like MW & Drizzt will have no problem generating ROI exceeding 2.6% p.a. More than enuf of cover the cost of the funds, this loan repayment & some for buffet + kopi. Then not many I know are as street smart or they just won't listen....

Seriously, being debt free is a good but boring feeling. but i like ^-^

Kyith

Friday 27th of September 2013

Don't say I am kao shou. Still learning as well.

I think if we can find some long term holds with good cash flow that organically grows in an inflationary environment it's good.

Music whiz will say personal debt is rather different from corporate debt

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