Author Topic: Inheritance: Pay off mortgage or invest  (Read 2006 times)

Ethel

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Inheritance: Pay off mortgage or invest
« on: October 31, 2019, 09:14:33 AM »
Hi all. I love this forum and the website, got my best motivation for my FI journey here. This is the first time I'm asking a question myself.

My apartment that I live in has a mortgate left of approximately 90k. I recently renegotiated and the new terms are 1.1% pa, fixed for 10 years.

I received an early inheritance that's just about enough to pay off the mortgage. But with these great rates, I thought of investing this amount instead in index funds and continuing to pay the mortgage the usual way. I'd leave the investment for 20 years or so, so short term losses aren't a concern if the market tanks.

(Apart from that, I already save about 500 a month in index funds.)

We live in a country where people (and especially my family) are a bit more financially conservative and index funds (basically, anything connected to the stock market) is considered high risk, so I've been getting a lot of pushback about this idea from family and friends.

On one hand, I expect my returns to be much, much higher if I invest, on the other hand, paying off the mortgage makes me more flexible and secure. Just wanted a reality check if this is a bad idea or I should go ahead with it. I don't have any other debt.

Stashing Swiss-style

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Re: Inheritance: Pay off mortgage or invest
« Reply #1 on: October 31, 2019, 09:19:52 AM »
Would  you pay a penalty if you repaid the 10 year loan early (here in Switzerland the penalties are high - effectively you have to pay all the interest that you committed to in the contract)?

Ethel

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Re: Inheritance: Pay off mortgage or invest
« Reply #2 on: October 31, 2019, 09:30:20 AM »
Would  you pay a penalty if you repaid the 10 year loan early (here in Switzerland the penalties are high - effectively you have to pay all the interest that you committed to in the contract)?
I haven't signed the new agreement yet. The previous fixed rate period is about to end and this new one will start once I sign it.  So I wouldn't pay any interest.

That's part of the reason I got the early inheritance from my parents, so I could pay off the mortgage once the previous fixed rate period ends. But then the new terms offered were so nice that I am reconsidering.

terran

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Re: Inheritance: Pay off mortgage or invest
« Reply #3 on: October 31, 2019, 09:59:38 AM »
Normally I would say invest it at current mortgage rates, but this isn't an inheritance, it's a gift from your parents to pay off your mortgage, so you should honor their wishes.

Ethel

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Re: Inheritance: Pay off mortgage or invest
« Reply #4 on: October 31, 2019, 10:04:17 AM »
Normally I would say invest it at current mortgage rates, but this isn't an inheritance, it's a gift from your parents to pay off your mortgage, so you should honor their wishes.
That's not how it works between me and them. They've made it clear that this is a gift to me, I'm free to do with it what I want since I'm an adult. They would have given me that gift even if I didn't have a mortgage to pay off but they timed it so that I received it in time to do so. Otherwise I probably would've gotten it a few months/a year later.

For the record, they're a bit worried about my new-fangled ideas about investing, but they're not the ones pressuring me to rethink.

terran

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Re: Inheritance: Pay off mortgage or invest
« Reply #5 on: October 31, 2019, 10:09:26 AM »
You're right, I shouldn't have assumed your parents are the ones pressuring you, that's just what I took from what you wrote. If your parents are fine with you investing it instead of paying off the mortgage, then I would invest it given the rate you've secured.

Ethel

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Re: Inheritance: Pay off mortgage or invest
« Reply #6 on: October 31, 2019, 10:37:09 AM »
You're right, I shouldn't have assumed your parents are the ones pressuring you, that's just what I took from what you wrote.
Yeah, I re-read what I wrote and it can really be misunderstood.

But thanks for your input. I'm considering it still.

Lulee

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Re: Inheritance: Pay off mortgage or invest
« Reply #7 on: October 31, 2019, 11:07:21 AM »
It's worth considering that there are alternatives to just investing OR just paying off the mortgage.  It may be that one of those alternatives will meet more of your needs.  For example, you could use part of the gift to pay the mortgage down to a point where you can finish paying it off during the new 10 year fixed interest rate period and then invest whatever is left in index funds.  That takes some pressure off on the mortgage end of your financials while giving you the benefit of a large influx into your investment portfolio that can really benefit you by the end of those 20+ years you mention. 

One consideration people seem to overlook in this situation is that IF you pay off the mortgage, you can choose to ADD what had been your mortgage payment to your monthly investment.  This won't give you as large a return as you would have had at the 20 year mark compared to investing the entire gift.  But it does mean you are giving yourself a way to increase your investments while removing a source of anxiety for yourself and others and giving yourself some flexibility in case you could use what would have gone to the mortgage payment for a short term need (unexpected repairs to your apartment that are larger than you have in your savings might be an example).  This is where being honest with yourself about your emotions as well as your future plans will help you make the best decision.

You're doing well and being as wise as you can be with your income as well this gift.  You deserve kudos for this.

SwordGuy

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Re: Inheritance: Pay off mortgage or invest
« Reply #8 on: October 31, 2019, 12:48:24 PM »
Here's a 38 page thread that pretty much covers every pro and con of paying off a mortgage early vs investing.

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

I would recommend reading it all the way through.   

If you haven't read thru JL Collin's stock series, I would recommend reading it.   But I'm guessing you've probably already done that or read the equivalent based on some of your comments.

At a 1.1% mortgage interest rate, I would absolutely invest it in low cost, broad-brush stock index funds.   Dividends are likely to be at least 2%.  Even if the stock loses almost 1/2 its value (and thus the 2% dividends are only equal to 1.1%), you'll still be ahead by reinvesting the dividends! 


DeniseNJ

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Re: Inheritance: Pay off mortgage or invest
« Reply #9 on: October 31, 2019, 01:30:57 PM »
Unless you have a cashflow problem and freeing up your mortgage payment will fix it, I wouldn't pay off a 1.1% mortgage.  You can get a better rate than that in a savings account!

Ethel

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Re: Inheritance: Pay off mortgage or invest
« Reply #10 on: November 02, 2019, 02:26:29 PM »
((Sorry, yesterday I was on the road and could not reply.))

You're doing well and being as wise as you can be with your income as well this gift.  You deserve kudos for this.
Thank you very much for the encouraging words. And your point about a possible middle ground is a good one.

Here's a 38 page thread that pretty much covers every pro and con of paying off a mortgage early vs investing.

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/
Awesome, I had missed that thread. Thanks for the link! I've read JL Collins' stock series and it's been very educational. Considering getting his book next.

Unless you have a cashflow problem and freeing up your mortgage payment will fix it, I wouldn't pay off a 1.1% mortgage.  You can get a better rate than that in a savings account!
Savings accounts over here give abysmal interest these days. The best deal I could find was still below 1% pa. XD

PGSD

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Re: Inheritance: Pay off mortgage or invest
« Reply #11 on: November 04, 2019, 11:00:46 AM »
Just a different thought: you need to access how well you manage/spend money and your current financial situation. Can you resist buying a new car (or whatever) if you have $90K sitting there? Do you have an emergency reserve already saved?

I paid off my mortgage early and it feels GREAT not having that monthly payment. That said, I've never heard of a 1.1% mortgage interest rate and almost would question what the catch is on the loan.

You can always split the difference: pay half the mortgage off and invest the other half...

   

Stashing Swiss-style

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Re: Inheritance: Pay off mortgage or invest
« Reply #12 on: November 05, 2019, 03:03:26 AM »
1.1% here in Switzerland is pretty standard - but we have to commit to a, say, 10 year term.  If we pay off early, we pay penalties as it's a breach of contract. 

I think the idea of using the money to both pay down the mortgage and invest is a good way to go.

Ethel

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Re: Inheritance: Pay off mortgage or invest
« Reply #13 on: November 06, 2019, 03:50:14 PM »
Just a different thought: you need to access how well you manage/spend money and your current financial situation. Can you resist buying a new car (or whatever) if you have $90K sitting there? Do you have an emergency reserve already saved?
To be honest, spending this money hadn't even crossed my mind. It's an important question to ask, certainly, but I'm not worried about losing control and wasting this gift.* I've always enjoyed saving.

*The one thing I am slightly worried about is being hit by a triple whammy of a 2008-esque financial collapse, losing my job and being unable to find another one. I do have an emergency fund and disability insurance though.

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I paid off my mortgage early and it feels GREAT not having that monthly payment. That said, I've never heard of a 1.1% mortgage interest rate and almost would question what the catch is on the loan.
It's fairly normal here in Germany these days, courtesy of the ECB's negative interest rates.

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You can always split the difference: pay half the mortgage off and invest the other half...

I probably won't pay off half, but I might lower the debt to, say 80k. I might be able to get a better deal on the mortgage then.

Dicey

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Re: Inheritance: Pay off mortgage or invest
« Reply #14 on: November 06, 2019, 05:13:51 PM »
Just a different thought: you need to access how well you manage/spend money and your current financial situation. Can you resist buying a new car (or whatever) if you have $90K sitting there? Do you have an emergency reserve already saved?

I paid off my mortgage early and it feels GREAT not having that monthly payment. That said, I've never heard of a 1.1% mortgage interest rate and almost would question what the catch is on the loan.

You can always split the difference: pay half the mortgage off and invest the other half...
There is no "catch". The OP is not in the US.

However, your advice is way off the mark. The split option is the worst of both worlds. If you're not sure why, feel free to come over to the DPOYM Club that SwordGuy linked above. Everyone is welcome to come and learn.

SavinMaven

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Re: Inheritance: Pay off mortgage or invest
« Reply #15 on: November 06, 2019, 06:30:05 PM »
I would invest, for reasons of liquidity. Once you pay off your mortgage, the only way to access that money is to sell, which you may or may not want to do if you find yourself in a hard situation in the future. Sure, if you invest, and need liquidity, you might have lost some value, and so for that reason the investment can't be seen as an emergency fund. But within the range of most things you're likely to encounter, I personally would rather have a pile of accessible money for whatever comes my way versus a complicated-to-liquidate asset.

acepedro45

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Re: Inheritance: Pay off mortgage or invest
« Reply #16 on: November 07, 2019, 11:37:15 AM »
Just a different thought: you need to access how well you manage/spend money and your current financial situation. Can you resist buying a new car (or whatever) if you have $90K sitting there? Do you have an emergency reserve already saved?

I paid off my mortgage early and it feels GREAT not having that monthly payment. That said, I've never heard of a 1.1% mortgage interest rate and almost would question what the catch is on the loan.

You can always split the difference: pay half the mortgage off and invest the other half...
There is no "catch". The OP is not in the US.

However, your advice is way off the mark. The split option is the worst of both worlds. If you're not sure why, feel free to come over to the DPOYM Club that SwordGuy linked above. Everyone is welcome to come and learn.

Dicey, can you clarify your thinking here? As a DPOYM club member, I would rank the choices from best to worst as 1. invest 100% of the inheritance in the market, 2. invest 50% 3. invest 0% and use 100% to pay off the mortgage. Why do you feel option 2 is the worst? I would suggest it to someone whose risk tolerance did not permit option 1 in a heartbeat.

Dicey

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Re: Inheritance: Pay off mortgage or invest
« Reply #17 on: November 07, 2019, 03:30:14 PM »
Just a different thought: you need to access how well you manage/spend money and your current financial situation. Can you resist buying a new car (or whatever) if you have $90K sitting there? Do you have an emergency reserve already saved?

I paid off my mortgage early and it feels GREAT not having that monthly payment. That said, I've never heard of a 1.1% mortgage interest rate and almost would question what the catch is on the loan.

You can always split the difference: pay half the mortgage off and invest the other half...
There is no "catch". The OP is not in the US.

However, your advice is way off the mark. The split option is the worst of both worlds. If you're not sure why, feel free to come over to the DPOYM Club that SwordGuy linked above. Everyone is welcome to come and learn.

Dicey, can you clarify your thinking here? As a DPOYM club member, I would rank the choices from best to worst as 1. invest 100% of the inheritance in the market, 2. invest 50% 3. invest 0% and use 100% to pay off the mortgage. Why do you feel option 2 is the worst? I would suggest it to someone whose risk tolerance did not permit option 1 in a heartbeat.
I can clarify that what I wrote was in response to PGSD's statement, particularly the bolded part, not the list you added. Also, I'm answering as an American living in the US. Here, all the bank cares about is that you make your scheduled payment on time. You paid off half your mortgage and then you lost your job or had some other problem and can't make your payments now? Tough shit, says the bank, as they heartlessly initiate foreclosure proceedings. From a position of power, it is always better to have your money in your control. Partially paying down a mortgage doesn't increase your control one iota. The better option is to invest until you have plenty of dough. Enough to theoretically pay it off in full. I say theoretically, because once you start to amass an army of green soldiers, you won't want to give them up. Reaching FI happens faster the sooner you get those soldiers working on your behalf.

As for risk tolerance, the best way to increase it is by studying the market. JL Collins Stock Series is an outstanding place to start. People fear what they don't understand.

I agree with @SavinMaven. Also this had been covered left, right and every other direction over on the DPOYM thread.

Tl;Dr: Paying a mortgage DOWN, but not OFF, is dangerous, especially if you fear risk.

Note: On this device, I can't see the original post. IIRC, the gift wasn't quite enough money to pay the mortgage off in full. Even if it was, I wouldn't do it. Seriously, until you have a shitload of money in the bank, i.e. invested, you just can't appreciate the feeling of power (and peace) it brings. Beats the pants off of killing a puny little motrgage.