At those interest rates you increased your risk of total financial failure prior to total payoff of the house. Since you're looking for the best risk adjusted return you chose poorly. Thanks for further proving my point that the risk for those who make the choice you did even when presented with the aftermath that they'd lost to the math which was the overwhelming likelihood. Are likely to make further poorer financial decisions in the face of the math and likely to let emotion override math in the face of a down turn in retirement.
While generally I'm not a huge fan of paying off the mortgage first in most situations myself, this line stood out to me.
@boarder42 I'm not sure how you measure risk-adjusted returns because there are several ways of doing that. However, I think everyone could agree that recency bias should not be a factor in that equation. The fact that the stock market went up 15% or so annually in the last few years is not very relative to the argument. It could just as easily have gone down 20% or more. We do know that the historical risk-adjusted return of stocks is approximately 0.4 as measured by the Sharpe Ratio.
Assuming @steveo maxed his tax-advantaged accounts (not sure entirely how that works in Aus), a risk-free rate of return of 4-5% in taxable accounts is actually quite good. The risk-free rate of return measured by Australia short-term government bonds is 2%, the Sharpe Ratio on mortgage paydown is then 2-3. That depends on how you want to input the standard deviation of mortgage interest...
In any event, "investing" in your mortgage principal certainly looks better than investing in short-term government bonds in just about every developed country since 2009. Comparing that to volatile stocks is plain silly when discussing risk-adjusted returns.
you're confusing volatility and risk. we know over time the market performs to avg. What Steveo is not analyzing and what many who choose to pay down their mortgage vs invest fail to recognize is if their goals are inline with their strategy - its great to say i want to reduce my risk - but risk of what - financial failure is what the risk is in all scenarios. Which is increased during the paydown period at these interet rates - there is no way around that - the risk of total financial failure is higher if one puts more money into a fixed illiquid asset. You only have so much money coming in each month - one could invest in the market and get a pre inflation return of 10% avg over 30 years or one could put their money into their house and get a pre inflation return of 5% - post inflation these numbers are 7% and 2% (since the purchase price of the house is fixed in time and doesnt index to inflation). So if we're going to talk real returns the real return on the paying down of the house is avg inflation over 30 year periods - 3.3% should be duducted from your "Guranteed return" so now we're sub 2% in real return. And we've increased our risk of financial failure - But how did i do that my money is safe in my house - well you did it b/c of the follow scenario
1. you lose your income stream
2. you havent fully paid down your house
3. the bank still wants your full mortgage payment each month they do not care if you've paid 100k extra to the house
so if person A was paying down their house at 30k extra per year
and person B was investing - minus complete and total market collapse person B inherently has more liquidable capital to ride out the bumpy road above.
Compound that with the normal response of I've got a huge EF that i keep liquid - so now you've got even more money sidelined to counteract your increased risk - where as person b would likely be more inclined to keep said EF invested
Or the response of i've maxed my taxed deferred accounts so i have that buffer too- now you've added the tax risks associated if you have to tap those accounts.
All these roads lead the same place higher risk regardless of market voltility unless it goes to 0 - which is the death of capitalism and you wont care if you were paying down your house or investing.
Steveo repeatedily just threw out assumption about what market returns were duing their paydown time - while not looking at the actual numbers - once you look at the numbers a logical human would feel more secure not paying down a house - but when emotion is applied - it leads to my comment that started this debate -
That is if you are going to rashly apply emotion to house paydown with out even looking at what would have happened in hindsite and making grand(likely Wrong) market return assumption - then you're more likely to give into emotion during a downturn when FIREd when there is much more on the line than when you're in the earning stages. Increasing your chances of financial failure again.