Hi all,
I understand well the logic behind not paying the mortgage under the current conditions in the US (rates about 3%, 30 year fixed term, etc.). However, different conditions apply in my country and I wonder if another path might be feasible/preferable.
Currently I have a 20 year mortgage at 7.25% fixed interest in local currency, for an apartment I bought 1.5 years ago (with a 30% downpayment). About three months ago I prepaid an amount equivalent to approximately of 1/7 of the outstanding balance. In my country the borrower has the option to make any number of prepayments at no cost, with the choice between reducing the term (and keeping the monthly mortgage payments constant) or keeping the term and reducing the monthly payment. I think this is called "recasting". I chose the first option, so that now my mortgage will be repaid in 16 years instead of the original 20. The payments remained the same but the principal is now decreasing at a faster rate, obviously.
Afterwards I regretted this decision, since unfortunately my P&I payments are higher than I am comfortable with (almost 50% of take home pay). If I could go back in time, I probably would have not made this purchase in the first place and would have opted for a smaller/cheaper apartment. However, that is done and I intend to stay at my current location indefinitely.
Looking forward, the standard advice in this thread would be to save as much as possible and invest, in order to accumulate enough funds that give me the option option to completely liquidate the loan at some point. Based on some calculations, if I stick to this plan I could reach that point in around 5-6 years.
However, the current mortgage costs in the meantime make me nervous. Would a "hybrid" approach make sense in my situation? To continue accumulating a stash, but also make some periodic prepayments that reduce the monthly payments to about half what they are now, and afterwards just holding the mortgage and focus 100% in saving/investing until maturity. The advantage I see is that I regain some flexibility that my situation is currently lacking.
Does this make sense or does the "don't payoff your mortgage" principle still apply in this scenario?
A couple of points for additional context:
- 7.25% is actually a good rate in my country, so that a refinancing is not realistic.
- Inflation is relatively low and stable, at about 3%.
- Market returns are extremely variable, and investing in the local stock market is also very costly (high fees, capital gains tax, etc.). On the other hand, term deposits at the bank pay up to 7% tax free.