Mortgage and investing

[cerberusss]

I've got a mortgage of around 250.000 euros. Last month, I made an extra payment towards the principal. I also opened an account to buy some Vanguard funds.

When I described this situation to a person, this person was of the opinion that I was speculating with my house. He said: you have a debt, why would you want to buy stock when you still have debt?

He also reminded me of a situation in The Netherlands about 15 years ago, where banks would sell mortgages that didn't save but instead would buy stock shares. This had people up the barricades when stocks plummeted and 10 years later, no payments were made towards the principle.

It made me rethink the whole strategy. On one hand, I can clearly see why one would both invest and make down payments. But if it's phrased as "speculating with my house", then I feel like I'm taking a lot of risk.

Anyone care to elaborate, and tell why they still invest in stocks/bonds/REITs while having a sizeable mortgage?

[PAW]

I would pay off my mortgage first. That's what I have done. Now that I am debt free and "don't need" my monthly saving amount I can invest without much worry. If you for some reason would be forced to sell your home and maybe even your investments in a bear market it would be devastating.

Meanwhile maybe it makes sense to have a small portfolio for educational purposes.

[plainjane]

I invest while still having a mortgage because my mortgage is at a lower rate than I think my index & bond funds will return over the long term.  But I'm also paying down my mortgage at an accelerated rate, and bonuses/tax refunds go there (my very reachable goal is to be mortgage free in just under 4 years).  This is partially because my mortgage is variable and is on a 5 year term (what the folks in the US call an ARM) as is standard in Canada, and partially because I'd like to stop having that recurring fixed expense in my budget.

I think of it as a diversified strategy.

[Khan]

It depends on the interest rate. Say you have your home loan at ~3-4% rate, historically, that's an incredibly low interest rate, and means that the bank isn't skimming much money off of you. In fact, if inflation ticks up(and houses historically only really track inflation, outside of housing bubbles) at all, the bank may lose money on that loan. Therefore, if you're financed at such a low rate, it's in your better interest to not pay down more money towards the house(outside of what you need to put down to have peace of mind if it bothers you that much), but instead invest it.

Think of it as diversifying your wealth. You don't tie up all of your wealth into one asset, especially a house that you are living in which is itself not an investment, but acts more as a liability, it produces no returns for you.

Disclaimers: My statements are heavily geared towards the US, Europe and the € may react different then that.
If you're financed at rates greater then 5%, then it might be in your better interest to put more money towards that debt then towards investing. At 2-4%, it's hard to justify paying off your loan early. At rates greater than 5, it's hard to justify the risk towards your principle when comparing to a guarenteed 5% return on your money.

[Villanelle]

The reason you would invest while you still have debt is that you expect the return on the investment to be greater than the interest you are paying on the house.  So if you are paying 4% but getting 8% on the MFs, then clearly you are coming out ahead.  Also, at low interest rates, a mortgage can also be a hedge against inflation. 

This is a huge subject of debate, but many financial professionals actually encourage people not to pay off their mortgages early. 

For me, my comfort zone is somewhere in the middle.  My mortgage situation is complicated, but in essence, I am working to pay it off somewhat early, but my focus is still mostly on investing. (I paid off the bank and now have a HELOC, which is at 2.6% but is adjustable so I want to get it gone before rates rise much.  There is also a more traditional P=I loan at a higher rate that is from a family member, but it still paid like any other loan.) However, the mortgage amount is well less than we would net from a sale (even if prices drop, again), so if we ever needed to sell, even in a hurry and therefore at a less-than-optimal price, we could easily afford to do that.  If I was underwater on the mortgage, then I'd work like hell to rectify that before doing much investing. 

If you are in a position where you could sell your house without bringing money to the table (and could do so even if prices drop somewhat significantly), then to me, you aren't doing much "speculating", and you certainly aren't taking on much risk at all.  If your loan rate is fairly low, then the difference in returns you can get by investing is, IMO, well worth the minimal risk. 

[Insanity]

Think of it as diversifying your wealth. You don't tie up all of your wealth into one asset, especially a house that you are living in which is itself not an investment, but acts more as a liability, it produces no returns for you.

Is this really true?  If you have 100% equity in the house and the appraised value rises, then aren't you getting returns?  The liquidity is not there, I understand (i.e.: you have to either get a loan secured against that equity or sell the house), but the financial aspect is.  Or are you factoring the cost of maintaining the home?

(note: this is a general question not an attack)

[matchewed]

Yes it is really true. If you've just dumped all your money into your house your only asset is the value of your house which is not liquid.  You do not get returns on your house unless you are renting or selling. Borrowing doesn't count as it is debt.

In general this question has been asked plenty of times in this forum. The answer has always been if you are seeking the best financial decision, investing in something which generally provides a higher return than the percentage on a mortgage is your best decision.

If you want to get rid of a payment and don't mind losing out on the opportunity costs and making the best financial decision doesn't matter to you then fine, pay off your mortgage.

As always there is no guarantee that investing outside of your mortgage will make more money percentage wise than the percentage on the mortgage. But there is no guarantee that your house will become suddenly worthless either.

*Edit* Obligatory link to three page discussion on this matter - https://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

[Insanity]

Yes it is really true. If you've just dumped all your money into your house your only asset is the value of your house which is not liquid.  You do not get returns on your house unless you are renting or selling. Borrowing doesn't count as it is debt.

In general this question has been asked plenty of times in this forum. The answer has always been if you are seeking the best financial decision, investing in something which generally provides a higher return than the percentage on a mortgage is your best decision.

If you want to get rid of a payment and don't mind losing out on the opportunity costs and making the best financial decision doesn't matter to you then fine, pay off your mortgage.

As always there is no guarantee that investing outside of your mortgage will make more money percentage wise than the percentage on the mortgage. But there is no guarantee that your house will become suddenly worthless either.

*Edit* Obligatory link to three page discussion on this matter - https://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

That much I've understood, I just never thought of it as a "liability"

[matchewed]

Your mortgage is a liability the house is an asset. He's not using a liability as a financial term there but more as a risk term. Tying all your money into one area is a risky move may have been a better turn of phrase. That's how I take it.

[Insanity]

Your mortgage is a liability the house is an asset. He's not using a liability as a financial term there but more as a risk term. Tying all your money into one area is a risky move may have been a better turn of phrase. That's how I take it.

Cool.  Thanks.

[Khan]

Your mortgage is a liability the house is an asset. He's not using a liability as a financial term there but more as a risk term. Tying all your money into one area is a risky move may have been a better turn of phrase. That's how I take it.

Not really, I truly think houses are more a liability then an investment. Yes, they are an asset, but in the same way that gold on my front porch is. Maintenance costs, insurance, taxes, etc. Are all costs of ownership. And having grown up in two bubbles(Silicon Valley and Las Vegas), I strongly believe that a house doesn't have a very strong intrinsic value as an asset. I think of home ownership in most cases as possibly less bad then renting, which is why I'm buying a house right now(especially paired with a roommate).

At less then 3% interest ill be paying, i can't justify paying a penny more towards the house then the biweekly payments I'll have set, but I only think its a better deal then renting, I'm pessimistic about the houses future prospects when I sell it, I hope I'm wrong but I'm not betting on it.

But yeah, it can also be a decent inflation hedge, especially with a low rate.

[matchewed]

Your mortgage is a liability the house is an asset. He's not using a liability as a financial term there but more as a risk term. Tying all your money into one area is a risky move may have been a better turn of phrase. That's how I take it.

Not really, I truly think houses are more a liability then an investment. Yes, they are an asset, but in the same way that gold on my front porch is. Maintenance costs, insurance, taxes, etc. Are all costs of ownership. And having grown up in two bubbles(Silicon Valley and Las Vegas), I strongly believe that a house doesn't have a very strong intrinsic value as an asset. I think of home ownership in most cases as possibly less bad then renting, which is why I'm buying a house right now(especially paired with a roommate).

At less then 3% interest ill be paying, i can't justify paying a penny more towards the house then the biweekly payments I'll have set, but I only think its a better deal then renting, I'm pessimistic about the houses future prospects when I sell it, I hope I'm wrong but I'm not betting on it.

But yeah, it can also be a decent inflation hedge, especially with a low rate.

I never said it was a good asset. But it is an asset by pure definition. I also think they are a terrible investment unless you are renting or in the business of flipping. Everything you listed are the risks/costs associated with home ownership. That is why I associated your use of liability with risk terms instead of financial terms.

[cerberusss]

The reason you would invest while you still have debt is that you expect the return on the investment to be greater than the interest you are paying on the house.

On an intellectual level, I do understand this. However, when someone puts it as "playing on the stock market with your house", then all of a sudden I get afraid that I'm missing/overlooking something :-)

If you are in a position where you could sell your house without bringing money to the table (and could do so even if prices drop somewhat significantly), then to me, you aren't doing much "speculating", and you certainly aren't taking on much risk at all.  If your loan rate is fairly low, then the difference in returns you can get by investing is, IMO, well worth the minimal risk.

That puts my mind somewhat at ease. Although the mortgage is around 250K, the house is worth about 300K (coming from 325K). Prices are expected to steadily decline by 2-5% this year. So that does seem to be in order.

My mortgage has an interest rate of 5.1%, but the tax situation is such that I'm paying effectively 3.8%.

[Insanity]

Your mortgage is a liability the house is an asset. He's not using a liability as a financial term there but more as a risk term. Tying all your money into one area is a risky move may have been a better turn of phrase. That's how I take it.

Not really, I truly think houses are more a liability then an investment. Yes, they are an asset, but in the same way that gold on my front porch is. Maintenance costs, insurance, taxes, etc. Are all costs of ownership. And having grown up in two bubbles(Silicon Valley and Las Vegas), I strongly believe that a house doesn't have a very strong intrinsic value as an asset. I think of home ownership in most cases as possibly less bad then renting, which is why I'm buying a house right now(especially paired with a roommate).

At less then 3% interest ill be paying, i can't justify paying a penny more towards the house then the biweekly payments I'll have set, but I only think its a better deal then renting, I'm pessimistic about the houses future prospects when I sell it, I hope I'm wrong but I'm not betting on it.

But yeah, it can also be a decent inflation hedge, especially with a low rate.

I really think that's a very pessimistic look at home ownership.  I see it as - I am going to be on this earth for a long time (hopefully).  I have already owned a home for 11 years (two different homes, but still).  Overall (especially with the sale of the one home  - still wish I had bought a year soon for another 5-10% return.. and wish I had gone to an interest only loan so I didn't have as much going out since I knew that was a short term place - but still) it has cost me significantly less to own my house than it has to rent for that same period if I was living in the same size space. 

It would seem to follow the same as anything else.  If you are paying for a service, then you are going to pay a lot more than if you did the same service yourself.  The only difference is a matter of "time" or "entertainment value" (in the case of eating out, it is sometimes longer to eat out than cook at home).

[meadow lark]

The idea of a house as a liability instead of an asset was made popular in the book "Rich Dad, Poor Dad."  The idea being an asset makes you money, a liability takes your money.  It's an interesting concept, and while I don't believe it personally, it is a way of making a point about the wisdom of spending more or less on houses.

[aj_yooper]

In investment terms, a house (or personal residence) you live in is an expense.  It is present consumption so it is not an investment, which is for future benefit (William Bernstein in The Investor's Manifesto).  When you landlord and rent a house, it is an investment.  A paid for house that you live in provides a monthly benefit (imputed rent)-free rent.  The return on the house is the annual market rent per year divided by the cost of the home, or the return on investment, like stock.    The return on investment is reduced by the property tax (2-3%) and maintenance (often 1%).  The real, non-inflation, appreciation is about 1%.  Bernstein covers this very well.  Imputed rent is tax free.

In accounting terms, a prepaid expense is an asset.  That is how an imputed rent is 'real'.

[Leisured]

Suppose you pay off half your mortgage, Cerberusss. Then you own half of your house, the bank owns the other half. Now use, say, a quarter of the value of your house as collateral for an investment loan. The outstanding mortgage and investment loan is still less than the value of the house and investments, which is what you need to aim for. Furthermore, the dividends from the investment will offset the interest on the investment loan.

This post really belongs in the Category Investor Alley.

[cerberusss]

Suppose you pay off half your mortgage, Cerberusss

That's great advice. I'm going to aim for that, and then in a much slower pace, simultaneously, build up the stock funds.

[Vinivedivichi]

Yes it is really true. If you've just dumped all your money into your house your only asset is the value of your house which is not liquid.  You do not get returns on your house unless you are renting or selling. Borrowing doesn't count as it is debt.

I don't agree with this.  If you don't have a monthly mortgage payment you are getting a return on your investment.  Whether you rent or own there is an associated cost, so paying off a mortgage generates a monthly return.

Also, paying off a mortgage provides a risk free return (I.e. the return is guaranteed).  Stocks, while over time tend to generate consistent returns, are not risk free.

[matchewed]

Yes it is really true. If you've just dumped all your money into your house your only asset is the value of your house which is not liquid.  You do not get returns on your house unless you are renting or selling. Borrowing doesn't count as it is debt.

I don't agree with this.  If you don't have a monthly mortgage payment you are getting a return on your investment.  Whether you rent or own there is an associated cost, so paying off a mortgage generates a monthly return.

Also, paying off a mortgage provides a risk free return (I.e. the return is guaranteed).  Stocks, while over time tend to generate consistent returns, are not risk free.

Risk free? Really? Do you perhaps want to rephrase that? In light of the 2008 recession I believe many people who were underwater on their mortgages wouldn't agree with you.

It's been mentioned in the dozen other threads. Pay the amount due and reinvest the rest in something which generally provides greater returns than the mortgage if that is available. You will be richer 30 years later more often than not than the individual who paid off their mortgage early and then started investing. It's math. It is fine if someone wants to own their house, is okay with a decision that makes them less money, or even if they say it's a decision based on feelings of security. That's their call. But do not tell me it is more financially advantageous to pay off your home when you have a 3-5% mortgage in the US rather than invest in something like index funds or another investment at >5% returns over the long term.

You may not agree with my statement but it is a fact.

[sherr]

Risk free? Really? Do you perhaps want to rephrase that? In light of the 2008 recession I believe many people who were underwater on their mortgages wouldn't agree with you.

I agree completely with the rest of your post, but here you are mixing two different concepts. Owning real-estate is not a risk-free proposition, it's value could go down and you could be underwater. Paying extra on the mortgage is a risk-free way to get a guaranteed return. The value of your house is completely separate from the value of the mortgage. Paying extra on the mortgage guarantees that you will avoid interest that you were otherwise guaranteed to have to pay, for a guaranteed, risk-free return on investment at your mortgage interest rate.

That being said I agree that other investments are better.

[matchewed]

Fair enough I can see that.

[aj_yooper]

Risk free? Really? Do you perhaps want to rephrase that? In light of the 2008 recession I believe many people who were underwater on their mortgages wouldn't agree with you.

I agree completely with the rest of your post, but here you are mixing two different concepts. Owning real-estate is not a risk-free proposition, it's value could go down and you could be underwater. Paying extra on the mortgage is a risk-free way to get a guaranteed return. The value of your house is completely separate from the value of the mortgage. Paying extra on the mortgage guarantees that you will avoid interest that you were otherwise guaranteed to have to pay, for a guaranteed, risk-free return on investment at your mortgage interest rate.

That being said I agree that other investments are better.

Much depends on whether you are working to build a stash or are retired and working the stash.  If an investment is "better" that means it is better to that person.  When the annualized return is higher, you need to add risk.  If you are building a stash, that is often more acceptable as the person is willing to take more risk for higher rewards.  If the stash is set and the person is retired, higher risk and corresponding higher return has less appeal.  Then, expenses matter, especially if you are taking capital assets and paying taxes on them.  It also has to do with portfolio allocation within asset classes.  MMM analyzed this from his perspective (retired and operating on a cash basis):  http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/

Better annualized return does not just mean a bigger number, but a bigger number within the context of the risk and reward curve. 

[Insanity]

Much depends on whether you are working to build a stash or are retired and working the stash.  If an investment is "better" that means it is better to that person.  When the annualized return is higher, you need to add risk.  If you are building a stash, that is often more acceptable as the person is willing to take more risk for higher rewards.  If the stash is set and the person is retired, higher risk and corresponding higher return has less appeal.  Then, expenses matter, especially if you are taking capital assets and paying taxes on them.  It also has to do with portfolio allocation within asset classes.  MMM analyzed this from his perspective (retired and operating on a cash basis):  http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/

Better annualized return does not just mean a bigger number, but a bigger number within the context of the risk and reward curve.

Read the entry and the comments really makes me sad I sold my townhouse in '05 instead of renting it out.   It didn't gain much in value form when I sold it, but it would have made a lot more passive income for me. 

[Vinivedivichi]

Yes it is really true. If you've just dumped all your money into your house your only asset is the value of your house which is not liquid.  You do not get returns on your house unless you are renting or selling. Borrowing doesn't count as it is debt.

I don't agree with this.  If you don't have a monthly mortgage payment you are getting a return on your investment.  Whether you rent or own there is an associated cost, so paying off a mortgage generates a monthly return.

Also, paying off a mortgage provides a risk free return (I.e. the return is guaranteed).  Stocks, while over time tend to generate consistent returns, are not risk free.

Risk free? Really? Do you perhaps want to rephrase that? In light of the 2008 recession I believe many people who were underwater on their mortgages wouldn't agree with you.

It's been mentioned in the dozen other threads. Pay the amount due and reinvest the rest in something which generally provides greater returns than the mortgage if that is available. You will be richer 30 years later more often than not than the individual who paid off their mortgage early and then started investing. It's math. It is fine if someone wants to own their house, is okay with a decision that makes them less money, or even if they say it's a decision based on feelings of security. That's their call. But do not tell me it is more financially advantageous to pay off your home when you have a 3-5% mortgage in the US rather than invest in something like index funds or another investment at >5% returns over the long term.

You may not agree with my statement but it is a fact.

Not a fact at all in some circumstances. If you have a mortgage at 5% and are not able to take advantage of the the interest deduction then paying off a mortgage yields a 5% return.  A post tax return on stocks over the long term yields about 5.5%. So you have a guaranteed 5% return vs. a probable 5.5% return. The risk free nature of the 5% is pretty compelling to me.  Especially if you believe that the market is unlikely to perform as well as it has in the past.

Furthermore, if you are fortunate enough to be able to pay your mortgage off in the short term it makes even more sense. The market has historically yielded consistent results over the long term, but over the short term it is unpredictable. If given the choice of paying off a mortgage or investing over a three or four year horizon, I would choose paying off the mortgage in a heartbeat  it's a more sound decision because the 7/8% assumption is not valid over a short duration.

[reverend]

One could argue that a house can be taken away from you by way of tax liens, eminent domain, a vandal throwing a flare through a window or any number of things. That's why some may think it's better to invest the cash and mortgage the house. That way you haven't lost your investment (ok, so you have insurance) if something bad happens.

What if you lose your job? Your paid off house still requires utilities and taxes to be paid. If you can't pay them, you could lose your house! If you put $10K down and make "rental" payments to the bank, the worst that can happen is that you lose the down payment and have to move to an apartment.


In my case, I have a 3.62% interest rate, and my stocks have returned about 33% annualized.  It's a no-brainer to let the house be rented out (at a profit) and invest the cash.


I was surprised to see the interest rate being over 5%.  I would have expected 2-3% or lower... I suppose rules are different in different countries.

[MrsPete]

I vote for paying down your mortgage AND investing at the same time.  Isn't diversification pretty standard advice for all things financial? 

Why pay down the mortgage?  It's a unique investment in that you can live in the house as well as (hopefully) see it increase in value.  You're always going to need to live somewhere, so it seems logical to want to own the house free and clear.  As a person who, in the past, had NO financial security, I have a strong desire for SAFETY and to know that my house is mine, mine, mine, mine, mine.  Every last brick, every shingle, every tile.  No other investment has that same emotional pull for me, and even if I could potentially make a bit more, owning my house is worthwhile to me. 

Why invest?  Because your house isn't the only thing you need.  You should especially invest in a 401K if you're getting a match from your company (hello, FREE MONEY), but the sooner you begin to build a nest egg, the sooner that nest egg can begin working for you.

My uneducated suggestion:  Whatever you have to invest each month, put 75% of it towards the house and the remaining 25% in other investments. 

[aj_yooper]

Mrs. Pete, you are already kicking it pretty well so I would say you are a very educated investor and a Mustachian.

[Mr Mark]

Think of it as diversifying your wealth. You don't tie up all of your wealth into one asset, especially a house that you are living in which is itself not an investment, but acts more as a liability, it produces no returns for you.

Is this really true?  If you have 100% equity in the house and the appraised value rises, then aren't you getting returns?  The liquidity is not there, I understand (i.e.: you have to either get a loan secured against that equity or sell the house), but the financial aspect is.  Or are you factoring the cost of maintaining the home?

(note: this is a general question not an attack)

It's a common misbelief that your house is an investment. But the house you live in is mainly consumption. Instead, you'd be better living in a smaller house, and investing the rest in a rental property, or riets, if real estate is your gig.

In most countries, due to mortgage interest rates, loan lengths, tax rates and treatment of various alternatives, and rampant property inflation, historically paying down your mortgage was pretty much the best investment you could make. But if you dont have offsetting investments, you are putting all your eggs in one asset, in one asset class, in one place. And if you never sell, and downsize, it's a dead part of your portfolio. If you do sell, when?

I think in the USA the situation is very special. Ultralow rates are in place thanks to the fed. We borrow in us dollars, so no currency risk at all. My net worth is far larger than my mortgage. And because I can borrow at low rates fixed for 30 years at 4%, nominal, I think a moderate mortgage is a good investment. It allows me to have a larger stash working away, compounding. There is still more volatility, especially short term, but compounded after tax average returns on a stash had better be more than almost  4%, or all of our plans are looking pretty dire... plus, the housing market is still looking very good value in many places compared to rents, income and historical highs. So chances of capital appreciation too are reasonable.

That being said, don't touch those snake-oil high fee, interest only/ invest the principal so-called mortgage products ever. Toxic for your financial health!

And also don't fall into the trap of using the above as an excuse to buy a too big or too expensive house to live in, especially when the interest is tax deductible, like the USA.