Should You Pay Off Your Mortgage Early Or Invest That Money Instead?

Paying off your mortgage early, or investing that money is a hotly debated topic. Some financial experts even tell you to "get the banker off your back" and get rid of mortgage debt. But why? When often the numbers prove it doesn't give you the highest returns. 

This episode talks about the reasons for and against where to put your investment savings - pay off a mortgage early, or investing that money (example: in to the stock market). I run through some math for you to illustrate what it looks like with either option (promise you won't be hitting the snooze button).

This episode is a financial lesson you can't miss! 

xo
Simone

If you're ready to start investing in the stock market, come and join Investing Bootcamp before the end of March before the price jumps up!

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You're here because you want more out of life, more money, pleasure, Florida, freedom, luxury. We are all about an unwavering Southwest and a net with you. Love to talk about. My name is Simone Mercer-Huggins. I'm your resident unapologetic Wolf queen. So far I've built seven figures from the ground up. And these community is now doing the same. The Ms. Wealthy movement is here to help you be more of the bad-ass queen. You were born to be so tune in for everything, investing money, energetics, millionaire, mindsets, and everything in between. If you want to be a powerful player in the money game, in the right place. Welcome to the kiss, my money.

Okay,

Welcome back to the kiss, my money podcast, my beautiful babe. I am Simone Mercer-Huggins, your host and today's topic is all about mortgage versus investing. You know, my parents still say to me, you know, rent money is dead money, and you have probably heard the very same thing growing up. Maybe you say to yourself now, maybe you have this kind of mindset or this belief system that paying off your mortgage early is the best way to go. And this episode is going to show you the reasons for and against and why you might want to do it and why some of the reasons of why you wouldn't. Okay, so let's get into it first. I want to talk about really the top line stuff, which not a lot of people address in that. It's not always about the numbers. Now I know that we have this, I say it all the time, American dream, Australian dream about paying off our home, owning a home.

It's like, that's the course that you take that is, you know, what you're meant to do. And it is actually not for everyone. Particularly now we have becoming more global exception, 2020, obviously, cause a lot of traveling halted, particularly for Australians. Uh, but we are moving to a more global economy. That's just how we are many more people, uh, picking up their jobs, going part time, you know, traveling around the world, making more of a, just global expedition whilst still maintaining their career. So not everyone wants to own a home. It may also be that you love moving all the time. And may also be that you just aren't really interested in, you know, I don't know, renovating your own home or being in one place for a really long period of time. I am certainly that person. I do have dreams, views of owning a home, but it's actually not something I'm interested in right this second, I own property, but it's not a home.

It's an investment property. And that's probably the one thing I want everyone to take away. At least from this episode, I'm going to give you a heaps of really tangible stuff that you can go and think about. But the very first thing is an investment property is not a home. They've two very different things. And when it comes from an investment property, we always want that property to what two things grow in crap, capital growth, meaning the price of the home actually increases in value. And then to that, it makes us money in income. So rental payments, ideally those rental payments that income exceed any expenses and depreciation and costs and anything that you have to spend on the property. So sometimes in some countries it's called negative. Gehring where you have an income that does not cover all of the expenses. And then again, in some countries you can take that money that you had to put into the, the mortgage essentially to pay off the home, to cover the gap in income versus expenses from your personal income, you can offset that loss against your personal income when it comes to tax time.

Except now a lot of countries, even though they've offered this negative gearing tax break, uh, making it hotter and hotter and hotter particularly well, this has definitely happened in Australia. I'm not up to date with other countries that often negative gearing tax breaks, but it's much more difficult now. And this is actually, it's not something that's talked about because obviously the government doesn't want to publicize it, but it's a lot more challenging now to offset. But also I don't want to spend a dollar to get 60 cents back. I'd much prefer to just get 50 cents or more rather than having to put money into something that is actually theoretically, not an asset because we define an asset. If it makes us money, if your investment property costs you money to run, it's not an asset. It's a liability. Is it increasing in value? Meaning like capital growth, hopefully, ideally.

And that is always the aim, but I have plenty of stories, but that doesn't happen. I have plenty of stories. People come to me. I have conversations in DMS. People have joined an investing bootcamp. Like literally they come from everywhere where women and men have lost hundreds of thousands, if not tens of thousands of dollars in property, because they bought somewhere that went down in price, particularly for, you know, like mining towns or anywhere that has a kind of a boom bust cycle. There are definitely areas all around the world where that is true. And so the aim is to obviously buy low and sell high. But if that isn't possible, then you can end up with massive amounts of debt, right? So the whole strategy around putting money into the property, if the income doesn't exceed expenses and putting, taking that income from your personal income, ideally, you want to make sure that something is a guarantee and that's just, isn't the Catholic.

We can't ever guarantee capital growth in a property. So the first thing to think about is if you're in an investment property or if it's a mortgage and if it's a mortgage and not something that actually pays you income again, it's not an asset that pays you income. So I know that the whole dream is to like pay off your house, perfectly house, perfectly house, a lot of financial experts even say, get the banker off your back. I don't actually agree with this methodology. And for some, it's an unpopular opinion because some people don't actually want to look at the maths and what the maths tell us. When we look at the numbers, just straight up numbers, a lot of the time paying off your mortgage is not a financially beneficial decision that I said it. I'm going to show you. I'm going to actually show you the numbers.

Why it's obviously it's a little bit difficult on a podcast. It's a so much easier to show you visually, but I want to explain it to you. So you understand the financial aspect to it. But this is why I say financial aspect to it. Because paying off your home, paying off that mortgage may not be a purely financial decision. Most of the time people are buying a home. It is an emotional decision. And I think it's just really important that people recognize that, see it as that and treat it as such because when you're buying a home, you're seeing it as somewhere you where you want to live when you're buying an investment property. Most of the time, I will ideally you're making decisions based on it being a financially sound decision, right? You're, it's, it's a numbers game. Like does this stack up as an investment?

And if it doesn't, then hopefully you're not buying overly. We're like, okay, we're staying clear of that. But when it comes to a home, it's about, do I want to put a garden here? Is this where I want to live? Is this where want to raise my children? All of those things that are emotional decision, is it close to, you know, transport? Is it going to be good for work? Is it close to my family? Like every, all of those things are not financial decisions and that's not wrong or bad. That's perfect because I mean, what is the point of money? If it is not for us to have the experiences we want to have, it's just really important that we see it and recognize it as that. And that know that we're making a home or buying a home or investing in a home, but it not be the best financial decision and not be okay.

Right? Because if we're making purely financial decisions for financial cost benefit, let's make it as dry as we want to make it right. Then it means we probably wouldn't buy the home in that place or in that location. I hear a lot of people actually say to me, Oh, we're buying this investment property. Um, and then, you know, maybe we'll live in it. And that's what starts to like blend the two of you buying an investment property for financial gain to add to your investment portfolio, to make you money, or are you buying a home because it's an emotional decision and try and not merge it. I also have some people say, Oh, this home is a great investment. Like this area has amazing, um, capital opportunity. Are you actually buying it? And you're using that as an, as a reason to give it to yourself.

It's a good decision. Why can't we go? This is a home I really excited to live in regardless of where, whether it financially stacks up. Right? So it's important to just see them as two separate things. Because even if you pay off your mortgage for your home, that you live in, it still is not an asset that pays you money. And if we just define assets, financial assets, uh, in terms of a wealth building capacity, the definition of which is that it makes you money. It pays you money. It brings in an income and you can go well, when I pay off the mortgage, it means I don't have to pay my mortgage off. It means I don't have to pay rent. It means I have less expenses. And whilst that is true, it still doesn't pay you an income. So you're still tied to that physical location.

You're still tied to having to be there. And particularly for me, and for a lot of people that define financial freedom and wealth, freedom, it is centered around having assets that enable you to live the life that you want, location time and otherwise freedom. And if you're fine being in the one place and you don't want necessarily want to, you know, move about or you're fine being fixed, then yes, it decreases your expenses. Sure. But it still doesn't pay you in income. It still doesn't bring in money. So this is where we have to see paying off a mortgage and a home as an asset that is still not paying an income. It's only reducing your expenses once that mortgage is paid off and or increasing capital growth. But again, it's only useful if that home is increasing in capital growth, if you are actually going to sell it, this is probably the third thing.

I want everyone to realize that everything, when it comes to the stock market and buying property, all of that gain is kind of useless from a capital gain perspective, unless we're actually banking it unless we're actually, it's called in financial times, it's called realizing the profit. So we have a lot of unrealized profit, particularly the way I teach women to invest in the stock market. A lot of it is unrealized. We see the increase of our value of our portfolio go up, but I don't teach people to trade. That's a whole separate thing. Learning to trade is completely different to investing. When it comes from investing, the whole point is to build net assets and not sell them. So we want to increase our net asset pool, right, with the entire intention of that pain and income at the end, or, you know, gradually when you want to retire, you sell off some of the assets in small portions, but it's still unrealized, profit, both in property or stocks or anything.

The difference being a home is not paying you an income. So the only way to realize the gain in profit is to sell it. So it's just important to understand that portion, right? So then let's look at the actual numbers, where and why, and how does it make sense to pay off a mortgage early, the whole topic around paying off your mortgage early or investing that money instead is a highly debated topic. And the reason I just gave you all of that preamble is because those things massively impact your decision because there is no one right way, but there is a right way for you. So the whole paying off your mortgage early might be an emotional decision for you. Some people just love the idea of not having to pay a mortgage. Some people just take it from a financial aspect and go, well, obviously investing that money is going to get a better return in the stock market, which is true.

And I'll explain why, particularly when we see interest rates of less than 3%, the benefit of you saving on the 3% mortgage is not a lot. Like we have extremely low interest rates at the moment. It changes massively though, if you're listening to this podcast in 10 years time when interest rates are eight or nine or 10%, and let's not pretend that that's not a totally possible scenario, it 100% is. And if you've ever spoken to a mortgage broker before they should have taken you through a scenario where you need to be in a position where you can pay off your interest on a loan at 8%, like easily, at least double the interest rates that we're seeing now in early 2021. So it's important because interest rates change. And if you look at the history of mortgage REITs, you will see that this absolutely happened.

And the con the economy goes through cycles. Part of that is interest rates and inflation and bank rates changing the federal reserve changes interest rates based on a number of different things like stimulating the economy, slowing down the economy. Their entire whole aim is to keep inflation at ideally kind of 2% ish. And so they pull the leave is of which the federal reserve dictates interest rates. It's the banks pass on or don't. And that dictates what you get in your high yield savings account and what you get on your mortgage REITs. Right. So what does that actually mean when it comes to mortgages at two P 2.5% or 3%? It means that, like I said, the benefit of you paying that down early, isn't a lot, you're saving 3% now. You're like, yeah, but I'm saving 3% on $300,000. Yeah. Okay, true. Here's the thing, are there assets bring in much higher returns than 3%?

Meaning the stock market stock market returns on average 10% that's including crashes and corrections and dips. So we're looking at a difference of 7% double the benefit that you get from paying off your mortgage. So then when we start looking at it, just purely numbers, why wouldn't someone want to get a return of 10% instead of saving, paying 3%? That's quite a difference right now. Yes. Does it get messy because we're paying 3% on 300,000, but if we're investing the difference than we're actually, it's not exactly the same, because maybe if we, you know, pay down an extra $10,000 a year, then that's only 3% on $10,000, but it's different because it's over the cost of 30 years. Like, yes, there are many different, tiny, tiny micro factors that pull different Leyvas, but there's still a huge difference between 10% and 3%. So the actual numbers, I like numbers wise, it makes a massive difference because compound interest matters.

So where assuming even if you take lump sum payments, or even if we're talking lump sum and you know, additional savings over a period of years or just savings and paying off the mortgage over a period of years, let's just say, you know, we have a certain amount paying off every single month. Let's just use round numbers, right? So let's say that you borrow $200,000 and it's a 30 year loan, which is pretty standard. And let's just say your interest is about 3% bit higher. Your mortgage loan would be about $870 a month. That's not including taxes or insurance. Okay. So you'd pay just over a hundred thousand dollars over that 30 years. So say you're like, well, I want to pay down more money. I want to pay off, you know, $2,000 every month more. So I want to pay off my mortgage in six and a half years.

So that means you only pay just over $20,000 instead of over a hundred thousand dollars over 30 years. So you'd say just over $90,000. So that's huge, right? That's a lot of money. That's another deposit on a home loan or an investment property. Here's the difference if we take that money instead, and we put it into the stock market, and let's just say, we don't even take the S you know, the annualized return that the stock market has provided, and we be more conservative. Maybe you're more a conservative investor. You invest in, you know, something is not purely stocks. Maybe it's some bonds and stocks to kind of limit the risk. And let's just say, it's around 8%. So instead of paying off the mortgage, you take that same $2,000 and you put that into the stock market, into a portfolio over that same amount of time, you would earn just over $200,000, which is over a hundred thousand dollars more than what you save on your mortgage.

So instead of one investment property, you could buy another investment property, or you'd have $200,000 to leave in your portfolio and continue compounding. So I'm not sure about you, but I would much prefer over $200,000 instead of saving just over $90,000. That's a bit of a difference, right? It's over double the difference in terms of what you actually get. This is assuming that interest rates and the just rates on mortgages have been this way for a while. They'd been pretty low and they'd been going lower. Will they keep going? I don't know, will we turn into negative interest rates maybe, but right now, the difference between paying off a mortgage versus investing you earn way more investing at rather than paying down the debt on your mortgage. So from a financial just numbers, when not talking emotions, or like your actual goals or your risk tolerance, or who you are as an investor, or how you feel about debt, there's a lot of things that come into play.

If we're just looking at numbers, the best ROI return on investment is investing it, not paying off a mortgage because they're different strategies paying down debt and investing money. Uh, two very different things there. Right? We see that. Yeah. So then it's like, what do I do? What is best for you? And this is why it's really important to be super clear about what you want, who you are. And if you bought a house with your partner, what they want to, what do you want to do together? So say, or someone that is like, I just, I don't want to have any debt. It's really important to me. Like I have this deep interest in being completely debt free. Maybe you are someone that wants to file follow the fire movement, financial independence, retire early. I particularly, I personally don't like or love this movement at the, to me, I see at the toxic end people just not living their life and trying to scrimp and save every single dollar to try and retire.

That's just not for me. I'm not saying that isn't for anyone else, but I'm much preferred to have a really balanced approach of saving 20% and investing it in high growth assets and building a portfolio that way, at least that's certainly worked for me, but that might not work for you. So if you're someone that no, I just, I want to have a mortgage free home. Totally fine. It's really important that you're clear about what it actually means from a financial perspective, because not everyone wants to look at the reality of what the numbers actually mean, meaning right now. And for the last number of years, it's made way more sense to invest in the stock market versus pay off a mortgage. And yet plenty of financial experts will tell you to pay down your mortgage. Now I want to just address why they do that.

And if you haven't guessed already, I'm not someone that agrees with this methodology, particularly because it's unfortunate, at least from the books that I've read barefoot investor in Australia, and a couple of other people, financial experts around the world, don't really properly address. At least from what I've seen, the other side of the equation, they just present their argument and go, Hey, you should pay off your mortgage quick, or just pay it down, get the banker off your back, like get rid of, get rid of your mortgage. And here is why they do it. And here is why they don't present the other alternative. They're presenting it to the lowest common denominator. And maybe this is true. Maybe it's not, I haven't had the chance to personally ask them why they don't present the other side of the equation, meaning the actual benefit of not paying off your mortgage financially and how you can be way further ahead from an investment portfolio and net worth perspective.

But my assumption is they're accommodating for the lowest common denominator by that. I mean, they assume that everyone is like everyone else. And you, uh, lumped into the majority of people who can't save and can't really manage money. Well, and it may be a living paycheck to paycheck and don't put money aside to invest. And the best way to do it is to pay off your mortgage. Because that way you can't take it, it out. Am I right? If your mortgage, you get penalized pretty heavily, if you borrow again, or if you try and take it back out, like once you pay off that mortgage, it's really hard to go, Oh, Hey, can I use that money again? Can I like take it back out? Unless you have something like an offset account, but that's, that's not talking, paying off mortgage. That's just reducing the interest on the debt for a period of time, right?

That's, that's very different. So they're assuming that you are the majority and you may not be the majority. You might have different dreams and goals and a different risk tolerance and different desires. So maybe you've never been presented with this difference of Holy crap. I could have doubled the money if I had paid off. Uh, if I had invested that money into the stock market instead of paid off a mortgage early. So the numbers, I mean, look, the numbers say that about 80% of people live paycheck to paycheck. So this is probably while they are assuming, give it a one size fits all approach and, you know, put your money, extra money into a mortgage, pay off your mortgage early. And that means you're not tied to the bank. And that means you're more financially free, but you still don't have an asset that makes you money.

You just have less expenses at the end, right? And they're assuming that you mean maybe you can't manage money. What if you can, what if you're great at money? What if you are great at putting money aside? What if great at investing? What if you're great at investing in not touching that portfolio? What if you are taught properly what compound interest means and how much it changes your life and how wealthy you become by leaving that money over a period of time. And once you actually get that you're lack. Well, I sure as, I'm never touching my investment portfolio because I know what it means for impacting my wealth in 10 years time. So you might not be the majority of people that live paycheck to paycheck. You might be someone that is like, I don't give a crap about the emotional side of owning a home mortgage free.

Like, so I much prefer to be financially further ahead, because it's a financially sound decision, removing whatever emotions that come into play about how I feel about owning a home. So do financial experts present, pay off your mortgage early? Yes, they do. And they do it because they want to set you up to have something that is an investment that you can touch. Is that okay? Advice, I guess like this, the wanting to make you wealthy. So it's not a bad intention. It's just that they're not showing you the other side of the equation. Does the other side of equation mean that you have to be more disciplined, more committed, have maybe a better mindset around money and ensuring that you are as committed and dedicated to invest that money into a portfolio. Say that $2,000 a month instead of that $2,000 a month paying down debt.

Yes, you absolutely do. Because there are more things that you could do with it. You could totally, totally, yeah. Take that out of your investment portfolio at any time. So you have to be self-disciplined, but again, once you learn about compound interest, I'm telling you your life changes. That's okay. What it did for me, you know, a lot of people that are investing bootcamp that changes for them. Okay. Okay. So there are a couple of things for you to think about is important to you. Is it an emotional decision? Is it a home? Do you want to be more financially ahead from a, like just numbers point of view? Do you want to have more money in the bank, more net worth? Do you actually care about having that mortgage? How long do you have that mortgage for? And we might be having a completely different discussion in five years time, because maybe by then mortgage interest rates, six or 7%, which totally could be, like I said, it's absolutely a hundred percent possible.

So at that scenario, if we still have a mortgage and it's on a variable, right. And not a fixed rate, and we have a locked in like a low rate, then we'll be having a different discussion, but is the capital growth worth it? So that is what you have to decide for you. The most important thing is that you make a decision that is best for you. And you're clear about the emotional impact and the financial impact and be okay with it being an emotional decision because most of the time homes are. And if it's just purely numbers and you're really excited about that, then make it about that too. So now, you know what the actual answer is, at least right now, financially, it makes more sense to not pay down a mortgage emotionally. Maybe it doesn't for you because it doesn't fit. There is no one right way, but there is a right way for you.

So whenever this comes up next in discussion, hopefully you are armed with the exact numbers, the exact decision making process. And hopefully we can also help other people make the same decisions when this comes up in discussion, because this comes up a lot and it's highly debated. Um, but most of the time it's just not questioned. What are your actual goals? What do you actually care about? What's important to you? And some other factors too, that come into it is where do you live? So personally, I live in the Eastern suburbs of Sydney in Australia, which is eight very expensive place to live, probably one of the most, if not the most expensive place to live in Australia. And from a perspective of where Australia sits in the rest of the world, it's an extremely expensive place to live. So I know other places that are expensive.

I like California in the U S for example. So to give you a bit of insight, a $2 million purchase price, nice. We'll get you like a two, two bedroom apartment, no land, not necessarily any view, you know, kind of like semi modern, but not like new, definitely not new. There's actually a lot of old buildings in the Eastern suburbs of Sydney. Um, and it's pretty standard. It's pretty average, not very big, probably just one bathroom, hopefully parking with that for one car. So when you actually think about it, that's insane. Like guys that is insane. You could buy a five bedroom house with land and four bathrooms and five box for $800,000 in some places, half a million dollars. And I'm talking in festival countries and definitely possible to buy F that in Australia too. So it also does depend on where you live because personally buying an investment property where the rent pays off the mortgage and it's positively geared where I live is just it's, it doesn't make any financial sense.

It also for us well for my husband and I, we don't want to live where we can buy us, where we would actually want to buy would probably be around the 3 million to $4 million Mark. And when it comes to an actual investment that earns us a higher income in terms of like an investment property from a financial making decision perspective, it's not a sound one. So other assets can make us an income and we rent where we actually want to live. And it financially makes perfect sense. So I just let comments like, Oh my God, rent money is dead bunny pass off like water off a Duck's back. Because I know when I do the numbers, it doesn't actually stack up. And I know Chris harder, for example, who he runs a podcast called for the love of money. He's spoken about this as well.

Um, I can't remember the episode number, but it was a really long time ago. And I was so glad that he was starting this conversation around financial decision versus emotional decision around property and being clear about what's important to you and where you want to live versus where you want to buy and do they match up and is it financially sound and then going leading from there? So a lot of people do ask me, Oh my God, you teach money, money, and wealth and investing, and you don't own your own home. And for me, obviously, it makes perfect sense because I know how the numbers do or don't stack up. And we buy a property that pays an income and other assets that paint income. And we do have you to buy a house or a home rather. Uh, but it's something down the track and it'll be a different decision.

It won't be necessarily a financial decision. It'd be an emotional one. Okay. So that was a lot. So now all you have to do is go away and decide what is best for you, where it sits for you. Is it an emotional one? Is it a financial one? And now you're equipped to be really clear about what the best decision making process is for you. If you want to look up compound interest calculator, then just do that on Google. There are plenty of calculators online. You can look at the benefit of paying less interest and you can look at the benefit of putting that money into the stock market, you know, between eight and 10% return and do the numbers for yourself. This is the start and the process of getting financially literate, financially educated. And if you are ready to start investing in the stock market, then you need to know something about investing bootcamp.

At the end of March, the price is jumping up massively. So make sure that you are either following me on Instagram or on the email list, because we are doing a big launch from the 22nd of March before the price jumps up on March 31st. So first from 1st of April, it will be the new price of $2,000 because of you get continuous ongoing support. So it's massive value as it is now, you get to save. If you come and join us from the 22nd of March onwards, we're doing some really fun stuff. I G lives on Instagram. I'll be making sure that I'll be posting on Instagram stories and Instagram telling my email list, but this is your pre-warning that if you want to come and join, then you'll get to save at the end of March. And the last chance to join before the price jumps up on 1st of April will be then. So make sure if you have been sitting on the fence that you come and join us before then that you, a part of this group that comes in, because I don't want you to put off investing for another year or five or 10. So, uh, I'll be letting everyone know again. So again, make sure that you're following us on Instagram, make sure you own the email list so that you get all the notifications to come and join investing bootcamp before the end of March. All right, beautiful. I will see you next week.

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