My Top 7 Reasons for Paying Off the Mortgage

I have 1 major goal over the next 2 years… To pay off my mortgage.  Here are my top 7 reasons for paying off the mortgage. 

My Top 7 Reasons for Paying Off the Mortgage:

1. To Be Debt Free

Just imagine being debt free…think about the freedom that you would have.  Any worry about job security would vanish.  If you hate your job, then quit! 

Being debt free and mortgage free significantly reduces stress over things like paying the monthly bills and unexpected emergencies. It also gives people a significant level of freedom and financial security…forever.

Say there’s a thousand dollars to spare from your monthly income after expenses, one of the smartest ways to invest your extra $1000 is to pay off your mortgage.  If you continuously put that extra money toward paying off your mortgage, you’ll finally be mortgage free.

Think about it.  Housing costs are the biggest monthly expense for most families. 

Average housing costs range from 30% to 50% across Canada.  That’s a significant part of a person’s after tax take-home pay. 

Imagine the kind of cash flow you would have without a monthly mortgage payment.  How quickly would your money pile up in your bank account?

This brings me to my second reason.

2. To Reduce My Cost of Living

When you eliminate the mortgage payment, your cost of living drops significantly.  You’ll also see a big rise in the monthly available cash flow. 

With the big increase in available cash flow I can quickly build up my investment portfolio.

3. Owning Your Home is Key to Financial Independence

What can I say, the older I get the more I realize that the cornerstone of financial independence is being mortgage free and owning your own home outright.  But I’m not the only one who sees the light. 

Many years ago in a MoneySense piece, Canadian author and financial columnist Jonathan Chevreau said “the foundation of financial independence is a paid-for home.”

Dave Ramsey includes being mortgage free as part of his 7 Baby Steps to Financial Freedom.

4. To Reduce Risk

There’s a lot of feel good reasons to pay off the mortgage and live a debt free life, but a big reason I’m choosing to pay off the mortgage is to reduce risk.

Housing costs are financed over the long term – anywhere from 25 to 30 years – which introduces a certain level of risk over the long term. 

The biggest risk to most people’s income is job loss and the inability to achieve a comparable level of pay in another job.  That means even more of your money goes toward paying mortgage, or in the worst-case losing your home altogether.

The other big risk for Canadians is interest rate risk.  Unlike the US where you can lock in an interest rate for 30 years, the average mortgage in Canada renews every 5 years.  That means that upon renewal the borrower could face a substantially higher mortgage payment if interest rates rise. 

Today people laugh at this because we are at the lowest interest rates in history and people believe that this will continue to be the case going forward.

But the truth is, interest rates could rise substantially in a variety of economic scenarios and people saddled with record mortgage debt could be wiped out. 

Of course in such a scenario housing prices would almost certainly collapse. So there is a genuine risk of people losing it all.

5. No Attractive Investment Opportunities

I’m writing in early 2021 and every asset class is trading at or approaching all-time highs.  As an investor you need to ask yourself is this really the time to put a substantial amount of money into any asset market?

Think about it, we have the worst economy in a decade and yet stock markets are trading at all time highs. 

Bond yields are at record lows, which means the prices are at record highs.  Junk bonds yield about 3.5% (Insane) thanks to the Fed buying them up. 

Real estate has never been higher than it is today. 

Crypto is for sure in a big speculative bubble. 

Even precious metals: gold is hovering around its 2011 high and silver is trending upward towards its all-time high.   

Cash is trash and is being devalued and debased by central banks (Fed and Bank of Canada) printing the currencies into oblivion.

So, to my mind, in the current environment paying off debt – even at record low interest rates – is the best use of my money in building stable long term wealth.

This leads me to point #6.

6. This is Not the Market to Make Money

I don’t think there are any good opportunities to make money in any of the above-mentioned markets.  So it’s my view that this is the time to focus on preserving our hard-earned wealth and eschewing risk.

We are in a global debt bubble the likes of which has never been seen before.  I don’t want to sound dramatic but we truly are in what central bankers, economists and policy makers call “uncharted territory.” 

Now I know some of you may be thinking that this sounds a lot like some of the extreme doomers and gloomers out there, but I think you should hear what Warren Buffett and Charlie Munger have to say about what happens when governments start printing lots of money.  Hint: it doesn’t end well.

That said unlimited money printing and debt issuance fuels asset bubbles that can last for a while.  But sooner or later they hit a wall and don’t touch the sides on the way down.  This to me says: Buyer Beware.

7. The Math Works in Favor of Paying Off the Mortgage

My annual mortgage payments are around $25k.  I usually put around $20k extra each year in lump sum payments to reduce the balance. 

By paying the mortgage off we’ll have a risk-free $45k to play with each year.

Now assuming I decide to invest to make $25k to pay the annual payment, never mind the extra I put down, I would need to invest $500k at a 5% rate.  But that is not an after tax number. 

Dividends are taxed at 30% so I would actually need to invest $750k or try to get a 6.5% yield on my investments. 

All of that by the way includes taking on huge market risk as I mentioned above.

Plus paying taxes on the investment income received to cover the mortgage payment. 

So by playing it safe and paying off my mortgage, I will be drastically reducing risk and avoiding lots of additional stress and taxes.

Thanks for reading My Top 7 Reasons for Paying Off the Mortgage.