Asset management
The time to go mortgage free
This blog is about investing in stocks. Today’s topic is the early or later repayment of mortgages. Do they go together?
Inseparable from stock investing is asset management. This includes asset allocation, handling of bubbles and panics and cash reserves. The decision whether to take $10,000 and pay down a mortgage or put the money into the stock market has, for me, always been a question of asset management. It is a decision to be taken for the long term.
The period between 2002 and 2022 was a wonderful time to be a homeowner. Mortgage rates were really low and, very much as a result, house prices were climbing. The great financial crisis of 2007-08 was a big hiccup in this story. But, with ultra low interest rates, it passed.
The argument you hear now it that this golden age for homeowners was a time to mortgage out the family home and, for sure, not a time to pay down the mortgage early. The argument continues that today, with high mortgage rates, prudent homeowners should be paying down the mortgage early and paying it off as soon as possible. Implicit in this is that one should put savings into paying down the mortgage rather than putting savings into the stock market.
Here’s the way a recent article in The Economist put it: “…repaying your mortgage early looks more attractive now than it has been in a very long time, even including those periods when interest rates were at today’s level or higher.” The Economist, Feb 15th, 2025 Buttonwood.
Let’s start with rates
Here’s a chart showing average 30-year fixed rate mortgages in the U.S. over the period from 1975 to present.
The big bump in rates in the last three years is clear.
The story in Canada
The history of mortgage rates in Canada is similar. There are some differences. First off, in Canada mortgage interest payments are not tax deductible. In the U.S., they are. Second, 30-year fixed rate mortgages are available in the U.S. They are not in Canada. In Canada, the typical fixed rate mortgage is 5-year. Some 10-year mortgages are sometimes available. A lot of Canadian homeowners go with flexible rate mortgages at certain times as they are typically at a lower rate than fixed rate. Here’s a chart of Canadian rates since 1975.
My experience
My wife and I bought our first home in 1973. The 5-year fixed rate mortgage was high single digits. The term was five years and the amortization was 30 years. The 30-year amortization meant that the mortgage would be paid off before I retired. A few years later we bought a bigger house and again chose a long-term amortization that would see the mortgage paid off before we retired. The simple idea was to be debt free on retirement.
Every extra penny we could save went into investments. After a couple of years putting money into a Canadian Bar Association pension plan, in 1975 I took all our savings and put them in a stock-only mutual fund. I also opened a very small stock brokerage account with which I learned to invest in common stocks. In 1985 I cashed in the mutual fund and put all our savings in 90-day treasury bills that paid just over 10% (!) per annum. In 1991 I started DIY stock investing and went back into stocks with a 100% allocation. In 1998 I sold almost all our stocks and went into 2-year gov’t bonds. In late 2002 I went back into the stock market and have had a 100% allocation to stocks since.
All of those efforts produced retirement savings that allowed us to retire. We retired in 2005 mortgage free.
Would we have done it differently?
With all the benefit of hindsight, I wouldn’t change a thing about not paying off the mortgage early. For essentially my entire working life, mortgage rates were higher than they are today. As for today’s ‘higher’ rates, I simply observe that for the period from 2002 to 2022 mortgage rates were artificially suppressed by the Federal Reserve in its fight against deflationary forces.
Today’s environment
I think today’s environment is the most normal I have seen in fifty years in relation to inflation, interest rates generally and mortgage rates in particular, i.e. not elevated or depressed. As well, the stock market is perfectly investable. We are not in a bubble and we are not in a major panic or crash.
Conclusion
In this situation, a prudent young person who can buy a house should be in no hurry to pay off the mortgage or pay it down early. One should simply aim to be mortgage free on retirement. Any extra money that might otherwise be available to pay down a mortgage early should simply be invested as retirement savings.
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I’m also on Twitter @rodneylksmith
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