Last Wednesday, we discussed 6 reasons in favour of paying off the mortgage early. Today, it is the turn of not paying off the mortgage early.

1/. Diversification

Housing accounts for over 50% of New Zealander’s net worth according to Statistics NZ

That is a lot of money in just one asset class.

To own several assets is a great way to diversify your net worth. Diversification is essential if you want to minimise your risk of losing money.

What if you have 80% of your net worth in your house and there is a housing collapse? You won’t be left with much.

By prepaying extra on to the mortgage you are tying up even more of your net worth in to the housing asset.

2/. Access to cash

If you put all your spare cash on to prepaying the mortgage, then you won’t have any money to take advantage of any opportunities that come your way. This could be cheap stocks, a business venture, or even overseas travel. Or maybe you want to retire. You can’t pay for your annual expenses with your house. You need cashflow for that.

Once you have spent the money on the house you can’t get it back, unless you have a revolving credit mortgage loan. But then, that would defeat the purpose of such a loan if you were to withdraw some money. Banks can also change the rules quite easily.

If you must pay extra on the mortgage, at least make sure you have a liquid emergency fund first.

3/. Good potential for better returns

This is by no means a guarantee, but more often than not, the returns from a well diversified stock portfolio will return more than the prevalent mortgage interest rate over the long term.

The difference in just a 1 percentage point difference between mortgage rates and investment returns could be hundreds of thousands of dollars.

The key term here is ‘long term’. Any less than 10 years and the odds start swinging in favour of paying off the mortgage from a risk-reward perspective.

4/. Payment with inflated dollars

Mortgage payments generally get easier over time. This is the result of inflation. Incomes generally rise with inflation, whereas mortgage repayments remain the same (assuming the same interest rate). The gap between your income and the mortgage cost tends to grow over time.

3% inflation would mean that $1,000 today would only be worth $500 in 24 years. Conversely, $1,000 in work income would be $2,000 in 24 years. Of course, assuming increases in income match inflation.

Why not use your future $1,000 to pay $2,000 worth of mortgage, instead of today’s $1,000 to pay a $1,000 mortgage? By waiting, you are able to use your future money to pay for 25 year old prices.

5/. Investing habits

If you start investing earlier in life, you can learn what works and what doesn’t over a long period of time. In this time, you can perfect the ideal investment mix to suit your risk profile.

If you don’t start investing until later in life, then you may find you make some expensive mistakes. When older we have more money (ideally), so any mistakes and losses are magnified.

Best to make these mistakes when younger if possible. Not only do we have less money to lose, but we have more time to recover from our losses.

6/. Estate planning

If you ask most heirs what they would rather have on the death of their benefactor – money or equity in a house. Most would rather the cash.

It offers them more flexibility and they can use it in a way that they best see fit.

This is probably not as important as the first five points, but if you are thinking about estate planning, and you should, then it is worth considering what would be best for the beneficiaries if it made no difference to you either way.

Always do what is best for you first though. I would only recommend this consideration if you are 50/50 on the decision, then this could be the swaying factor.

I am not saying which is best. Pay off the mortgage or invest. I am just here to lay out the benefits of each. Whichever benefits you put the highest weighting on will determine your decision.

Always remember that it is not an either/or decision either. You can always do a bit of both.

For more on the decision to pay off mortgage debt or invest, you can read my guest article here.

At the end of the day though, if your decision is to pay off the mortgage or invest, you are doing great. You have a budget surplus and want to use it in a productive manner. Long term, you can’t lose whichever way you go.

If you need a personalised plan that makes the most of your housing asset whilst ensuring your individual goals are considered, then get in touch and we may be able to help.

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here.