For most of us, obtaining a mortgage is a necessity in order to buy a house. And, for the next 25 years, paying it off becomes a hugely important part of our lives, alongside saving for retirement. As such, the majority of people aim to pay off their mortgage and live debt-free by the time they cease working.
However, while this is a noble aim, it may not be the most logical route to follow. That’s at least partly because the return generated on shares is superior to that generated on property. Certainly, in the last few years this has not been the case, but the FTSE 100 in the UK has posted annualised total returns of 9.6% since its inception in January 1984. House prices, meanwhile, have risen by 6.1% per annum during the same time period and, while this is very respectable, it appears shares beat property in the long run. Therefore, investing excess cash in the stock market rather than overpaying on a mortgage seems to make more sense.
That’s especially the case now since interest rates are at historic lows. As such, borrowing is extremely cheap. Of course, this is not always going to be the case and, less than three decades ago, interest rates were in the double-digits. However, with uncertainty surrounding Chinese growth prospects and a general nervousness among Central Bankers regarding cutting off the UK’s resurgent economy, interest rates seem likely to remain low over the next handful of years.
While house price growth has lagged share price growth in the last 31 years, it seems likely that the value of property will continue to rise. Clearly, it is unaffordable for many people and that is disappointing, but there remains a major supply/demand imbalance (especially in London and the south east) which seems likely to push prices up in this region. This means that even if you have a mortgage in place at retirement, the chances of falling into negative equity are rather slim.
In addition, maintaining a degree of leverage throughout life makes sense when inflation is factored in. That’s because, over time, the real-terms (i.e. after inflation) value of all cash amounts deteriorates. As such, paying back £100k today is likely to be a lot more difficult than paying back £100k in 20 years’ time and, while inflation is currently at or near zero, the likelihood is that it will rise over the next few years.
So, while paying off a mortgage as quickly as possible may be the default option for the majority of homeowners, the appeal of the stock market, low interest rates, rising house prices and the chance for debts to be inflated away makes it a less obvious choice than it perhaps once was.
Got a mortgage? Thinking about paying it off early? Think again and contact me