Should you pay off your mortgage?
The Advocate, October 2, 1996
Ask any banker or other financial advisor if it is wise to pay off your mortgage as soon as possible. Chances are they will say yes and then go on to show you all the future interest you will save that you would otherwise pay. I think you can agree with me that that is the conventional wisdom. I agree it is a good thing for most people also, but not for the above reasons. I feel it is an emotional, psychological reason more than a pure economic one.
However, one does gain a lot of security knowing that your house is paid for with the uncertainty in the job market these days. So in most cases I cannot say it is wrong. But let us look at it from the viewpoint of an investor. As I wrote in August of this year in my article, "Mr. Normal or Mr. Investor", there are other ways of looking at a conventional mortgage than just the interest rates. I showed you how you could not only stop paying your mortgage payment out of your wages five years earlier but end up with your house paid for plus a substantial amount of money.
Let's look at one other important reason why paying off your mortgage early is not all it's cracked up to be. This fact is mentioned by only a few, if any. Twenty to 25 years down the road your mortgage can cost you anywhere from 50% to 75% less in terms of what it costs you today when you take inflation into consideration. Let me explain. A $1,000 a month mortgage amortized over 25 years will gradually cost you less as the years go by.
The average annual inflation rate from December 31, 1967 to December 31, 1995 was 5.97%. I have a chart that shows you the inflation rate for every year since 1967 plus the average cost of houses compared to GICs and a top mutual fund. It is a real eye-opener. Call me for your copy.
Remember one important fact. You will be making significantly more money 10 - 20 - 25 years from now than you do today. Just how much and just exactly how will that affect your mortgage? At a 6% average inflation rate, $1,000 will only be worth $500 in purchasing power at the end of 12 years, but if your wages have kept up with inflation you should be making twice as much. Therefore your wages have inflated also so that you now have $2,000 to pay off the $1,000 mortgage. In other words, your mortgage is effectively reduced 50% in terms of purchasing power of your inflated wages. In another 12 years it would be reduced another 50% or 75% less than when you first acquired it. The last year's payment (the 25th) of your mortgage will be paid off with dollars that are worth 75% more. In other words, it costs you 75% less in year 25 than in year one. I know that this is highly simplified and there are other factors that enter in but it illustrates a point that conventional wisdom never seems to mention to you.
Why isn't this one ever mentioned to you when you are considering alternatives when paying off your mortgage? Remember, if you end up doing what most other people do, your chances are over 50% of ending up financially dependant at the end of the road. Over 50% of people at age 65 will end up dependant on the government and/or friends for financial assistance. Another 15% will still be working whether they want to or not. Only 10% will be financially secure enjoying a lifestyle close to what they were used to when they were working based on past statistics.
You need to think for yourself and not follow the crowd. You need to think like a contrarian, like an investor. Break away from conventional thinking. Learn to take informed, educated risks. Is Risk really a four-letter word? Unfortunately, for GIC addicts, it certainly is. How about you?
If you have any questions, please call Reg Borrow at (519) 855-6339. He is an Independent Financial Consultant with Regal Capital Planners.
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