Eoin McGee: "It doesn't make financial sense to pay off your mortgage."

Finance_Novice

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Our strategy has always been to repay our mortgage as quickly as possible while maintaining our lifestyle but having watched "How to be good with money" with Eoin McGee and following him on Instagram, we are wondering if that is still the right strategy. He suggests that investing into a fund is a better use of excess cash than overpaying the mortgage.
 
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Brendan Burgess

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1. Our strategy has always been to repay our mortgage as quickly as possible while maintaining our lifestyle but having watched "How to be good with money" with Eoin McGee and following him on Instagram, we are wondering if that is still the right strategy. He suggests that investing into a fund is a better use of excess cash than overpaying the mortgage.

Can you provide a link to where Eoin says this?

It makes no sense to borrow money at 2.75% to put it in a risky investment (outside a pension fund) which might or might not return 2.75% after tax and expenses.
 
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Brendan Burgess

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Hi Finance Novice, I thought that you might have misundstood him, but I have seen it for myself.


It doesn’t make financial sense in most cases

But it might make emotional sense

There are some cases w here it makes sense, even if it does not make financial sense.


  • If you are going to pay it anyway,
  • Paying a little extra every month makes no financial sense
  • The extra money is gone if you ever need it back
    • You lose your job
    • You get sick
  • If the mortgage is keeping you up at night, reducing it might make sense
    • But the opposite is true, if it’s keeping you awake at night , because you might get sick not be able to pay your mortgage, you would be glad to have the money.
  • There are maths behind this too
  • It doesn’t make sense unless you are clearing it off completely

That is very poor advice from him.

He does not explain why. He just asserts that "it makes no financial sense."

In this piece he does not go into the alternatives.

Here is a summary of when it might not a good idea to overpay your mortgage
  • If you are on a cheap tracker
  • If you are trading up in the meantime
  • If there is a fair chance that you might need the money in the short to medium term
  • If you have scope to make pension contributions which attract tax relief at 40%
But it is much better to pay off your mortgage than
  • to invest in an investment product as it would have to make a very large return before tax and expenses to be better.
  • as most people do, leave it sitting in a deposit account earning very little
  • as many do, to just blow it on things you don't really need.

Brendan
 
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Younginvestor93

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Here on aam, the advice seems to be to pay it off to get a guaranteed risk free return.

I have heard advice from Paul Merriman of ask_paul on instagram promote the same thing. In one scenario he suggests if the rate is 3 or 3.5% then it might be worthwhile paying it off but if it's lower than that you should invest your money and try to make it work harder for you.

Different strategies I suppose.

If you have 20 years left on a mortgage, would the money not work harder for you in an investment account over a long period like that than being used to pay off the mortgage. Also, its available to access if there was an emergency whereas when you pay the mortgage its gone.
 

Marc

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It’s very dangerous to make generalisations like this.

It can make very good financial sense in fact I’m planning on doing it myself.


I have a loan with a monthly payment of €265pm which means I need to earn €509pm to meet those payments. Gross salary less taxes to meet the net payment

To be “better than paying off the mortgage” I need to make a return to compensate for the tax on the salary, plus investment charges plus tax on the profits of my investment.

just to be clear I have no idea how I would generate such a return, it’s simply not credible and not with the certainty of clearing the mortgage.

So, by clearing the mortgage I free up €265pm which allows me to save €509pm in my pension (company contribution and reduced salary) which then grows in a tax free environment.
 
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Brendan Burgess

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Also, its available to access if there was an emergency whereas when you pay the mortgage its gone.

You need to distinguish between "access" and "gone".

In some circumstances, I advise against contributing to a pension fund, as the person can't access it until they retire. But I would not ever say "The money is gone."

If you overpay your mortgage, you will have lower repayments in the future. So while you are losing temporary access, you will probably access more in the long-term.

Most of us can access emergency money either via an overdraft, credit card or family loan.

But if you want to have an emergency fund, by all means, having €20k in an emergency fund is fine. But having 100k , is not a good idea.

Brendan
 

Gordon Gekko

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“Advisors who get paid when people invest in ‘advice that people should invest’ shocker”

Unless a person has a tracker with low rate, it’s difficult to envisage a scenario where it makes sense to invest rather than paying down a mortgage.

I like that Eoin McGee guy, but that’s an appalling piece.
 
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Younginvestor93

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Is it not a calculation whereby if we take current mortgage rates at say 2.5% or less. If you put money away for 20 or 30 years, will it not grow at a rate after expenses and taxes of over 2.5%. I would of thought those returns would be very achievable over a long time frame?

Is that not what these guys are suggesting, that this sort of after tax return is attainable?
 

Gordon Gekko

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Is it not a calculation whereby if we take current mortgage rates at say 2.5% or less. If you put money away for 20 or 30 years, will it not grow at a rate after expenses and taxes of over 2.5%. I would of thought those returns would be very achievable over a long time frame?

Is that not what these guys are suggesting, that this sort of after tax return is attainable?

It might.

But repaying a mortgage is the equivalent of getting a GUARANTEED return of circa 5/6% from an investment.

Imagine if there was an investment where you could get that sort of return, GUARANTEED?
 

Younginvestor93

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It might.

But repaying a mortgage is the equivalent of getting a GUARANTEED return of circa 5/6% from an investment.

Imagine if there was an investment where you could get that sort of return, GUARANTEED?
Where does the 5/6% return come from, how do you come up with that figure when repaying the mortgage?
 

RedOnion

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What makes the advice a little more unusual, is Eoin constantly promotes a 'no-brainer portfolio' of 60/40.

Why would anyone invest 40% in bonds while carrying mortgage debt, which is essentially a negative bond?
 

Gordon Gekko

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Grossed up for taxes, fees & charges...

I set-up an investment portfolio. It does well and makes 6%. I’d be doing well to get away with fees of 1%. And then call tax 40% of the gross. That’s 2.6%. Taxes are not an exact science but taking 40% as a blend of 33%, 41%, and 52% shouldn’t be too far off.
 

Finance_Novice

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I didn't realise I would inadvertently generate such debate :) My wife saw him offer this advice on one of his Instagram Q&A sessions. We like how he simplifies financial jargon and enjoy his shows but this one confused us. We are by no means financial experts so thought it would be best to reconfirm on this website. Glad I asked now. Thanks for all the replies so far.
 

RedOnion

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Possibility of capital appreciation? (I admit it's unlikely with rates already so low)
Possibly. You're just gambling on interest rate movements though. Long term bond funds have had a phenomenal return over the last 2 years. But, over a longer term investment timeframe it doesn't make sense; held to maturity the return is known (with a credit risk), and the maturing bonds are replaced with lower yielding ones.
 
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