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

presidenttttt

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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

Hi Brendan, is there any data on this? You state most people leave excess income sit in a savings account. I would be curious to know how many people who can overpay their mortgage actually do it?

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.

So in essence, break even is a waste of time considering the risk attached to it.

Considering the risk and the admin hassle, i would want to be very confident of netting at least 1% more, over time that might just compound to be worthwhile. How many investment options can claim confidence in a 7.5% return?
 

Dublinbay12

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Hi Brendan, is there any data on this? You state most people leave excess income sit in a savings account. I would be curious to know how many people who can overpay their mortgage actually do it?

Irish Deposits at banks are around €120 billion. Interestingly this grew to the highest levels during Covid suggesting that there is 'free cashflow' just sitting on deposit.

The report below also has some interesting trends etc. However, I'm not sure there's a data set that ties each deposit amount to that individuals mortgage. I agree with Brendan's assumption.

Household Credit Market Report 2019
 
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SPC100

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We don't know what mortgage rates will be over life of mortgage, so while a return guaranteed, the return is not guaranteed.
 

Brendan Burgess

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We don't know what mortgage rates will be over life of mortgage, so while a return guaranteed, the return is not guaranteed.

Hi SPC

I had wondered about this point.

I am campaigning for Irish mortgage rates to fall, so I hope that they will.

But they are more likely to rise in the medium to long-term.

Today, it makes no sense to borrow money at 2.5% to put it on deposit at 0%.

I suspect that when/if normal markets resume, the deposit rate will still be about 2% less than the mortgage rate. And of course, the deposit rate will be subject to tax.

So it's fairly clear that people should pay off their mortgage rather than put it on deposit.

But apparently McGee suggests borrowing at the mortgage rate to invest in a fund with an uncertain return. This is wrong. And rising mortgage rates will make it more wrong.

Brendan
 

SPC100

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I repeatedly see people on this site, repeating the mantra incorrectly, 'it's a guaranteed 2-3 p.c. forever', and I wanted to correct this. We don't have crystal ball for mortgage rates or market returns.

INot a line from a broker. A line from me! But if you are quoting me, Please let the customer know, I strongly agree with paying down mortgage, having money just sitting in a deposit account is a big waste.

It's much less clear to me if the choice is pension investment vs mortgage overpayment. if higher tax relief available and employer match is not maximized I think pension definitely wins. I think pension likely wins even if only higher rate tax relief is available.

But I think more personalized guidance is needed before deciding to invest rather than paydown mortgage.

Brendan, does similar economic logic, imply the stock market return should be higher than the mortgage interest rate.
 

Gordon Gekko

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I repeatedly see people on this site, repeating the mantra incorrectly, 'it's a guaranteed 2-3 p.c. forever', and I wanted to correct this. We don't have crystal ball for mortgage rates or market returns.

INot a line from a broker. A line from me! But if you are quoting me, Please let the customer know, I strongly agree with paying down mortgage, having money just sitting in a deposit account is a big waste.

It's much less clear to me if the choice is pension investment vs mortgage overpayment. if higher tax relief available and employer match is not maximized I think pension definitely wins. I think pension likely wins even if only higher rate tax relief is available.

But I think more personalized guidance is needed before deciding to invest rather than paydown mortgage.

Brendan, does similar economic logic, imply the stock market return should be higher than the mortgage interest rate.

I don’t think anyone is comparing pension investment vs mortgage overpayment.

It’s personal investing vs mortgage overpayment.
 

Brendan Burgess

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Brendan, does similar economic logic, imply the stock market return should be higher than the mortgage interest rate.

I don't know. All I know that there is huge uncertainty that the after tax and after expenses return on a stock market investment will exceed the mortgage rate.

And that the potential excess return does not justify the risk involved.

Brendan
 

NoRegretsCoyote

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I repeatedly see people on this site, repeating the mantra incorrectly, 'it's a guaranteed 2-3 p.c. forever', and I wanted to correct this. We don't have crystal ball for mortgage rates or market returns.

In 2011 you could have bought a bond that paid 5% instead of paying off your mortgage. Mortgage rates have fallen since, and the bond would be subsidising your mortgage today.

But interest rates have fallen so far that there is almost no scenario where mortgage rates will fall so far that the coupon on a bond you buy today will ever be higher.
 

Brendan Burgess

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I see that I did a Key Post a couple of months ago

 

SPC100

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Nice! Although it seems a bit conservative on the pension vs mortgage part. e.g. only if 'underfunded' or if your interest costs are .5%
 

SPC100

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So we all agree don't invest with after tax money given Ireland's tax regime, as your investment has to do very well to overcome tax and expenses.

Don't listen to Eoin.

But, what about inside pension?

If you are managing your finances excellently today, you are likley on 1.9-2.3% mortgage, and you might be in a pension that is passively tracking global indices, with a total costs of a bit over 1%. And you can get tax relief and potentially employer match on the way in. (but you do suffer taxes on drawdown).

If you are a marginal rate tax payer, who hasn't yet maxed your relief (at higher tax rate), and you have resonable sized mortgage, wouldn't it be highly expected that the pension will outperform over the long term?
 
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ArthurMcB

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I dont understand the last two posts.

I thouggt we have been saying that pay down mortg generally makes sense versus investing because invedt would need to do exceptionally well to beat the guaranteed retirn in paying fown mortgage.

How does that logic suddenly not apply to last parag in SPCs last post above?

What releavnce re marginal rate tax payer?
If mortg is say 2%, wouldnt the pension investment, regardless of whther marginal tax payer or not, still need to do exceptionally well to beat guaranteed mortg return? Why, in this instance, is it more advisable to invest rather than pay down mortg?
 

Marc

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What was the average mortgage rate over the last 30 years. I’m fairly sure it wasn’t 3%
 

mojoask

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193
I dont understand the last two posts.

I thouggt we have been saying that pay down mortg generally makes sense versus investing because invedt would need to do exceptionally well to beat the guaranteed retirn in paying fown mortgage.

How does that logic suddenly not apply to last parag in SPCs last post above?

What releavnce re marginal rate tax payer?
If mortg is say 2%, wouldnt the pension investment, regardless of whther marginal tax payer or not, still need to do exceptionally well to beat guaranteed mortg return? Why, in this instance, is it more advisable to invest rather than pay down mortg?

If it's the choice of after-tax income being invested, you're unlikely to do better than over-paying your mortgage. If it's a pre-tax income like a pension, and you're in the top tax bracket, it becomes a trickier comparison.
 

Gordon Gekko

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5,487
I dont understand the last two posts.

I thouggt we have been saying that pay down mortg generally makes sense versus investing because invedt would need to do exceptionally well to beat the guaranteed retirn in paying fown mortgage.

How does that logic suddenly not apply to last parag in SPCs last post above?

What releavnce re marginal rate tax payer?
If mortg is say 2%, wouldnt the pension investment, regardless of whther marginal tax payer or not, still need to do exceptionally well to beat guaranteed mortg return? Why, in this instance, is it more advisable to invest rather than pay down mortg?

Hi ArthurMcB,

Where someone is investing personal monies, the position is reasonably clear.

However, when it’s pension money, the position changes. There’s tax relief for starters whereby the State contributes up to 40% of investment monies. Then the invested capital can compound tax-free. And then at the end, it can be withdrawn on favourable terms via tax-free lump sums and the 20% rate band.

I practice what I preach, in that I maximise our AVCs, then overpay our mortgage, and only thereafter do I consider personally-held investments.

Gordon
 

Marc

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1,468
I've just completed a more detailed analysis of this question looking at the very specific 60/40 portfolio recommended in his book

 

SPC100

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Nice article. I like the graph for grossing up interest rates. Would be nice if you pushed the article a bit further at the end and created a table showing the difference in return after taxes for the two strategies using various tax rates that could apply on pension drawdown (dependent on pension earnings), and subtracted the extra interest paid.
 
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