When Market Is Bad, Payoff Your Mortgage

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The world economy may be in a bad shape, but that does not mean you should let your finance go into a bad shape too. In this current market condition, it is hard and very unlikely you will find any investment instrument that can yield any positive returns. If you are hording cash because your trust your gut feeling and it tells you that the market has hit rock bottom and you are planning to buy more shares, my advice is - Don’t.

Learn from the 2008 market crash, things can get worst when you least expect it and I call this the “Murphy’s Law of the financial market”.

Well, if you don’t invest your money, you can still generate some returns by stashing your cash in a savings account which yield around 2-3%. If we ignore inflation risk, there is almost zero risk involved in generating this kind of guaranteed return.

Another great way to generate positive return is by paying off your mortgage early. Here are the reasons why.

payoff-your-mortgage

Some assumptions before we start:

Your outstanding mortgage is $100,000

Mortgage interest rate is 6% perpetually

Loan tenor is 10 years

Interest is compounded at the beginning of each year

A meal cost $5 perpetually

1. Money Saved is Meals Earned

If you pay down an extra $10,000 to your mortgage, you would have saved $600 that year or earn yourself 120 meals. If you calculate the real saving over 10 years, the amount you saved is actually $3,300 and that is more than half a year worth of meals. Don’t you think this is a good return? When you pay off your mortgage early, you’re effective earning money equivalent to the interest you saved on that mortgage. Unlike investment on the shares market or currencies, in this period of uncertainty, paying off the mortgage is risk free and guaranteed you a return or a meal at least.

2. Left Pocket to Right Pocket Principal

Many people are worried because they are afraid they will have less money if they pay down their property. When we are paying off our mortgage or doing a partial-payment, we are actually transferring our money from our left pocket (cash) to our right pocket (property asset). Paying off your mortgage does not make you poorer or richer. Your network does not change at all. My mum call this “moving money around”, I would call this “Left Pocket to Right Pocket Principal”. Human tends to feel more secured and richer when they can see and have quick access to their money. However, don’t you think you will feel more secure if you own the roof over your head?

3. Property vs. Piggy Bank

Allocating money into your property instead of your banking account makes it harder for you to “withdraw” your money. You will certainly have lesser impulsive spending because if you want to make a big purchase, you would have to sell your property first. Of course, I am not advocating anyone to put away all their money into property. Having an emergency fund is still an important part of personal finance which I would cover later on.

4. Options, Options, Options

In a lousy market or if an industry is at the bottom of a business cycle, job retrenchment is inevitable. When the tide turns against you and if you are still carrying a mortgage, you are still expected to pay the installment even though you are retrenched or “retired” by your company. And by retirement, your expenses should be kept as low as possible. Paying your mortgage early will give you more options both in terms of coping with job loss and protecting your golden retirement.

But if you have a ton of credit card debts, no emergency fund or haven’t funded your retirement accounts, it will not be wise to pay off your mortgage early.

This is an article from The Brandless Blog.

Last 5 posts by Rendell

January 5, 2009 · Filed Under Personal Finance

Comments

2 Responses to “When Market Is Bad, Payoff Your Mortgage”

  1. Danny CooperNo Gravatar on January 10th, 2009 7:14 am

    This is some really solid content you are pumping out mate, nice work!

    Fortunately I’m not even old enough to have a mortgage yet, but I do have a savings account and the interest rate is dire right now.

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  2. RendellNo Gravatar on January 10th, 2009 7:19 am

    Hi Danny,

    Thanks for visiting! It is never to early to start learning personal finance.

    I am in the mid of writing some basic lessons on investment and finance stuff for beginner. Hope to see you again.

    Rendell

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