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14 Sept 2011

Why I Dont Pay off my Mortgage

I am a PF blog hopper and I read blogs of people who are fighting student loans, trying to pay off mortgage, conquered debt, investing, living in financial freedom, etc. I am right in the middle, working my way towards financial freedom. The only debt I have is mortgage on two properties. I have no credit card, or any other debt.

This is why I don't pay off my mortgage:
When I started investing in property back in 2001, everyone was preaching the "pay your mortgage early" sermon. It was at a point where I was a sponge, absorbing any personal finance information available. I was buying books and books on investing and finances in general. I am very glad I did. However, not everything written is right for everyone. The heck, not everything is correct period.

I remember Suze Orman and her passion on this subject. It made perfect sense. It still does for one's primary home in my opinion. So why  am I not paying off my one errrrrr two mortgage debts quick? There are several reasons why its not always advisable to pay off the mortgage instead of saving or investing elsewhere. Before  get to the small list of my reasons, know this....I paid my first apartment off in just under four years. I was over the moon. Now back to the reasons I wouldn't dare:
  • Leverage
I wouldn't even be investing in property if it were not for leverage. Why use my money when I can use someone else's (the bank's)? My sort of twisted thinking just doesn't allow me to prioritize paying off mortgage when I could be building my savings, strong emergency fund and investing elsewhere. There is a higher risk to me not having enough savings than paying more to my mortgage.

  • Illiquidity
Think about what would happen in the unlikely event that all five of my properties become vacant? My cash flow would be hammered, I would not have money to pay for the two mortgages, and eventually, I would probably lose them all. The money paid into the property is gone. Cash is really king. One needs cash reserves for whenever there is a need and an emergency.
  • Cost
It makes no sense paying the cheap debt when you have an expensive one. People who owe on high interest credit cards would be a bit foolish to pay on the mortgage with today's low interest rates. 

  • Tax
There are tax benefits that come with a mortgage. Think about how those will put more in your pocket at the end of the year.

  • Other Investment Options
With interest rates being this low, one can get a better rate by investing elsewhere. Shouldn't I be putting more money into my retirement plans instead of paying it into the property? Which is bringing in more interest. How about other investment options like stocks, bonds, etc?

I am not about to pay off my mortgages at the expense of my emergency fund. If anything, I will just invest elsewhere, or even get another unit. I do have cash flow to service property debt. This is also not a one size fits all. It depends on whether your property is your primary residence or an investment property, how much other debt you have and whether your portfolio is balanced or not. Think about your priorities. Should you lose your job/ main source of income, will you have enough insurance cover? How are you going to live, until you get your next job?

The bullet points above are reasons why I don't pay off my mortgage. I know most people, including my wonderful hubby, don't quite get it. He is uncomfortable with the debt. I say its a good debt.


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