Thursday, September 6, 2012

Inflation vs. paying down the mortgage

So... with the low interest rates on today's mortgages is it really a good time to aggressively pay down your mortgage?  I know most people out in the blog-o-sphere or the general public have an entrenched belief that all debt is bad and comes with a stigma.

According to Wikipedia: The word mortgage is a French Law term meaning "death contract", meaning that the pledge ends (dies) when either the obligation is fulfilled or the property is taken through foreclosure.[1]

The entire mortgage page on wiki can be seen @

Now there are some very popular adages in today's society regarding the inevitable death and taxes.  But I would like to add that inflation is equally as important and inevitable.

What is inflation?  To dumb it down completely it means that prices for goods and services rise over time.  Generally wages keep up to inflation not including the various micro-cycles of the world.  Eventually wages and prices average out to a net zero.  (Please don't flame me for this... I'm basing this on the fact that everybody hasn't had to move out of homes into cardboard boxes...  We're still all buying food, clothing, shelter, etc.)  If you want to read more about inflation  check out the wiki:

What does this mean for any fixed price loan?  The longer you take to pay it down, the more deflated your debt becomes.  What does that mean?  It means that even if you only serviced the interest, the "value" or "net worth" of your loan would diminish as the value of the currency it's based on depreciates.

So if inflation is 2% and you've managed to secure a 2% mortgage (which I know some friends who have) then it makes no sense at all to aggressively pay it down.  Why?  The "worth" of the loan is depreciating as the dollar depreciates.

To calculate the true cost of your mortgage you need to subtract the value of inflation from the interest rate to see what it's actually costing you. 

So if you have other debts pay them down first before you ever consider paying down your mortgage early.  Personally, if I had a mortgage I would only be making the minimum payments.  Sure banks, brokers, and TV personalities like adding up the number of extra money you give to the bank by not paying down your loan sooner but honestly this represents a HUGE opportunity cost.  MUCH more value can be created even with the small amount of money you can use to say, buy MORE property through a REIT, (Real Estate Investment Trust) or some other investment like a stock or derivative.

Many of the REITs I own have yields in the 5-8% range.  They pay out more in distributions than most of my friends variable OR fixed rate mortgages.  This is how it makes sense for me to borrow to invest.  I borrow at 4% and buy REITs that pay 6-9%.  (A large basket of REITs so if one or more tank I can still make my loan payments.)  So I'm getting 2-5+% profits on borrowed money.  (This is how the rich get rich!)

So I say, run that mortgage out until your death.  The longer you have it, the less it costs you.  Provided of course you're not adding on 2,3,4,5th mortgages to pay for your overspending.  And, this opinion is based on today's economic reality of LOW interest rates.  (Trust me friends, low interest rates are here to stay for at least the next 5+ years)

I know many of you will think I'm crazy.  But remember this is an OPPORTUNITY COST.  The path you choose to take is up to you.


  1. This is a great topic. Someone can write a whole book on this haha. I mentioned to my friends before how debt is a depreciating liability because all fiat currency around the world loses value over time. But all I ended up doing was confusing them lol. To fight inflation you need hard assets. And if you take on debt to purchase those assets then your debt in real terms becomes more affordable to pay off over the years, which is why I always buy hard assets with borrowed money when interest rates are low.

  2. We are in the mortgage prepayment camp, but I totally understand your point of view. Some people like us- are just debt averse- and hate prepaying makes sense for our peace of mind. Also, we live well below our means so we still have plenty of money to invest on top of our mortgage prepayment.

    I think it's a matter of personal preference! Do what works for you! =)

    1. I see this as a HUGE opportunity COST... You're losing money paying it down early. Your money is better invested as it will earn more than your mortgage costs you.