Everyone seems to want to be mortgage-free.
Every YouTube channel talking about personal finance makes videos about how you can pay your mortgage off early.
The funny thing is that all of this advice is wrong.
The numbers just don't stack up.
In fact, the faster you repay your mortgage, the more money you are losing in the process vs. NOT doing it.
A lot of people will point to the amount of interest you save by repaying your mortgage early and becoming mortgage free.
But the truth is - that saving on interest pales into insignificance when you consider how much those overpayments COULD HAVE EARNED if you invested them in the stock market instead.
If you make overpayments on a mortgage, you are agreeing to take a very low rate of return on your money. A typical average mortgage rate of 3% over time is a return that barely beats inflation.
So if there are alternative places you can put your money to work that will earn you significantly more (like the 9% average you'll get from the stock market), why would you choose to opt for earning 3x less?
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Every YouTube channel talking about personal finance makes videos about how you can pay your mortgage off early.
The funny thing is that all of this advice is wrong.
The numbers just don't stack up.
In fact, the faster you repay your mortgage, the more money you are losing in the process vs. NOT doing it.
A lot of people will point to the amount of interest you save by repaying your mortgage early and becoming mortgage free.
But the truth is - that saving on interest pales into insignificance when you consider how much those overpayments COULD HAVE EARNED if you invested them in the stock market instead.
If you make overpayments on a mortgage, you are agreeing to take a very low rate of return on your money. A typical average mortgage rate of 3% over time is a return that barely beats inflation.
So if there are alternative places you can put your money to work that will earn you significantly more (like the 9% average you'll get from the stock market), why would you choose to opt for earning 3x less?
💵 GREAT INVESTING APPS I USE
SIGN UP FOR ETORO
https://med.etoro.com/B15358_A95689_TClick_SSasha.aspx
67% of retail investor accounts lose money when trading CFDs with this provider. Your capital is at risk. Other fees may apply.
GET A FREE SHARE WORTH UP TO $150 WITH STAKE (UK, Australia, NZ)
https://hellostake.pxf.io/qnA3xq
You will get a free share if you sign up using this link and deposit a minimum of £50.
GET A FREE SHARE WORTH UP TO £200 WITH FREETRADE (UK ONLY)
https://magic.freetrade.io/join/sasha-yanshin
You need to sign up and make any deposit to get the free share.
👍 SUBSCRIBE TO MY CHANNEL
https://www.youtube.com/c/SashaYanshin?sub_confirmation=1
DISCLAIMER: Some of these links may be affiliate links. If you purchase a product or service using one of these links, I will receive a small commission from the seller. There will be no additional charge for you.
DISCLAIMER: I am not a financial advisor and this is not a financial advice channel. All information is provided strictly for educational purposes. It does not take into account anybody's specific circumstances or situation. If you are making investment or other financial management decisions and require advice, please consult a suitably qualified licensed professional.
Hey guys, it's sasha, everyone seems to want to be mortgage-free. Every youtube channel out there. Talking about personal finance, makes videos about how you can pay your mortgage off early. The fire movement will tell you that you need to pay your mortgage off as fast as possible, and dave ramsey will tell you that all mortgages are evil and they're gon na make you poor.
I own several hundred million dollars in real estate and i pay cash for every bit of it. The funny thing is that all of this advice is wrong. It just isn't correct. The numbers do not stack up, and in this video i will show you how bad it is how wrong those numbers are.
If the average family goes and repays their 30-year mortgage in just 10 years, they would actually be 800 000 poorer. That is a huge amount of money. That is a life-changing amount of money. It is the difference between just about making it in retirement and having hundreds of thousands of dollars in extra disposable income.
So let me show you exactly why overpaying your mortgage is a bad idea. Let's take an average house worth 250 000. It can be in dollars, it can be in euros, it can be in pounds, it doesn't really matter. The principal applies wherever it is, that you happen to live and whichever currency symbol you use.
Let's assume that over time, your average mortgage rate is three percent. Sometimes it's gon na be higher other times it's going to be lower like it is at the moment. So let's say that a typical family will take out a mortgage for that 250 000 at three percent and then pay it off after 30 years. That is a super common example.
So let's use that as a baseline. Now, let's say that that family decides to make a 10 overpayment on their mortgage, so instead of just paying 1049 dollars per month, which is what the regular repayments will be. They are now going to be paying 1153 per month, not a huge difference, and if you are tight with your budget, you can definitely do it right. Well, if you do do that, then your 30-year mortgage will actually clear in less than 26 years.
So that is a quite good saving and in the process you're going to save 19 378 dollars in interest sounds great right. Well, i'm gon na tell you why it's not great at all in just a minute now over here i have another scenario where the family. Instead, decide to take it up a notch and they're going to make huge, overpayments and they're going to pay more than double the amount per month just over 2 400, so that the whole mortgage can be cleared in just 10 years, because almost every video out there Goes and tells you that paying it off in 10 years is the thing to do amazing, you're gon na save 88 360 in interest. That is a huge amount of money right wrong.
The truth is in both of these scenarios. You are actually going to lose money. That's right by repaying your mortgage early versus not doing it, you are going to be losing money. Let me show you exactly how the 10 overpayment scenario works in a bit more detail so that you can understand the numbers behind it. In this scenario, the family is paying an extra 105 dollars per month on top of their regular regular monthly mortgage payment so that they can repay it four years earlier and that saves them the 19 378 dollars in interest over that time frame. But what if that family instead took that 105 and just invested it instead? Nothing fancy no crazy returns, nothing ridiculous, no stock, picking just regularly just put it into the s p 500 index or the total stock market index. Something like that basic! No choosing every month put 105 into the market instead of paying it into the mortgage now, an average rate of return for investing into the market over time is about nine percent over decades and decades. So, let's just go with that: let's use nine percent as the average.
Let's assume that, instead of overpaying the mortgage, the 105 is invested every single month for 30 years. Those monthly deposits will add up to 37 000 over time and those investments are going to grow by a hundred and forty thousand dollars if we use that nine percent average rate for a total investment portfolio over a hundred and seventy eight thousand four hundred and eighty Three dollars that is a bit better than the nineteen thousand three hundred and seventy eight dollars that you will save and interest very paying your mortgage right. Well, there's actually a bit more to it. Remember that if you repay your mortgage early, you will have four years at the end, where you don't make any repayments whatsoever and because the investing option that i'm comparing it to takes 30 years.
It is only fair to assume that at the end, once if you repay the mortgage, you're then going to go and spend four years and one month investing an amount equal to your monthly repayment into the stock market. So they were comparing like for like then, at the end of the 30-year period, you're going to have 68 362 dollars worth of investments. In this example, you can actually completely ignore the interest savings on the mortgage, because, in both cases, in the case, when you repaid early in the case when you don't, you actually have spent the exact same amount of money per month in terms of leaving your account. If that makes any sense, the amount that is left your bank account is identical and, at the end, both options leave you with a fully paid of house that you own and in the case where you make the 10 over payments.
You also have 68 000 worth of investments, but in the case where you didn't make any overpayments, you have 178 000 worth of investments, so you have a hundred and ten thousand dollars more. That's almost half the cost of the entire house in the first place. Now, let's look at the really popular example: next, the example of repaying a house in ten years. It gets much much worse if you up your monthly mortgage repayments and repay the whole mortgage in just 10 years and then invest the equivalent of your monthly payment into the stock market. You're going to have your house plus 1.5 million dollars worth of investments. That is not bad at all. That is a pretty good place to be because you've been making all those extra payments right, but if, instead, if instead of making those overpayments, you continued just slowly repaying your house over the 30 years, and you took that extra money that you were putting in your Mortgage and instead go and invest it then at that point you would have your house and 2.3 million dollars, that's 777, 000, more than if you made the overpayments. That is a huge, huge difference.
Now let me cover one really important thing: if your monthly mortgage payments are a huge burden, if you can't sleep at night thinking about your monthly payments, if you feel tense because of those payments, it is really affecting your life, then you know, if repaying your mortgage Early frees you from all of that burden and you feel great, then that can be more important than money. I do get that, but it is really important that you do understand that if you choose that option, then you will lose hundreds of thousands of dollars or pounds or euros in the process. And if i'm honest, if you are in that position where you can theoretically repay your 30-year mortgage in just 10 years by making huge overpayments, i reckon you probably aren't. Actually that stressed about your mortgage payments, because you're paying so much more every single month and here's the best bit in that last example, where we're talking about repaying your mortgage in 10 years.
If, instead, you took the slow 30-year repayment route instead and took all that extra money and put it into the stock market, then on average, after eight years and four months, you will actually have more in your investment portfolio than the total balance of your mortgage. At that point just eight years and four months yeah. So if at that point you really really wanted to, you can still go and cash. Your investments in repay your mortgage and you're going to repay your mortgage considerably sooner than if you took the option of directly repaying it, which will take 10 years remember instead.
So the likelihood at that point is that you're probably not particularly worried about your mortgage repayments, because at any point you can go and clear your mortgage whenever you want to just by cashing some of your investments in and at that point, if you are not doing It then you're choosing not to do it because you're choosing to grow your money at a faster rate than you would otherwise have been able to do. In essence, you have a situation where the bank is lending you money at a low rate of three percent, and you can then go and put that money to work to earn you nine percent. So, yes, you do have to pay the three percent of interest, which is the only bit that most people seem to talk about or focus on, but you get to actually earn nine percent. If you go and reinvest that money instead of paying down your mortgage keeping the six percent for yourself and yes, the stock market is volatile. Yes, that's true, there are crashes. Sometimes it goes up. Sometimes it goes down, but over time those rises and falls average out and 30 years is a very long time and because you're putting money into the stock market every single month, you will average out and you will ride out those waves and bumps, and you are Actually going to be getting a somewhat average rate of return because you're not trying to time the market some of the money, you'll deposit during the high periods, some will be right at the bottom of the market and those will average out to ensure that those fluctuations Do not specifically affect your return. One important thing to remember is that this logic only applies to low-cost long-term debt.
If you have any kind of high cost credit or credit cards at 18.9 or 25 or whatever, you do absolutely need to go and repay, because that debt is a priority. Every time you repay that debt, you were essentially getting a 25 annualized return on your money. Toxic debt is bad and can really suffocate you if you don't work hard to get rid of it. However, if you make payments towards your mortgage, you only get a three percent return on your money.
That's the rate of the debt that you are covering with your repayment, so if you can get a nine percent return on your money instead by putting it somewhere else, instead of using that three percent option, why would you choose the lower option? Instead, if you know that you're going to be 800 000 worse off, do you still want to be mortgage-free in 10 years? Hopefully that gives you some food for thought, and maybe next time you see one of those videos telling you how you can repay your mortgage in just 10 years. You might just look at it a little bit differently. Thank you very much for watching. I really really appreciate it and, as always i'll see you guys later, you.
Another great video that is so clear to understand! I am very grateful that you added the part at the end that this does not apply to high interest debts like credit cards, which should be paid off first, but you are speaking about low interest long term loans such as mortgages. 20 years ago, when I made my first investment into a tech fund in 2000, it plummetted, and took 15 years to regain the original amount I invested. Therefore, I spent most of my extra money to pay off my student loans and debts instead. This one investment was a truly negative experience, and I did not invest again until last year, 20 years later as I am not in the finance field and when I had the confidence to do so again after some education from internet. It is important to be educated on knowing what to invest in as well. I wish that i had studied this much sooner! Thank you so much for your awesome educational videos and so well explained!!!
These clickbait videos of both extremes are hilarious.
You know you could do both things at once, right? Overpaying regularly while also investing is the way to go. You always win and you don’t have to pick just one side!
Don’t underestimate the importance of peace of mind and earlier freedom.
Watched this again as my mortgage was up for renewal.. great advice again mate.
9% is a bit generous but I get your point what about fees which is around 10% minus the invested total how accurate is compound interest calculator I got my pension future value and It’s not what I expected a lot lower than my goal when I crunch the numbers 😞
In the time I have been putting money into my 401k the market has crashed 2x! One day you have $100k the next $35k, that is reality and it takes years to recover the losses. And will crash again before I retire. Market crashes are a certain as death and like death, it comes like a thief in the night. The amount of money over time when you factor in the losses is nowhere near 9%, sometimes yes, but total over time it is much closer to 3%. It grows but really only because me and my employer adding 10% of my gross pay every month. Which is by the way is more than $150 a month, it is much closer to my mortgage payment. My 401k after 25 years is nowhere near $800k! But mortgage isn't near of an issue as credit card debt. That is what I have systematically been eliminating.
Really enjoyed this video. As you mentioned not many people singing from this hymn sheet. Question for you Sasha, I stopped over paying my mortgage a while back now, however my fixed term is coming to an end soon and i wondered what your thoughts on going on an interest only mortgage? Part of the benefit of paying it off is that, should you find yourself in a situation whereby you are not able to get a mortgage in the future the remaining amount would be less? Just wondered what your thoughts on this were? I have considered extending it to the maximum term too, to give me more to invest with. Thanks
1969-70 Hong Kong flu pandemic.
1971 US/Nixon defaults on gold backed dollar debt.
1971-81 Bond market resets and interest rates rise from 2% to 20%.
Very interesting and eye-opening video, thank you,Sasha! I'm only 20, but I really enjoy learning about this stuff so I can have a better financial life down the road 🙂
Quality points/video for a certain demographic of home buyers and investors. Many people leverage debt..imo Dave is not wrong in his way of investing, if he was….he clearly wouldn’t be as successful as he is.
Hi Sasha, this is great work! One thing I would add would be inflation. Inflation is bad for when you're saving money and is good when you're borrowing money. I would convert the loans to NPV while adjusting for inflation to get a more accurate result. The disparity is actually even greater. Cheers
Interesting perspective. I think the general dislike of debt in the financial community encourages any process of eliminating it, no matter the long term cost.
Great video. Really enjoy your content Sasha. I'd appreciate your thoughts on this point though… You have used 3% as the mortgage rate in the calculation. Between 1980 and 1990 the average UK mortgage rate was in double figures, often at 15%. In the next decade it was lower but still between 6 -10%. Rates have only been low in the last two decades. How does this stack up against average stock market returns?
Why on earth would I want to be in debt for 30 years? If somthing happend to me and I lost my job I could be homeless as the bank would take its asset away from me.
Morgages make you forced to work a 9 to 5 job for a magority of your life. If thats not a scam idk what is!
Iiked your other videos but claiming 9% on stock returns is a best case scenario, on average. 6% would better reflect what every day joes, (not finances houses) are performing at.
It changes your figures drastically.
good luck getting 9% in next 30 years! Also 30 years only and s&p only are NOT representative at all! Also last 10-15 years are rigged with historical lowest FED % rate. 3% mortgage will not last….
If they put that into there SIPP it would also get a minimum of 20% back from tax man (UK) and then when they hit 55 year they could draw out those payments and pay the mortgage.
You poor person, you have been trapped in the Corporate mindset! Money is just a tool to allow you freedom! What is the point of saving money when you restricted what you can do with your life! If you advocating paying the debt as late as possible, most people will be employed and restricted until the debt is paid off! When you are free of Debt burden, you can plan to live your life more freely without the worry of losing your home and travel and experience life.
Something else to consider: Is the person bad with money? If that person is going to see that balance in the brokerage account, and be tempted to spend it then the mortgage payment is the way to go as well.
This Theory ONLY works if interest rates stay low or if your mortgage is fixed for the whole term. Right now in the UK it's very hard to find a long term fixed rate mortgage, therefore most mortgages will eventually move to the SVR rate after the fixed rate ends. If inflation happens which is likely and interest rates rise, the mortgage payments could increase to the point where they become unaffordable, not to mention if interest rates rise stocks tend to go down too. Having a home paid off or a good amount of equity in your house would protect you from this situation. Personally I would do both, putting a portion of your budget towards overpayments AND a portion towards index funds investments imo is the way to go.
Not sure if I missed it but you should also consider a 60% LTV mortgage is usually half the rate of a 90% LTV mortgage. Paying off this portion of the mortgage first is worth it.
Great video – well explained and fair assessment. Can't argue with the numbers if we assume the same level of long term growth. I'm not overpaying my mortgage – investing every spare penny into assets. I was actually working on some content like this and now I'll look like a copy cat! lol. I'll hold off for a few months. Hahaha! 👍
Something you've missed: in the interim, overpaying may take you down from one LTV band to another saving you some interest on the WHOLE balance not just the amount overpaid.
E.g. if I'm at 3% based on a 90% LTV, but my overpaying I can get to 80% LTV come my next mortgage renewal, I may get a lower rate, e.g. 2.5%. I'd not only be saving 3% on the amount I've overpaid, but a further 0.5% on the WHOLE 80% outstanding balance. Something worth considering
This was very timely for me thanks. About to start a new job and have a few extra bob to invest monthly so really thought I wanted to pay mortgage off hard in 4 years. I’ve watched a few videos about both sides (investing vs paying off) but this has edged me into the investing side so thanks. Btw this is because I think you have credibility and I am prepared to take your opinion on board. 🌹
Paying extra for the mortgage means you have an instant 3% 30 years "gain". Investing is volatile, you can't know if there's going to be a crash exactly 4-5 years before the 30 years finish. Here in Romania the mortgage debt is more like 4.5%-5%. And the inflation more like 3-4%. So paying down early totally makes sense, I'd say
Paying off the mortgage early is about psychological ease and risk management.
Paying off a mortgage is a guaranteed ~3% return on your money.
Whereas investing in the stock market might have return an average % higher than that every year, there is no guarantee that you will get those returns in the future.
Also, when you get older you tend to invest in things that are less risk averse so you won't be getting those 9% returns.
Then there is always the situation where we could return to 1989 interest rates where you're looking at 11% interest on your mortgage.
At the end of the day, people like the ease of mind and owning an asset. The old adage at the end of the day is to invest in property and land as they're not making any more of it.
Sasha how would the taxes work in the UK (I'm new to investing ) a Vidio would be great 👍
I have a mortgage overpayment line in my budget and that goes straight into my ISA. I think it’s a great way to trick your brain into complying with the ‘conventional wisdom’ while also making the best mathematical decision with your money.
You are absolutely right, you will never save money spending money. Mortgages are becoming outdated
Only works on crazy bull bubble markets. In 30 years will it continue? Who knows. This is where the risk profile comes into play. Yes you can be a millionaire if you bought BTC a long time ago. But most people will prefer the peace of mind and be debt free
Great video Sasha. Love it. I also love mathematics 🧮! I overpaid my mortgage for years until I discovered this. I extended my 13 year mortgage to a 30 year mortgage and bought a rental property and started investing the difference AND reduced my monthly payments. WIN WIN WIN
I tend to agree with this video, however it’s a little dangerous presenting as matter of fact. Taking the interest rate at 3% is very low and until recently (last 13 years) repayment calculations were always taken at 5%.
The Ftse 100 doesn’t return 9% on average, it’s more like 7.5%.
Great video-made me rethink my strategy. In the end if I invest more using my overpayments I can pay off my mortgage even quicker in the long run, thanks!
In the old pay off the mortgage vs invest debate, one thing that is often overlooked is that if your circumstances change suddenly and you need a lump of cash, it's far easier and quicker to sell your stocks and shares than it is to get all your overpayments back off the bank.
Dear bank manger, I've just lost my job, oh and I've been diagnosed with a long term health problem that means I can't earn for the foreseeable future, can you lend me 50 grand please to keep us going?
I paid my mortgage off early, 15 years early. You know what that means? My employer has 1 less bitch, I can work in a super market part time if it came to it. You know what else, I have a fuck tonne of spare money to invest.
Sasha your point is valid if the mortgage interest rate is say less than the SnP 500 growth rate. And you haven't taken the pound depression into account here.