Pay off cheap mortgage or keep it?

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WingsOnFire
Posts: 50
Joined: Mon Jul 06, 2020 4:24 pm
Location: Finland

Pay off cheap mortgage or keep it?

Post by WingsOnFire »

I've just made a deal to buy a small house on a half an acre of land for 165K. I'm selling an apartment with asking price of 278K, of which I have 72K mortgage with 1,4% interest rate cap for 14 years. So it's really really cheap. There is no penalty in paying it back early.

It's probably smart to keep the mortgage for the new house is it not?
I am ready to spend some money on renovating the house, but mostly I'd need to find a place to land the extra cash (minus taxes). I currently have nothing in the stock market and that is an option but I'm reluctant to get into stocks at this time of market cycle. I know it's impossible to time the market but it's just so volatile right now and seems highly overvalued.

Generally I've done well with less liquid investments (as I'm impulsive and easily go in and out of stocks, which I need to stop doing so much), I particularly like houses and apartments :D I owned a small studio I bought for 149 K, kept it rented for two years at 5% profit and then I sold it for 175K. I had no renovations done in that one. The apartment I have now I bought for under market price this spring and I've been renovating it and I had no clear plan actually, I may have ended up renting it or living in it, had I not found the little house. But now it's going to be a flip.

So another option is to get another apartment to flip, as I enjoy planning and executing renovations (with professional help when needed of course).
But I'd rather do the flipping without a mortgage so I'd look for studio apartments in my new future hometown where it's way cheaper than here.
There is some added stress to that though - but if the housing market turns studio apartment are always pretty easy to rent out.

Is there any downside to keeping the cheap mortgage that I'm missing?

WingsOnFire
Posts: 50
Joined: Mon Jul 06, 2020 4:24 pm
Location: Finland

Re: Pay off cheap mortgage or keep it?

Post by WingsOnFire »

Or actually, instead of buying a studio as an investment property, I could build another small house on my property and rent it out. That would actually create better profit, and it might be more useful. Though then I'd have an extra neighbor XD

horsewoman
Posts: 567
Joined: Fri Jun 07, 2019 4:11 am

Re: Pay off cheap mortgage or keep it?

Post by horsewoman »

Regarding the extra neighbour, it depends on your type! We have a U shape farm with 3 buildings, we live in the horizontal building, and our renter lives in the vertical building left of us. Our entrances face each other and he can theoretically look into our bedroom from his balcony (curtains are a necessity).
Our renter is a super introverted, quiet, nice guy. Nevertheless my husband is consistently slightly stressed by the fact of a "stranger" living on our farm, and would rather forgo the income to be alone here.
For me, this is not an issue at all, considering how little we notice him at all.

I think it is smart to use land at your disposal to generate income!
But if you build, consider where to place entrances, terraces, footpaths, ect...
If done smart, this is a fine income stream with very little work attached.

Lucky C
Posts: 703
Joined: Sat Apr 16, 2016 6:09 am

Re: Pay off cheap mortgage or keep it?

Post by Lucky C »

If you were in the US, it would be a dangerous time to try to use a mortgage for leveraged real estate investments, with housing starting at very high valuations, the high impact of COVID-19 in our country, and reports of large numbers of mortgage owners and renters failing to make payments. In Finland maybe conditions are much better for real estate investment? If I had access to a 1.4% loan in the US I would be tempted to invest it rather than pay it back, but not in our housing or stock market.

Matt3121
Posts: 66
Joined: Mon Sep 09, 2019 7:45 pm

Re: Pay off cheap mortgage or keep it?

Post by Matt3121 »

Lucky C wrote:
Thu Jul 09, 2020 5:18 am
If you were in the US, it would be a dangerous time to try to use a mortgage for leveraged real estate investments, with housing starting at very high valuations, the high impact of COVID-19 in our country, and reports of large numbers of mortgage owners and renters failing to make payments. In Finland maybe conditions are much better for real estate investment? If I had access to a 1.4% loan in the US I would be tempted to invest it rather than pay it back, but not in our housing or stock market.
Yeah, now is maybe the hardest time to be an investor since the 1930's. IT's just not really clear, and I feel caution is the way to go here.

That being said, you have an ultra low interest loan, likely lower than inflation, so by that standard it still seems relatively safe. Just my 2 cents.

WingsOnFire
Posts: 50
Joined: Mon Jul 06, 2020 4:24 pm
Location: Finland

Re: Pay off cheap mortgage or keep it?

Post by WingsOnFire »

I have a feeling that with this amount of money printer brrrrrrrrrr... there will be inflation.
My current yearly rent raise is cost of living index + 2%. The last apartment had yearly rent raise of 3%.
Just based on that, 1,4% max mortgage seems like a keeper... Also I only have 72K mortgage on a 165K house so that's pretty safe.
I LIKE the idea of being totally debt free though. I just doubt it's the smartest move..

tonyedgecombe
Posts: 451
Joined: Thu Aug 30, 2012 2:11 pm
Location: Oxford, UK Walkscore: 3

Re: Pay off cheap mortgage or keep it?

Post by tonyedgecombe »

There is something deeply satisfying about paying off your mortgage.

fingeek
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Joined: Wed May 24, 2017 8:16 am
Location: Wales

Re: Pay off cheap mortgage or keep it?

Post by fingeek »

Depends on what you're optimising for. If you're optimising for raw ROI then you can probably get better return elsewhere - eg stockmarket, though note that that's isn't a risk-free-return whereas your mortgage payoff would be risk-free. On the other hand, if you're optimising for extra cashflow, this might make things more attractive with a capital repayment mortgage.

I've personally gone through the same thought process and decided to pay off my mortgage in the coming months, as I'm optimising for cashflow (, it brings my ER date ~7 months earlier, and a few other benefits (details in my journal posts)).

MidwestCoder
Posts: 34
Joined: Mon Jan 27, 2020 11:05 pm

Re: Pay off cheap mortgage or keep it?

Post by MidwestCoder »

Not sure anyone ever regrets paying off their mortgage. Maybe a very select few.

I will be paying my 2.8% mortgage off within 2 years, currently sitting at 65k. I am an experienced investor and might be able to beat that return. Thing is, that’s 2.8% risk free AND tax free. 1.4% I’d still do it, especially if it’s not fixed rate.

Peanut
Posts: 549
Joined: Sat Feb 14, 2015 2:18 pm

Re: Pay off cheap mortgage or keep it?

Post by Peanut »

Yes I think there are downsides but some of them are intangible so it’s hard for me to explain. Maybe something like, if you really understand how much money you have, because you are now looking at 40k and not 110k on your balance, you will be encouraged to save and make more money. Or from a principles standpoint, why keep debt when you don’t have to? Debt costs money. I don’t care if it’s 14%, 1.4%, or 0.14%. I exaggerate a bit but not much. Playing games with mortgage rates doesn’t move the needle—it’s just a distraction from the goal of FI.

WingsOnFire
Posts: 50
Joined: Mon Jul 06, 2020 4:24 pm
Location: Finland

Re: Pay off cheap mortgage or keep it?

Post by WingsOnFire »

I'm starting to lean to the side of paying it off. Just because I would love the feeling of no debt, less than 200 euros per month of total housing cost for me and DD, for the simplicity. Yeah, I'm a huge fan of simplicity. Then all I gain is mine to keep (except for the taxes of course..)
I'm not keen on leverage, even though this one would be as risk free as they come.

Matt3121
Posts: 66
Joined: Mon Sep 09, 2019 7:45 pm

Re: Pay off cheap mortgage or keep it?

Post by Matt3121 »

tonyedgecombe wrote:
Sun Jul 12, 2020 2:08 pm
There is something deeply satisfying about paying off your mortgage.
I paid for my house in cash and I am glad I did. I consider it a bad investment because I could have had the money invested elsewhere. But not paying any rent for the rest of my life is a great feeling! No stress. I love it

ThriftyRob
Posts: 124
Joined: Wed Jul 01, 2020 7:20 am

Re: Pay off cheap mortgage or keep it?

Post by ThriftyRob »

I don't see any point in paying interest on a debt that can be paid off.

WingsOnFire
Posts: 50
Joined: Mon Jul 06, 2020 4:24 pm
Location: Finland

Re: Pay off cheap mortgage or keep it?

Post by WingsOnFire »

I guess the point is that if you pay max 1,4% interest on the loan and you can invest the money for anywhere between 5-10% profit, then the loan is making money.

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Bankai
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Joined: Fri Jul 25, 2014 5:28 am

Re: Pay off cheap mortgage or keep it?

Post by Bankai »

Depends on how close to retirement you are. Generally you want leverage in accumulation phase and de-leverage in drawdown to reduce sequence of returns risk. Average inflation over the next 14 years is likely to be more than 1.4% so pretty much anything with above inflation return should make you money.

As to noone ever regretting paying off their mortgage - true, but it's also true that noone runs calculations 5-10-15 years later to see what would happen if they kept it and invested instead. I don't even recall anyone on this forum doing this, never mind MOPs. And it's also true that almost everyone who paid their mortgage off early over last 11 years would've been massively ahead if they kept it and stayed invested instead.

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