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Financial Planning Tip July 2023

Now is a good time to be a saver. Money market funds are paying more than 5% and even normally stingy banks are paying for deposits. One saving strategy we don’t recommend, however, is pre-paying your mortgage. Some personal finance gurus advise this, but it is really only appropriate for people who have difficulty saving. If money burns a hole in your pocket, then locking away savings in your house might be OK. But if you are a good saver, then having a mortgage could actually allow you to save more money.

If you have a mortgage that allows you to borrow at a low rate, like 3%, then taking that money and putting it in an account earning 5% gives you a guaranteed 2% return above your cost of borrowing. If you factor in tax savings, that is even better. Today’s mortgage rates are higher, of course, so it might make sense to pay down a 7.5% mortgage. But the cost of borrowing on a mortgage is still relatively low (especially if you are in a high tax bracket – the effective interest rate on your 7.5% mortgage could be more like 5%) and there will be refinancing possibilities in the future.

Pre-paying your mortgage has other disadvantages. Money locked up in your house isn’t available for emergencies or unexpected bills. Anyone saving for retirement should prioritize maximizing those pre-tax contributions that can compound over a lifetime, rather than directing more money to a home. While we do strongly advocate for paying off high-interest debt, like credit cards, keeping a mortgage can actually be an advantage, allowing you to earn and save more in the long run.


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