Saturday, Feb 24, 2007
Debt is so good
MSN money: Why it pays never to pay off your mortgage
The author argues that debt generates wealth in a booming market.I enjoyed spotting and counting the statements supported by weak arguments; the most obvious being that markets don't always gain.
Posted by magnifico @ 10:16 AM (140 views) Add Comment
7 Comments
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1. Garch said...
Bit silly really. Apart from it being a one sided analysis of the effects of leverage, it ignores the key point that most people want to pay off their mortgage so they can remove their largest monthly overhead i.e. rent/mortgage payment - particularly with regards to retirement when they will have limited income.
2. mrmickey said...
This piece of advice would have been fine in the 1970's when the country was in a high inflation environment, your large mortgage could be quickly eroded away by your 10% pay increase every year. Try asking your boss for a 10% pay increase now and you'll be quietly reminded of the companies plans to shift jobs to India.
3. japanese uncle said...
This sort of guy should be branded a 'financial terrorist' and sent to Guantanamo Bay, never to return.
4. Newdad said...
This guys doesn't know the difference between risk and reward.
Yes gearing MAY provide higher returns on the way up, but it COULD also provide bigger losses on the way down. With a 5% account, there is no risk of losing any of your money. With his scheme there is! What if, after 25 years his investments haven't done as well?
The arguments for paying off your mortgage quickly are that you earn a guaranteed rate of tax free interest on the amount you repay. Eg if the interest rate is 7%, if you pay back the capital and the interest like a replayment mortgage you are in effect earning 7% on your savings tax free. I'm being too simplistic here but I hope you understand the argument. There is NO RISK in this. At the end of the period you have paid off your mortgage and own a property.
Yes, you MAY make more money with an INTEREST only mortgage and an alternative savings plan. Good luck if you do. However, can you afford to take the risk with the roof over your head?
5. bidin'matime said...
>So gearing is good for accumulating wealth. <
Tell that to the people I've known go bankrupt over the years through borrowing to finance dodgy business investments...
If you put down a 10% deposit on a house and prices fall 10%, you make a 100% loss!
6. Also Sold To Rent said...
Gearing is good for wealth building as long as you control risk through good money management. That's all there is to it. However, the article seems to be a little confused as to who it's talking to. Paying off the mortgage quickly is the best thing if you are buying the house as a HOME, whereas this dude's suggestions are aimed squarely at someone who owns the house as a INVESTMENT. Unfortunately in these days of easy-money prices-only-go-up lunacy, everyone thinks they are an investor, just like in the tech bubble, and that's when things go wrong.
7. Redfabian said...
I cannot understand the criticism of this article - it is well argued and logical. To counter the specific points
Garch says people WANT to pay off their mortgage - this doesn't make it the best option. Mortgage payments may be the highest expense for many, but the point is if you invest appropriately over the medium/long term you are very likely to generate more than enough income to offset this expense
MrMickey is talking about the difference in nominal and real interest rates - however the point is irrelevant as the statistics for higher returns on equity versus property (on an unlevered basis) are valid across period of high and low inflation.
Japanese Uncle has put forward a well balanced argument!
Newdad makes some good points, however he states there is NO RISK in paying off your mortgage. He is wrong. The risk is broadly the same - namely that an individual's total wealth is insufficient to pay-off total liabilities at any point in the future. It makes no difference if this equation is 'reduced debt and reduced savings' as for someone paying off the capital, or 'same debt, higher savings' for someone investing in appropriate diverse equity based savings. The question individuals should ask themselves is how can I increase net wealth with appropriate risk (there is no zero risk approach).
Bidin'matime is for some reason comparing investing in dodgy business ventures - unsurprisingly this is not a good strategy, but doesn't really add anything to the debate
In essence I see this as highlighting the point that people invest in property thinking it is a one-way, no risk ticket, when in fact (on an unlevered basis) is has a worse risk/return profile than equity. Why not therefore invest any spare income in the better investment? The only proviso is you have to be prepared to think over the medium long term for equity investments, and if you can't for some reason, then you should stick with paying off your mortgage.