Mortgage: Pay it off now, or later?

Today, something different. Usually in this space, published around 8:00 am Eastern Time every Saturday morning, I give my thoughts on the market in this weekly commentary (234 consecutive weeks and counting). Today, instead of me giving you my thoughts, I want you to give me your thoughts, since I am faced with a decision, and I want your advice.

The mortgage on my house is up for renewal at the end of the month, and I need to decide whether to renew it, or pay it off.

The mortgage isn’t huge (I am an “old” guy after all, having paid on it for a few years already), and I have the cash available, so it would not be a serious imposition to simply pay it off.

Advantages of paying off the mortgage now

The obvious advantage of paying it off is that I would have no debt.

I like the idea of “no debt”. No debt gives me maximum protection in the event of a crisis. If I was to get sick and be unable to work, at least I wouldn’t have to worry about the mortgage payment. (And yes, I have disability insurance, so that would give me an income in the event of a disability for a period of time). If I was to get hit by a bus tomorrow and drop dead, not having a mortgage payment would be less thing for Mrs. JDH and my two boys to worry about. (And yes, I have life insurance, so I’m probably worth more dead than alive, but that’s not the point).

No debt is also nice because I have no mortgage payment each month. That instantly improves my cash flow, which I could then use for investment, or fun, or whatever.

Finally, no debt means no interest payments, which is a financial saving, even in this low interest rate environment.

NOTE: For my American readers (and 43% of you are American, according to my Google Analytics report, as compared to 36% from Canada, 4% from the U.K., 2% from Australia, and the balance from 64 other countries in the last month), please note that I live in Canada, and mortgage interest in Canada is not generally tax deductible, so there is no tax advantage to having mortgage payments.

(Yes, I have an accounting background, and I realize there are ways to make a Canadian home mortgage tax deductible, but let’s keep it simple and assume it’s not tax deductible).

Advantages of NOT paying off the mortgage now

So if I want to be out of debt, what’s the decision here? Pay it off and be done with it, right? I can see two compelling reasons for keeping debt.

First, if I take my available cash and pay off the mortgage, I only benefit to the extent of the mortgage interest savings. I can get a one year fixed rate mortgage for 3.19% at the moment (from ING Direct, for example). Paying off the mortgage is an after tax return of 3.19%.

However, if I took that money and instead invested it, I would need to be confident that I could earn more than 3.19% after tax. As long time readers of this blog are aware, I’ve had some good years, and some disasters, as documented on my Portfolio Performance page. Last year I was up 14.5%, so obviously last year investing the cash would have been the preferred alternative, as compared to paying off a 3.19% mortgage. However, if we enter a repeat of the disasters of 2001, 2007 and 2008, a 3.19% return will look pretty good.

If I assume the price of gold will continue to increase (and gold did make a new high this week), then backing up the truck and investing everything in gold would be the prudent course of action. I should use my cash for investment, and presumably take out an even bigger mortgage and invest that as well. That’s the argument for investing the cash, and not using it to repay debt.

There is a second reason for keeping the debt, and that’s the reason I’m raising this question today:

Inflation.

During periods of inflation, or even hyperinflation, you don’t want to hold cash. We all remember the Hyperinflation in Zimbabwe from 2004 through 2009. With inflation at over 50% per month, cash quickly became worthless.

I doubt that we are going to see hyperinflation anytime soon, but a pick up in inflation has the same impact, although on a lesser scale. With 10% inflation my $100 today is worth only $90 next year. Wouldn’t it be great to borrow $100 today, and only have to pay back $90 next year to fully extinguish the debt?

That’s the advantage of holding debt during periods of inflation.

Why am I worried about inflation? Don’t you bookmark the Fed’s website? Here’s a link to St. Louis Fed’s Adjusted Monetary Base chart, and here’s the chart itself:

As this chart shows, the monetary base went from $800 billion in late 2009 to $2,800 billion today. If you consider inflation to be an increase in the money supply (and I do), that’s 250% inflation in two years, or about 125% per year. That’s not hyperinflation (commonly defined as inflation exceeding 50% per month), but it’s scary nonetheless.

Now you see why I’m considering keeping the mortgage. Even with inflation of “only” 50% per year, in two years I could pay off my mortgage for zero dollars in today’s money.

It’s a compelling thought, obviously.

My conundrum, of course, is that I don’t expect 50% inflation in the short term. So, if the only good reason for keeping the mortgage is to pay it off in deflated dollars, that may not be a good enough reason. A better strategy would presumably be to buy gold, which will appreciate (or at least hold it’s real value) in an inflationary environment.

Or perhaps there are other factors I’m not considering.

Tell me what you think. You can post a comment below, or you can post a comment on the Buy High Sell Higher Forum, or you can vote in the Poll I created on the sidebar on this site (right under my Twitter feed and the ads).

Thanks, and I’ll announce my decision, based on your input, next week.

Tagged as: cash flow, cheap rates, debt, disability insurance, economics, finance, hyperinflation, inflation, interest, life insurance, low interest rates, mortgage, mortgage acceleration, mortgage backed security, mortgage interest rates, mortgage interests, mortgage payment, mortgages, pay