It is generally considered better to pay off a mortgage rather than holding onto the equivalent amount in cash [1]. This is because mortgage interest rates are typically higher than the interest rates you would earn on cash in a standard savings account, meaning paying off debt provides a better financial return [1].
Assuming you have enough savings left over for emergencies and things that you need, it is better to pay off the mortgage especially given the current interest rates. You have no guarantee but you will make that percent back in the market in any given period.
The "2% rule" for mortgage payoff has two main interpretations: either add 2% extra to your standard monthly payment, or, if refinancing, aim to lower your interest rate by at least 2 percentage points (e.g., from 7% to 5%) to significantly reduce interest and pay off the loan much faster. Both strategies accelerate principal reduction, saving years and thousands in interest by tackling high-interest periods early in the loan.
The main reason NOT to payoff a mortgage is the cost of debt. Just like cholesterol, there's good and bad debt. Mortgage debt is typically the least expensive debt avail. and (in the USA) there are tax incentives that further push down the cost (for most, not all homeowners).
While the possibility of job loss can trigger financial panic, Orman advises against rushing to drain your savings to pay off your mortgage early. Even if you have enough money saved to wipe out your mortgage, don't pull the emergency cord until absolutely necessary.
The cons of paying off your mortgage early:
Mortgage interest rates are historically low right now, so your expected ROR (rate of return) in other investments is much higher than what you're paying to borrow money from the bank.
A highly controversial strategy, the 8% rule can be summed up as Ramsey recommending that retirees allocate 100% of their assets to equities. From there, these soon-to-be-retirees or retirees would then withdraw 8% per year of the portfolio's starting value, with each year's withdrawal adjusted based on inflation.
Mortgages can act as a hedge against inflation. As inflation rises, the real value of your fixed mortgage payments decreases, making it cheaper to repay in the future. This is a compelling reason why you should never pay off your mortgage, as inflation effectively reduces the cost of your debt over time.
Myth 1: Being debt-free means being rich.
A common misconception is equating a lack of debt with wealth. Having debt simply means that you owe money to creditors. Being debt-free often indicates sound financial management, not necessarily an overflowing bank account.
It might make sense, for example, to pay off your mortgage early if you struggle with keeping money in the bank. Your home can be a forced-savings tool, and making extra payments can save you thousands of dollars in mortgage interest over time, plus you'll build equity in your home more quickly.
Tips to pay off mortgage early
The rule requires the buyer's solicitor to inform the lender when a seller is attempting to sell the property when the seller was registered at the land registry less than six months prior to the agreed sale. The lender will not usually lend in that case.
Ignoring the Impact on Your Long-Term Finances
An early payoff can feel appealing, but it may shift resources away from other priorities. Extra payments reduce your balance faster, yet they also use cash that could support other financial goals, such as retirement contributions, debt reduction and savings goals.
They Prioritize Investing
Investing is a fundamental aspect of a millionaire's wealth-building strategy. They often focus on long-term investments, understanding that the power of compounding interest and growth can significantly increase their wealth over time.
He goes on to say: “Paying off your mortgage early seems impossible but it is completely doable and people do it all the time, but how can you do it and why would you want to put in the extra effort? Paying off your mortgage early will rev up your wealth building.”
No Mortgage Payments: With no loan, there are no monthly mortgage payments. More Negotiating Power: Sellers love cash buyers because it reduces the risk of financing falling through, which can mean better terms. Faster Closing: No loan means you can close faster.
By the age of 50 it is ideal to be debt-free, and your retirement savings should be enough to give you a comfortable life. Retiring with debt can be a stressful.
Turning $10k into $100k in one year requires very high-risk, high-reward strategies like aggressive stock/crypto trading, flipping digital assets (websites/e-commerce), or launching successful online businesses (courses, dropshipping), as traditional investing yields far less; you'll likely need a combination of significant capital investment, rapid skill acquisition, strong market timing, and exceptional execution, accepting the high chance of significant loss.
The Worst Kinds of Debt to Have
Peters explains that the biggest potential downside to an early mortgage payoff is what's called opportunity cost. “If you use extra cash to pay off your mortgage ahead of time, you may miss out on opportunities to invest that money and potentially earn a higher return, especially in a strong market,” he says.
In a recent episode of her "Women & Money" podcast, Orman addressed a listener's question about whether it made sense to use $50,000 in savings to pay off a low-interest mortgage — and her advice was clear: don't do it.
Paying off your mortgage early can be a smart financial move, potentially saving you thousands in interest over the life of the loan. Since the interest charged on debt is usually higher than the returns you'd earn on savings, using spare cash to reduce your mortgage balance can often make good sense.
Your $500,000 can give you about $20,000 each year using the 4% rule, and it could last over 30 years. The Bureau of Labor Statistics shows retirees spend around $54,000 yearly. Smart investments can make your savings last longer.
To retire on $70,000 a year in Australia, a single person typically needs around $800,000 - $1.1 million, while a couple might need about $700,000 - $1.1 million, depending on if you're single/couple, your age, and if you own your home outright, with estimates suggesting a balance of roughly $690,000 combined for couples and $595,000 for singles for a comfortable lifestyle. The exact amount varies, but expect figures in the $700k to over $1M range for a comfortable life, assuming you get the Age Pension and own your home.
And to go one step further, we recommend dividing your mutual fund investments equally between four types of funds: growth and income, growth, aggressive growth, and international.