Being fully debt free is something that attracts me a lot. It allows me to minimize the monthly cash that I need. This will bring FIRE so much closer. But having debt is also a good thing. And for 2 reasons
Reasons to keep debt
In general and in the long run, the stock market should outperform a reasonable priced mortgage. The long term total returns of the world stock market is often quoted between 5-7 pct after inflation. A well negotiated mortgage in 2015 should have a far lower interest rate. Imagine you have 10K to pay back the mortgage, you will save a on interest during the remaining time of the mortgage. Or you could invest it in the stockmarket and get a potential higher return. Keep in mind: you need to have the time to reach the long term average. In between some serious downside risk is present. In Belgium, like in many other countries, we have an income tax benefit of having a mortgage. You can get a tx dedcution of 2280 euro, per person (in our specific condition). This is a nice amount of money for having some debt. Especially if the tax gain of this is actually more than the interest you pay per year. With our mortgage, we will soon be in the situation where the tax benefit is more than the actual interest paid per year. So, we borrow at a negative rate. Great.
Reasons to repay debt
The market will crash! Maybe tomorrow, maybe next year. It can not be timed. Therefore, it is better to repay mortgages as soon as possible! Just joking…! As a passive index investor, I will invest each month in the market. But, given the current state of the markets, the ongoing conflicts and a potential GREXIT, I prefer to not deploy extra cash into the markets and repay debt. Next to that, we are well above the minimum debt amount that we need to get the tax advantage. there is thus some room to repay debt without loosing the tax benefits.
As we have some cash sitting around that does nothing, we decided to pay back a part of our mortgage. It is a long story, but we have some accounts that are excluded from the whole FIRE setup. They sometimes pile up cash… By paying back, our monthly mortgage repayment will reduce with 13 pct. Nice. This money will be used as from July as extra contribution to the F-Money. This extra monthly contribution should speed up the acquisition of some trackers. I look forward to see the results in our stats. How is your mortgage doing?