Should You Pay Off Your Mortgage or Invest? (A 50-year historical backtest)

[@JamesShack]

It's great to see a wide range of opinions in the comments. Please remember that what feels right for you may not be right for someone else. There is no single right answer for everyone.

[@SolemmeCy]

The unfortunate truth is, all of these investment strategies are reliant , or edge ahead, over repaying the mortgage based on current regulation. All it would take for some of these models to fail would be a change in the regulatory framework in the UK. Now that's probably a risk factor you cannot predict!

[@mrscreamer379]

Not sure if this is in your wheelhouse ... but what if I retire abroad? Is it possible to take my 25% tax free money, and then move tax jurisdiction to say Montenegro with a flat tax rate and then draw the rest of my money at 9% ... or move the pension to a QROPS alternative and take advantage of their rules? If I can retire abroad to a better tax system, how does that change my situation, would I lose access to the NHS, would I still get the state pension? ... because yes, having saved tax free into my pension with the understanding they get the tax later on draw down ... I'd like to do the dirty on the government and leave them with nothing. I feel you have a whole video on the implications of retiring abroad. 😁

[@JamesShack]

@@mrscreamer379 It's not my area of expertise but I know that it depends on which country you retire too. Some recognise UK pensions in their entirety and you still get 25% TFC. Other don't allow TFC but you can draw down the pension at marginal income tax rates - which are often lower than the UK.

[@RowanSmith-y9x]

When comparing the pension to the ISA am I correct in understanding by using the 25% tax free you cannot then use it in the future. So if you get say £10k from state pension and £30k from your pension you lose the benefit of 25% of the £30k beings tax free say £1.9k per year, say £38k over a 20 year retirement as a basic rate tax payer? Irrespective of this I believe the pension looks favourable over the ISA but as you elude to the overall strategy suits wealthier people who can ride out the crashes

[@JamesShack]

@@RowanSmith-y9x That is correct, if a scenario ended up having £400,000 in the pension but you have to use al of your tax free cash to pay off the mortgage, the remainder will be taxable. So, a result that leaves you with £50k left in your ISA would be better than a result that leaves you with £50k in a pension. Depending on your marginal tax bands, of course.

[@j10001]

Phenomenal analysis! So many KZbinrs skim the surface and repeat one another’s simplistic ideas. Finally someone who “gets” data and can do quality analysis! Thank you.

[@user-dv8bs7tb5c]

Yes!

[@l.d.t.6327]

Even these data aren’t fully representing the actual situation. All depends on the stock market the moment you invest. So it matters what day of the week or month you buy stock. Average over a year or even a month won’t be the same as for a given day…

[@markkelly6532]

I'm a finance director and would fancy myself as a Treasury expert and I think this video is phenomenal. Well done. Superb analysis.

[@DG_1296]

James, I'm 28 and had a completely financially ignorant upbringing (I guess I can be happy at the luxury of not having to worry about money, but also now I'm realising a shame that I didn't know more about finance). I just wanted to thank you for your videos, I have spent countless hours over the past few years educating myself on finance and future planning. Your videos are always my go-to, and have hugely helped me understand personal finance, including starting to invest and buying a house. I'm sure you get loads of these messages, but I just wanted to express my personal thanks for everything you do completely for free. All my friends and family now watch your videos, please keep doing what you're doing.

[@JamesShack]

Thank you so much for taking the time to comment! I’m glad you’re finding the content useful and I will certainly keep it up! Thanks again for spreading the word about the channel.

[@despoticmusic]

I’ve paid off two mortgages very early (15 and 10 years on 25 year loans) in my lifetime - both with overpayment since day 1. My outlook on life and work changes completely when I’m mortgage free. 🎉

[@llamudos9809]

Dito last payment in may. Have 2 properties and paid both off in a similar period. I'm now preparing for early retirement (57 planned). Just waiting to fill both our Premium Bonds and still paying into 5 pensions (2 DB's, 2 DC's and a SIPP) between me and the better half. So well on way to be debt free and able to enjoy life early without anyone having a hold over me

[@mynameisben123]

That’s perfectly legitimate, if you decide the mental health and other benefits of paying off a mortgage outweigh the financial benefits of investing in stocks - but that’s a personal decision only you can make. This video just illustrates the method that makes the most money.

[@BlueRose-k5d]

im 75k away help! its been so hard! ive been on this intense journey for 3-4 years now! i feel ive had no life!

[@llamudos9809]

​@@mynameisben123 I have seen people take your approach and do well. I have seen people put their mortgage over payments into Stocks and shares and fail miserably so i see it as a gamble and risk where as simply paying your mortgage first is a sure thing.

[@jasonburden7999]

@@BlueRose-k5d sorry to hear that you're in this position. I too am considering buying my first place, but to afford it by myself would mean cutting back a lot and potentially feeling like I can't go anywhere or do anything, except just stay at home and pay for a house for 25+ years. Are you trying to overpay your mortgage or just keep up with payments? It sucks feeling like you have to miss out on life just to have a roof over your head and yet this is all we hear from previous generations. Can you stretch the length of your term to reduce monthly repayments? Are you able to earn more money in your current job or a new one? Is downsizing an option so that you have a smaller mortgage?

[@TheWelshBloke319]

What a well rounded video. I hope people didn’t stop watching half way through.

[@markcarter9476]

My first mortgage was taken out in 1987 and was an endowment type. These relied on an investment vehicle to pay off the mortgage when it matured in 25 years time at the end of the mortgage period. Many of us remember the scandal of endowment miss selling when the FCA had to step in and sanction the industry. My endowment tanked and paid out about half the required amount when it matured, thank you Canada Life. Luckily I have already paid off the mortgage some 18 years earlier and was not relying on the endowment. So fantastic concept but relies on managing the investments effectively.

[@njipods]

the problem with endowments is that the interest rates dropped. people got less return on investment but also paid a lot less for there mortgage. had they paid the savings they made into more investment or the mortgage they would have been ok

[@meibing4912]

Yes, we will give you millions now and you never have to repay us. Wonder how anyone could think that might ever go wrong?

[@lobbierox]

I don't often comment on KZbin but this is absolutely top class - excellent analysis, clearly presented.

[@JamesShack]

I’m glad you enjoyed it!

[@ankuryadav4322]

This video and the comments thread it led to is by far the best educational piece of KZbin content I've seen in a long time. Thanks a lot!

[@JamesShack]

Thank you so much! Really appreciate it!

[@thomascowan6933]

I'm 27, I'm a newly qualified Financial Planner, I personally put much more into overpaying my mortgage than I do into investing. I know that I would very likely be better off allocating more to investments given historical return models, but I also know I'm naturally conservative as a person. For me, the peace of mind of being 40-45 with my mortgage paid off, vs having a much healthier private pension but my mortgage still hanging over me, is a no brainer. I still invest in my retirement plan and for me it's the right balance. It's always helpful to look at these kind of models though, great video James!

[@dw300]

This results is less liquidity and less diversification. Is that not a worry for you?

[@m_r__r_o_b_o_t]

Well, not sure if this will make any difference to you, but I am 45, and I _really_ regret paying my mortgage off early! I’d be way better off now if I’d invested, and because the money is illiquid and tied up in my property I don’t even feel more financially secure.

[@JamesShack]

Thanks for the comment, and congratulations on qualifying! In your situation, where you're a long way off pension access age, then this specific strategy would not work. I follow a different more flexible version of the strategy in the video. I have an IO mortgage and invest all of the cash flow I save compared with a repayment mortgage. Instead of investing in a pension, I invest into ISAs and GIAs for greater flexibility. As you can see in the video, your chances of success are lower with an ISA or a GIA, but, as I get closer to pension access age I can use them to make much larger pension contributions. This gives me more flexibility and could be just as tax-efficient/effective if I do make those pension contributions in the future. It also helps protect against changing pension rules. Edit: To add some context as to why this is suitable for me but may not be for others: I am someone who is very comfortable with risk, has a long investment horizon, and has adequate insurance in place. I also save into a pension for the employer match from my company and to get below certain tax thresholds as required. I have a fairly low-interest rate (2.4%), and I may take a different view if my interest rate goes up to 5 or 6%. That would not be an entirely data-driven decision, but one that just feels right at the time when considering my wider financial position - and emotional state!

[@leemarsden1846]

If you lose your job you can’t use the pension to keep up the mortgage payments and you may be repossessed if you have made overpayments you can fall back on them

[@thomascowan6933]

@@m_r__r_o_b_o_t I still invest, I just currently invest more in paying off my mortgage (I review this yearly and would change it if interest rates changed significantly. If you’re 45, you’re likely looking back regretting not investing in the stock market more in between the ages of 30-45, when market returns were excellent and interest rates were very low. And that’s reasonable, and maybe you should have invested more. But there’s no guarantee I will experience those same economic conditions in the next 15 years of my life. Based on my person tolerance for risk, and historical data from the last 100 years, not just the last 15, I believe my current strategy is right for me.

[@samantha392]

I paid off my mortgage 13 years early. I couldn't afford overpayments so I sold up and downsized from a 3 bed semi to 3 bed mid terrace in a cheaper area which is now a property hotspot and my house is now worth the same as the 3 bed semi. I managed to clear my credit card debt and now have savings. I left the job I hated which was even better, it was beginning to feel like a life sentence which is what a mortgage feels like when you are buying alone and have children.

[@wlegna18]

Best video I've seen on the subject! Thank you! It would be interesting to see the numbers for 50% paying off mortgage, 50% investing in stocks.

[@Andrew-o9k6h]

It could definitely be insightful to see a breakdown of the numbers comparing the impact of putting 50% towards paying off a mortgage versus investing 50% in stocks. I recommend looking into a portfolio manager. A lot of folks downplay the role of advlsors until being burnt by their own emotions. I remember couple summers back, after my lengthy divorce, I needed a good boost to help my business stay afloat, hence I researched for licensed advisors and came across someone of utmost qualifications. She's helped grow my reserve not with standing inflation, from $275k to $850k. Rebecca Lynnne Buie is her name. She is regarded as a genius in her area and works for Empower Financial Services. By looking her up online, you can quickly verify her level of experience. She is well knowledgeable about financial markets.

[@chrismunt8443]

Amazing content. No.1 financial KZbin channel! Would be nice to see some content for newer investors on the UK medium salary.

[@ChrisRobinsonish]

What a brilliant video. So well put together and thought out - every time I thought of a 'what if' at the start of the video, you ended up covering it off later in the video. Very comprehensive and great information, thanks - you've gained a new subscriber!

[@AshJun17]

Great content. I love the data and analysis. So much more granular and powerful than 99% of financial content out there.

[@AnthonyBuonanno]

James you are brilliant - thorough, super clear, realistic and engaging. Thanks for another great video.

[@bensolomons4299]

Your clarity around the risks and appropriateness of everything you say makes this video fantastic!

[@terryjlee1531]

Great video. There are some people in the comments saying they will pay of their mortgage and others calling that out as not being right. However I will also be paying off my mortgage as a priority. At the end of the day it comes down to personal preference and no amount of internet advice that is generalised should impact that. The first step is to educate yourself, make sure you know what decisions you need to make and when. Then do some self reflection and understand your personal circumstances but also what type of person you are. Then know and accept that if you choose to pay off your mortgage, most likely you’re not making the most financially sound decision but if it’s right for you for other reasons and you’re doing it with both eyes open. Then overall you need to step back and give yourself a massive pat on the back, because at the end of the day you have created a situation in your life where you can choose to make these choices, as opposed to most who don’t have the spare cash to do such things. To be clear, I focus on my mortgage after maxing out my investment ISA but again that’s not for everyone.

[@Episkopi2008]

One of the best videos on KZbin! Proper financial education.

[@jamesdaw131]

These are the videos I come for! As someone with my own model for back testing - I love these.

[@The_BenD]

Great video all around! As a Canadian, it's refreshing to see some content that discusses this from a non-American viewpoint. While our pensions, mortgages, etc don't work quite the same way as the UK, there's a good amount of overlap that in many ways makes us more similar than to the US. I'll have to do some math to see just how much the outcome changes when taking into account some Canadian specific items (RRSPs, TFSAs, Smith maneuver, etc.) but this is a phenomenal starting point.

[@RobinLee-h1u]

Very good analysis indeed! I particularly like your comment in the last part about zooming-out to really look at the total risks the investor is willing to expose himself/herself to, namely job security, health condition, personal stress during the periods of market fall, especially when they are prolonged periods of time.

[@XayedAli]

This is one of the best videos I've ever watched on financial planning

[@Zermatt1]

Brilliant, truly, this is one of your best and most insightful and emotional video. You cover it. Keep it up!

[@guypeach1050]

I've been grapling with a similar question myself. This is one of the most useful answers I could have asked for!

[@belle9360]

The hypothetical analysis you did with your client in the last part is a key differentiator in your content and is the value add that financial advisers don’t often demonstrate. The numbers say one thing, but if someone hasn’t considered their human responses to a crisis, the data can obfuscate the real risk. Great video.

[@charlieglenister6672]

Love the content James! Its implicitly touched on throughout your videos but would love to see a video on the optimal path to building wealth for people currently in their 20's / 30's, particularly with a focus on retiring early amd not necessarily waiting for your pension to kick in

[@davefoster5911]

So thorough it made my eyes water. I think every sentence had value. The graph showing how good stock market returns have been over recent years, relative to historical returns, really made me think (surely not sustainable). Also the section on how the ‘99-2010 period would REALLY make you feel if you were 100% in stocks. I have a big lump in an offset account (which, at 7% variable I consider a good proxy for bonds) and a few investment properties, but this video still made me want to de-risk my stock portfolio. Thanks for posting, great video.

[@alangordon3283]

Paid my mortgage off last year 12 years early . I’m secure in knowing I’ve always got a roof over my head . What I paid in mortgage payments now goes into my pension.

[@davidjewood]

Very wise. Good move

[@tancreddehauteville764]

But you've left it late for the pension.

[@tancreddehauteville764]

@@davidjewood It depends. I assume you are one of those who has a defined benefit pension, but if you don't then this isn't a good move.

[@paulmussett94]

Very similar to you, paid off my 25 year term after 14 years. Invested in both over payments to mortgage heavily and some nominal SIPP payments. I now direct all spare cash into a global mix of equities, hedged global bond, japan and UK stocks.

[@jellyd4889]

I knew an Alan Gordon.... Essex.. probably lots of Alan Gordons

[@Flynbourne]

Mate. This is honestly the best analysis I have ever seen. It takes into account all the technical stuff. But also considers timing considerations and almost mostly importantly the psychological implications of different options. I absolutely love this.

[@JamesShack]

Thanks for the feedback!

[@anthonyuzum]

Excellent video again James. I personally use a repayment mortgage but I save extra in my pension & LISA to have the option to pay off the mortgage early in the future. The best bit for me was understanding the risk in other parts of one’s life. I have chosen to be aggressive with my career & investing (100% stocks & lev BTL). Perhaps I need to consider a slightly more conservative approach in one of them. Thanks again, these videos make a huge difference to our collective decision making process.

[@fennugreek-gs5zb]

Very interesting to watch from a US point of view, mostly because in my head I needed to keep translating the UK investment and retirement terms to American equivalents. Also, the mortgage options can differ, especially with the ability to fix rates for longer terms in the US. In the end, an excellent analysis and I completely agree with the conclusion that it is important to consider not only your risk tolerance but also how you will behave. I like to imagine that I have a high risk tolerance, but when I had some spare cash I would find myself paying down my 'sure thing' mortgage rather than adding to my investment pile.

[@ricksanchez1393]

The best investment is the one that gives you the best sleep. I paid of my mortgage years ago ZERO regrets.

[@chrislyons6181]

Brilliant analysis, the emotional journey part at the end and overall package of risk a person has is GOLD. It's easy to look at the historical outcomes and think a particular strategy is a no brainer.....but living through it and not knowing is very different. Very thought provoking.

[@barneyboy2008]

Yes, you are all amazing paying your mortgages off early. I did the same, but then divorce came along. At 46 i lossed half my stuff and had to start again. Its hard to recover at that age.

[@NJWiddowson]

Phenomenal video - some of the calculations I’ve tried to make just by eyeballing it. Great to see it studied and presented this well!

[@Appollochan]

I'm 34 just about to buy a relatively cheap flat with 25% down. I'm gonna be paying off that mortgage as quick as I can (hopefully 5-6 years). I really can't hack risk, I'd rather feel safer with less money.

[@ShutterSpeedGaming]

This is the way 😎 God bless you.

[@jobane2]

Great video, three comments: - in the USA mortgage interest on the main home is tax deductible, reducing the net mortgage rate paid - capital gains on investments are taxed, reducing the net rate gained So the net spread is lower from both sides between invest vs pay down the mortgage. Finally, this begs for a Monte Carlo simulation on the investment side and different asset allocations between cash / bonds / stocks 🙏

[@markjwgraham7842]

@JamesShack - excellent video sir. I can only imagine the amount of work it took to sift through this data, collate it into charts and meaningful decision-grade data, let alone editing it into a video. Being aware of all these options and how they could be configured for a desired outcome really shows the value you must add to your clients as an FA.

[@JamesShack]

Thank you for thinking about the effort! Yes, this was a monumental task; I think it took me about 60 hours in total with some very late nights. I need to get a video editor!

[@MrDuncl]

@@JamesShack It is interesting to see how trends change. Back in the 1980s all the lenders were pushing endowment mortgages, which weren't dissimilar to the stock market idea except the funds were "with profits". while the idea of changing / fixing your mortgage every couple of years was unheard of.

[@TechnoCaveman1]

Brillent video, has to be in the top 5 investment videos I have seen. It gives great insight in how to interpret data. Thanks for sharing. Just goes to highlighting how timing and risk ratio can influence outcome.

[@goncalomenboss]

THEEEE best personal's finance video on the face of youtube, hands down. This is pure nuggets of gold🙏💲

[@regiondeltas]

Great and fascinating analysis. Im definitely happy to keep on paying my mortgage with the security and equity that gives md

[@j10001]

Maybe it’s only an American thing, but two typical features of mortgages here are (1) fixed rates for 30 years and (2) ability to refinance at a lower rate if rates fall (and in fact to extend the mortgage at that time for another 30 years!). This creates a phenomenal real option, meaning if you begin a mortgage in a high-rate environment, you can step down to a lower rate when rates fall. It also means if you begin in a low-rate environment (as did many current homeowners), you enjoy a low fixed rate even when interest rates and returns increase. (Also, I believe underwriting is usually based on current income without regard to approaching retirement, but I could be wrong on that.) I suspect both of these facts would meaningfully change the excellent analysis you have done here. Thank you for some great insights!

[@nataliawalker4184]

Damn why UK mortgages don’t work like that! Fixed interest rate for 30 yrs and that if you did it at the low rates that would be amazing

[@raeveth]

Yeh it doesn't work like that here unfortunately. If it did, everyone would have fixed when rates were next to nothing before covid. You can only fix for a few years, certainly not more than ten and ten works be a lot pricier than a two yr fix

[@brucewilliams6292]

You have given some great insight into investing and more importantly human emotions. Getting wiped out in the markets can really leave one shaken.

[@keithclunk3125]

Not so relevant for me as I've already paid off my mortgage and have no debt, but that doesn't detract in anyway from this video. Very good indeed and it's clear a lot of background work took place to create this. Good job, man!

[@mattlongman]

Excellent video James. Mortgage paid off and now contribute 40% of wages directly into Salary Sacrifice pension. This evidence is very relatable to my low risk appetite.

[@mattsennett]

Overpaying my mortgage for many years so as to clear it sooner was the route I went down alongside investing. Yes I could have done better by not doing that but I wanted the guarantee of being mortgage free. This then lead me to increase my pension contributions via salary sacrifice rather than pay more to service debt due to mortgage rates increasing. Knowing our home is all ours is a good feeling where as my pension doesn't feel like mine yet as I can't access it.

[@AshJun17]

Sound strategy and the one I employed. I can also invest aggressively now with the additional cash. The lack of liquidity point some are raising just doesn't apply to the majority of people that are fortunate enough to pay off their mortgage early as they usually earn more and have great emergency funds. Also stock markets don't go up in a linear fashion so not sure how liquid it truly is as who would want to pull it out after a 10%+ drop?

[@tonybarrett8543]

I was just talking to a friend about this and as he pinted out he's a recovering alcoholic and will sacrifice exponential growth for certain securities, but will sacrifice certain securities for exponential growth after the first securities are realised. Good vid as it addresses different types of people.

[@alexmitchell3359]

Love the design of your kitchen!!

[@streamhits2347]

James, this was a masterclass in this concept. well explained, thoroughly researched and brilliantly presented. It has really helped me get clarity on my dilemma as the profile you mentioned is similar to mine. Going to overpay first.

[@danteburritar2822]

What a great video, many of us will need to watch it more than once as there is so much unique information in there. Personally I’d like to see a similar video using historical datasets to compare the continued investment of a pension TFC lump sum (withdrawing it gradually to pay the mortgage each year) versus using that TFC to pay off a repayment mortgage. By keeping it invested you pay mortgage interest but gain investment performance. I imagine the results owuld be similar, i.e. not as much benefit keeping it invested as we would perhaps imagine.

[@gwilymthomas3699]

This was a very informative video and it’s given me a few things to think about. I very much appreciate the real-world recognition at the end. It’s easy to look at long time-period, uptrend graphs and lament that you weren’t fully invested. However, how easy it also is to forget the feelings that come over you when a market is falling and the media’s losing it :).

[@matt_-_-_]

I'm in my twenties, lucky enough to have a mortgage and I look at all the data but my emotions are getting the better of me. I agree with lots of other commenters that I like the sound of the security of owning my home outright. Although the maths checks out in a lot of historical scenarios, I'd rather continue to pay the mortgage and make some contributions to my SIPP (not an employee). I bought the house with the current high mortgage rates but look at some who have been hit very hard after getting used to the low rates. The ISA model doesn't seem to have enough of a reward - and the pension would be too risky if mortgage rates spiked and I'd be unable to access the cash before I'm 58. Not to mention the additional equity may help if we decide to upsize in the future (no plans for kids but I might want a big garden). All in all, a great video James. Very thought provoking!

[@apb3251]

Owning your home outright gives you financial security against any risk (apart from repairs, bills and council tax) if you are risk adverse this is the best strategy as once the mortgage is paid off and remember the more you pay the lower the monthly amount as you get older, you can then invest aggressively as you get older but with the secure house paid off

[@Solihul886]

​​@@apb3251for the majority of situations that leave those people vulnerable to being pension reliant, which never keeps up with inflation, why survive when you can thrive. For the most effectiveness, diversification in investments for 1-2 decades and then pay off debt would be more optimal.

[@luitzenhietkamp]

What gives security is having cash on hand. If something unexpected happens and you've sunken all your money in overpaying the mortgage you have very limited options. This is why I have a six months of outgoings in emergency fund and put more than half of my net pay in an index tracker. I think the whole analysis also only really applies if your mortgage payment is still quite considerable to you. The mortgage costs less than 20% of our take home pay so I don't really think or worry about it. The money that doesn't go to my mortgage should be invested optimally. Overpaying on 2% is not that.

[@apb3251]

@@luitzenhietkamp you can get mortgages that allow 10% overpayment each year with no penalty. Each overpayment (monthly or annually) reduces the capital repayment meaning your likely have more cash in hand each month. Don’t forget that on e.g. £500k mortgage borrowed your actual repayment will be £700k over the term due to interest (£200k on interest payments). So any investment you make has to cover the difference in paying interest on the mortgage otherwise you are worse off not replaying the mortgage. In the example James gives the person can reduce their monthly repayment by £200-300 per month by just one year 10% over payment giving them £2k -£3.6k per year to invest extra on top of their other free cash. If the stock market crashes you have significant less value for years ahead, if the house market prices you have a home that maybe worth less but you still have a place to live. It is also an asset (like stocks) that increase with time and can be sold. Also don’t forget that unless the stocks are in an ISA or Pension (which limits you to £80k a year investment tax free) you pay Capital Gains Tax on them even after retirement and if the return exceeds the annual permitted £12500 per year you pay income tax as well.

[@kewlrunnings1]

Great analysis always wondered about this dynamic, prepay mortgage vs investing long-term, your in depth analysis elevates the sequence of returns risk to the next level. Thank you!

[@badlittleking]

I appreciate the time and attention to detail you put into this. Thank you!

[@LiquidFlower]

Soo good. Whenever I try to run my own scenarios I get so overwhelmed with the variable scenarios @-@ this is quite a nice summary to cut through all the bank and gov strategies they don’t tell us about.

[@sunkissed6220]

From the US, I paid off my home right before Covid. Truly the BEST decision I ever made. The feeling is absolutely incredible 😊

[@bramdeclercq7885]

It sure feels great, but in Europe, we had big inflation. Having a loan during high inflation is great, even though it doesn't feel great.

[@vivianwoodell1759]

Very interesting video. A question for you: for someone like Tom, is there a scenario where you invest in a portfolio of 100% government or high quality corporate bonds of different maturities, perhaps timing it so they all mature at the point you repay the mortgage, and where you always come out ahead based on historical data? So you could feel less stressed about risk? I can imagine this might only work because of pension tax reliefs (which can change) and of course it uses up the tax free cash in a pension you'd otherwise have had for other things. Interestingly, when I took out my first mortgage at the age of 26, I was sold a "pension mortgage" where the tax-free lump sum (then a higher percentage for self-employed people) was expected to pay off the balance. The pension was unit-linked and all in equities. Selling that kind of arrangement was banned a few years later along with endowment mortgages.

[@deyoswed]

What brilliant take on a dilemma I think many of us are faced with, thank you for your time and effort❤ I know a longer term mortgage would give the portfolio more time to compound, but i still would have loved to see the chart with a 25 or 30 year term mortgage😊

[@daverichardson6490]

We took the decision to pay ours off 14 years early with a lump sum and then aggressively over paying. It clears in April and we couldn't be happier. The certainty of no mortgage is there and we now have 'spare' capital to invest/spend as we see fit. I get the maths and the predictions, but to get rid of a mortgage early is a tremendous feeling!!!

[@JamesShack]

Congratulations! Everyone must find their own approach, and for most people, paying off their mortgage is the right option. It's interesting to see the data, though!

[@Ugi5]

so you're paying off 2-6% mortgage aggressively instead of investing and generating 10% returns? it sounds like you're not fully taking advantage of opportunity cost.

[@webbo73]

a bird in the hand....

[@jakespeed6515]

I’m not sure what that feeling is like, I bought my house with a small loan and, and cleared that in 8 months, will you be investing in stocks and shares isa or buying another house and letting your as a HMO?

[@daverichardson6490]

You are welcome to your opinion@@Ugi5

[@michaelhogg6923]

Super video. While I'm in a different country (Canada ) and certain concepts are totally foreign ( frankly bizarre like salary sacrifice) the methodology of your argument is refreshing. Sequence of returns have such a significant role in investor actions and attitudes and are often ignored or understated. Thanks for raising the barwith this quality video.

[@jonaxworthy]

tried the pension as a mortgage vehicle 4 years ago - bank would not accept it (i would have access to pension by the end of the mortgage). Great content and shows how using average returns, average rates etc over long periods don't work when planning. Presumably this is exactly the same when drawing down defined contribution pension lumps (i.e. the lumps aren't to pay off a mortgage but to give an income

[@ThanosNikolopoulos]

This is pure GOLD! Thank you for this detailed analysis!

[@Lord_Drregron]

James - thank you for this video. I already understood many of the principles but you’ve brought it together with such clarity and using solid data and graphs. Clearly explaining the methods you’ve used to produce them so if anyone has an issue then they can recreate or alter the method - it’s truly great and you don’t see this often (KZbin is often filled with unbanked ‘facts’. You’ve also articulated that this is so much more than just stats as it’s about personal emotional state as you go through life. Will be revisiting some of my own planning in light of your video - it may not change but some great food for thought. Thank you for making and sharing such a well rounded video 👍

[@rankinr]

I have watched this video a few times now. There is so much useful information in it. I am not able to completely take it all in. Everytime I watch it, I learn something new and think darn, if only I had access to this knowledge 20 years ago. I would be a millionaire by now, retired, mortgage free and cycling through the European countryside. I still have some time to pull it back though. So I am switching my mortgage to interest only and paying the difference into my pension. The only problem will be taking the money out of the pension when the time comes and minimising Tax.

[@Lillith.]

My first year of investing my investments were down 8%. I didn't know my reaction to downturns, so I chose a 50/50 approach with my investments. It took a lot to not quit and pull everything out and wondered why people invested in the first place. After that first year I went to a 100% stocks portfolio. I had learnt I could weather the storm. My portfolio is now up 30%. I didn't know my first year would be that bad, I wouldn't have started investing if I did, but once I started and the downturn happened I decided to turn it into a test for myself. It was only my first year, it's not a lot on the line, but it's all my money that disappears. It's not a guarantee for the future and maybe I will pull all my money out in the future despite knowing the numbers. I also know I can do the difficult thing because I've done so before.

[@climbscience4813]

This is fantastic! I have asked myself this very question quite a bit and discussed this with my wife too. We came to a very similar conclusion, since we don't have nerves of steel when it comes to these things and life is too stressful to be able to afford this on top. Great analysis and reasoning. Well done! 👍

[@simonupstone4924]

Great explanation James, very interesting. Years ago I was persuaded by James McIntosh and his short view videos on the FT that the 60:40 portfolio could deliver all the returns you need and help you sleep better. I haven't lost that faith despite the losses of 2022.

[@JamesShack]

Thanks for the comment. Yes, 2022 was an exceptional year for bonds and the 60/40 portfolio. The exception that proves the rule ( I hope).

[@barbarar5869]

Great video. I am all about diversification. I will overpay my mortgage and I plan to pay it off a few years early, but I don't want to only focus on that. For me the most important thing is being able to be flexible so that if something happens down the road, not all of my money is tied up in my pension or my house.

[@adm58]

Excellent video, excellent channel. I just discovered it. Thanks for your work James and for sharing your knowledge with us all.

[@PaulTebbs]

The word "diligent" is coming to mind! Awesome content, thank you for educating us all!

[@TheodoreMateo3h]

Its worse here, our economy is like a flailing fish, fighting for its life. The normal state of the U.S. economy is actually very bad. Because of this it goes into convulsive spasms fighting to grow any way it can out of desperation. Tricks, gimmicks, rule changes try to stimulate the economy and prevent it from falling but they only bring temporary relief to people since, when you factor in inflation we are declining.

[@CharlotteNoah3]

People believe their currency has the worth it does because they have no other option. Even in a hyperinflationary environment, individuals must continue to use their hyperinflationary currency since they likely have minimal access to other currencies or gold/silver coins.

[@DeborahMicheal6k]

Inflation is gradually going to become part of us and due to that fact any money you keep in cash or in a low-interest account declines in value each year. Investing is the only way to make your money grow and unless you have an exceptionally high income, investing is the only way most people will ever have enough money to retire.

[@CharlesLiamh1p]

I've tried investing in the stock market several times but always got discouraged by fluctuations of stock value. I would be happy if you could advise me based on how you went about yours, as I am ready to go the passive income path.!!

[@DeborahMicheal6k]

My CFA NICOLE ANASTASIA PLUMLEE a renowned figure in her line of work. I recommend researching her credentials further.

[@CharlesLiamh1p]

I just looked her up on the web and I would say she really has an impressive background in investing. I will write her an email shortly.

[@mooremoneymakin]

Such a good video really going into what volatility really looks like in a 100% stock portfolio. Given me lots to think about in terms of my own strategy!

[@mauriziocassano]

This is an amazing piece of content! Wonderful, thank you!

[@KharmaComa123]

Great video James. I would also add another consideration that the real value of a mortgage also decreased over time with inflation. This is one of the reasons why property investing with debt over the long term can be lucrative as the value of the debt is eroded + property value increases = free asset eventually. This is offcourse all dependent on an individual's risk tolerance, their finnacial position and financial market risks (interest rates, market disrutions etc.).

[@alexporter7003]

Great idea and analysis. Thats some above and beyond financial advice!

[@Elk454]

Great video. My first two mortgages were repayment ones. Then I learned about investing tax efficiently and took out an interest only mortgage in 2006, it's worked out well for me as since then interest rates were very low in the main and market returns good (400%) but I do understand why most people would prefer to pay off their mortgage early as it's seen as a something that prevents them feeling they own their home. For me a mortgage is a low cost way of borrowing money to invest in a pension.

[@boyasaka]

I paid of my first mortage in 5 years by age of 28 8 years or so later I moved house and took out a 30k mortage which I paid off in 5 years Few years later moved in with my long term gf She sold her house , I sold mine and bought a house together , got another 30k mortage and paid that off in 3 years My reason No matter what happens to the market What happens to your health Or what happens to your job If you have no mortgage your in a much safer place and will always have a roof over your head

[@deldia]

Agree. I'm not in a bad situation but I have 20 years of mortgage now. Should be ok but I'd prefer to be in your situation. I have paid off £2k today though so maybe we can bring it in a few years early.

[@davem.4003]

That is terrific, well done! However the low mortgage value and speed of repayment does suggest an unusually low mortgage to income ratio and an average person, having a more typical mortgage to income ratio of around 4x is unlikely to achieve the same results. It was, of course, much easier to achieve during the (relatively) recent times of ultra-low interest rates.

[@boyasaka]

@@davem.4003 I’ve always been a saver Dave and never a high earner Left school in 1990 at 16 years old Worked on a hardware shop for £75 a week Soon as I passed driving test aged 17 , started delivery pizzas 4 nights a week Made about £60 a week from pizza delivery Gave mother £20 board £40 a week pocket money And banked the £75 a week from main day job 4 years later aged 21 ish had 15 grand in the bank and was earning £120 a week in same day job working in hardware shop Left home and Joined Royal Navy Think pay was about £800 a month ( this would be around 1995 ish Gave myself £200 a month pocket money and saved £600 a month Or tired to Story short Bought first house in 1999 for £52 grand and put £30,000 deposit down paid off £22 k mortage Mortage was £200 a month exactly But was paying £600 £800 £400 extra each month as much as I could , while driving a old car and being really carefully Fast forward many years and I’m now 52 I now take home £2000 a month pay £1000 a month into pension £500 a month for my share of bills and food etc And have £500 a month pocket money for nights out, clothes , etc etc etc

[@boyasaka]

@@deldia over paying your mortgage each month is the best thing you can do Even small amounts can knock years off your term My tip to anyone is If your paying x amount and your interest rate drops , just continue to pay what you were paying when the interest was higher , and it’s lashing money off your outstanding balance owed 👍

[@brettsta72]

This is a phenomenal video. James this is so insightful and balanced. Thanks so much.

[@m_r__r_o_b_o_t]

Great video. People all too often underestimate the emotional aspect of holding stocks long term when thinking about these issues!

[@JamesShack]

They do indeed!

[@MrDuncl]

And people forget the emotional aspect of days like Black Wednesday on people with mortgages, especially when I was telling everyone how clever I had been to take out an 11% fix (a rarity back then).

[@gerardocrolla5894]

In my opinion, this is definitely a sophisticated investor idea. If you have other income from Buy to let etc... then there isn't the issue of losing your job etc... and therefore having the stress of no income at all. The great thing about a property ( bought well) is that the property will rise with inflation so the debt will also fall with inflation in terms of Loan to Value, so interest only would be the best way forward. But as I said if you are a sophisticated investor then interest only on your buy-to-lets for example allows you to reinvest in more property or diversify into equities. This would apply to your Home too!

[@jsr44444]

I paid off my mortgage last year, 10 years early and it wonderful to be mortgage free. My money now goes into my isa and it’s great to watch it grow.

[@ucesarr]

Best video I have seen when it comes to financial advice. Excelent research and exemplary results presentation. (Liked/Shared and Subscribed)

[@OroborusFMA]

Bought my condo in 2011 with a 30 year mortgage at 4.85% interest rate. Paid it off in 2019 because I hate paying interest. This was before I knew about dividend investing and "snow ball" effects. Was probably not the optimal move, in hindsight but not having a mortgage means I pile up savings month by month. Now I'm tempted to buy a retirement home in the Sunbelt but the prices and interest rate are crazy and my dividend investments are just getting rolling.

[@HarithBK]

i know you are limited by the debt of the property he owns but this really shows how he exposes himself with leveraging the property he lives in. split the property into two with the same level of debt but the second is a property to let suddenly market crashes loses much impact since it won't change his base for the worse just the prospective gains or losses. really shows the benefit of making deals on a secure base.

[@Harmaakettu]

It would be interesting to see an analysis where one would first prioritise investing in the global stock market for let's say the first 8 years and then switch to prioritising paying off the mortgage for the remaining 7 years. Since stock returns tend to go up over time, earlier investments yield better returns than later investments, on average.

[@nathanwooldridge85]

First time watcher. Wow I loved all the data! You covered so many scenarios. It crossed my mind that giving Tom needed £200k at a specific date a reasonable scenario would be to transition his portfolio balance the closer he got. Or an alternative scenario would be to take out £200k when he hit the target rather than just waiting for the drop dead date. He could then pay off the mortgage and put his repayments into investments. So many options

[@lrac111]

Nothing compares to being mortgage free for your mindset, your money and risk IMHO. Been mortgage free since 32yrs old and I heavily invested into pensions, isa and with having low overheads I retired at 55yrs old

[@jamesgiedt5682]

Got to pay that mortgage off

[@jamesgiedt5682]

Play mortgage off in time to retire and invest all the while

[@johall3401]

Very relevant for me as this is my current quandary. I have £400k left on my mortgage and just turned 51 and not much invested in pensions. Good for thought but I think I will look to overpay on my mortgage to have the peace of mind later on. Thanks @james!

[@raymccrae]

I remember there was a scandal in the UK about banks misselling endowment mortgages which worked similar to what you're describing here. Unfortunately the funds that the banks were investing peoples money were frankly junk, nothing like a global equity tracker. The banks had to pay compensation, but also people faced big shortfalls at the end of their term.

[@deanthrower6637]

That's fine but purchasing an endowment was with money post tax and NI, since pension freedoms this has opened up a completely different perspective and hence the outcomes seen in James models

[@MrDuncl]

@@deanthrower6637 But there was MIRAS tax relief back then. The big problem was basing inflation and growth forecasts on previous years. When I took out an endowment in 1986, 8% inflation was at the lower end of forecasts.

[@deanthrower6637]

@@MrDuncl Tax relief on a pension yes, but not an endowment, your endowment contribution would be post tax, and if at 40% its a serious injection of cash upfront plus any compounding, even more if salary sacrifice.

[@MrDuncl]

@@deanthrower6637 The difference was that in a high interest environment like the 1990s the endowment payment was a fraction of the interest. I recall paying something like £250 a month interest and £25 into the endowment. No wonder the endowment underperformed.

[@alistairlambert3275]

Too many people I know switched to interest only and got burned as time ticked by. Better to prioritise your mortgage then invest when the slate is clean.

[@AndreGK82]

Really great explanation on how to view surface analysis and understand all the variables. Specially the toll it might take on you going through the down periods, contrary to a safer route with potentially less gains.

[@Mememeeeeeeeee]

Reminds me of the endowment market of the 1990s... that didn't always end well. But using the pension as a vehicle, and spreading repayment over a few years to reduce tax on pension withdrawal, seems sensible.

[@johnristheanswer]

Yes but those who took out endowments in the 70s and early 80s did do well. Swings and roundabouts.

[@spazzman90]

I asked myself this very question 5 years ago when I started taking my mortgage and investing very seriously. Came up with the same conclusions as far as the best answer on paper. But then there was the 'sleep at night' factor. Couldn't really decide, so I went with 50/50. Every extra dollar and windfall was split 50% extra on mortgage, 50% investing. Of course, the investing route has produced much higher returns, but there have been plenty of soft spots in the last five years that would have left me with little sleep. I plan on not changing a thing going forward. The house will finally be paid off in 5 more years.

[@adambritain5774]

I’m not fussed about paying a mortgage off early. I know it may financially cost me but i watched my dad’s wealth get absolutely descimated by inflation as he wanted his mortgage gone ASAP. He hasn’t had a mortgage since 1994 and he’s worth WELL over a million quid less than he could have been if he’d have been more than 99% conservative with his outlook. Being mortgage free must be a lovely feeling, and i know there’s things you can do with the money once you’ve paid it off to keep above inflation, but in my own experience being mortgage free has come at a HUGE financial cost. I’m not interested or intelligent enough to work out what i should do with the paltry sums of money i save so i stick £100 a month in a Vanguard 100% LS (which will be heavily increased in the future but i have a very young family ATM and i’m far from a high earner) and i want a mortgage for as long as possible as it seems to me to be one of the ‘easiest’ ways for a life time of investments to at least match inflation, or beat it.

[@adambritain5774]

Possibly. But that good nights sleep cost him over a million quid and massively reduced his ability to pass on generational wealth to his children. He’s a typical boomer really; fairly self centred.

[@davem.4003]

Hindsight is a wonderful thing. If only...

[@Tie509]

​@jimbojimbo6873 I sleep well knowing how much inflation is eating away at the value of a fixed rate mortgage while I make compounded double digit returns. Math over feelings.

[@canducky01]

Thank you for this video! I work in Finance and think this is a superb explanation of mortgages, pensions, and investing, in layman's terms and using data skillfully. By coincidence, I am in almost the exact same scenario as "Tom" so found this very useful. Thanks again

[@JamesShack]

Glad it was helpful!

[@daf3147]

An interesting video James. I got my first mortgage in 1985 with interest rates at 15%, it was an endowment mortgage so I suppose something similar to this. When we moved after 5 years and looked at the interest that could be saved by paying the mortgage off in 10 years it was an easy decision to make. Following completion the focus was on pension contributions and this has paid off. The reduction of debt was my main focus and I would always recommend that path, the recent increase in interest rates will no doubt make others feel the same as the mortgage deals need renewing in the near future. I think the current interest rates are reverting to historical norms and the low interest rate environment of the last ten years plus and loose monetary policy that has seen huge market returns is unlikely to return.

[@tancreddehauteville764]

I suspect that you must have had a small mortgage. For many people paying off the mortgage in 10 years is simply impossible.

[@leoania]

@8:54 The reason the returns are so good at the end of this chart is the interest element of the mortgage was so low in the 2010s so much more money per month was free up for investing based on James’ model - and during a period of decent stock returns…

[@jameswong391]

I think some mistakes around 20:40 - assume you mean "2002" on sound and not "2020" on the graph

[@JamesShack]

Ah yes! 2002 is what I meant.

[@michaelmoreno6431]

Tom is a super hero. He never falls sick, never has an accident, is always employed, can always save the same money while not being forced to as with a mortgage. Tom also can always remortgage despite his age increasing and his life insurance is not increasing either. Tom also amazingly is not paying trading fees which put a massive dent to the returns and is on average picking the right stocks and markets. Tom is happy to pay a rent when he is old. Tom is that super hero who can also explains to his wife he is right. He is really a super hero! And that is why there is not a single Tom out there and even fewer WOMEN who would follow that strategy!

[@__Wanderer]

Interesting analysis! I would also factor in inflation (unless this is already done). A 100k mortgage on a house may only be worth 60k in "real terms" (100*0.97^15) . Time itself and printing of money is favorable + an added bonus every year.

[@MrDuncl]

The house I am in cost £12500 new back in 1974 ! It was a lot more than that when I bought it though.

[@ryand3201]

Exactly. Teach this in schools .

[@jeremiahreilly9739]

Fascinating. Your analysis shows why the "right" answer depends so much on context and temperament. As an 100% aggressive growth stock investor, it has worked well for me. VERY well. But then again, I never look at my portfolio. I never rebalance. I never withdraw. And I have enough cash on hand to weather a 5-10 year downturn. As I approach 70, I am beginning to think, maybe I'll put 5% into bonds. Chacon à son goût.