Maybe You Shouldn't Pay Off Your Mortgage

| About: SPDR S&P (SPY)


With today’s low mortgage interest rates, does it make sense to pay off your mortgage?

I hate debt, but low interest debt is not always a bad thing.

I back-tested to compare how two hypothetical retirees would make out with and without a mortgage and present the results here.

In general I avoid debt. I had one car loan in my life, for my first car, and I borrowed that money from my dad. I pay my credit cards in full every month. I paid off my one and only mortgage in seven years. So writing this article goes against my grain. However, if you believe that today's low interest rates and inflation rates will revert to the mean, then having a mortgage may work in your favor.

In this article we compare two hypothetical retirees. Retiree one has the following Assets and liabilities:

Investments excluding his home: 950,000

Home: 300,000

Mortgage: -250,000

Net worth 1,000,000

Retiree one has a fixed rate 15-year mortgage with an interest rate of 3.3%.

Retiree two's Assets and Liabilities:

Investments excluding his home: 700,000

Home: 300,000

Net worth 1,000,000

In the first test, each retiree is 100% invested in the S&P 500. For each retiree, we run a scenario where the retiree retires in each year between 1928 thru 1999 and we evaluate their retirements 15 years later. Each retiree's investment earns the return of the S&P 500 based on the historical total return for each year of retirement. For instance, if the retirement start year is 1965, the total return of the S&P 500 in 1965 is used as our retirees' return for the first year of retirement and the total return of the S&P 500 in 1966 is used as the rate of return for the retiree in year two etc. Each retiree withdraws $28,000 in their first year and the withdrawal rate is adjusted each year for inflation. Inflation adjustments are also done using historical data. The withdrawal is done on January 1st. Our first retiree withdraws an additional amount each month to cover his mortgage payment.

At the end of each 15-year period each retiree owns their home without a mortgage and we determine which retiree has a higher net worth. The results of running these scenarios were that retiree one (with mortgage) had a higher net worth after 15 years for 66 of the 72 (92%) time periods. With the retiree two coming out ahead for retirements started at 1928, 1929, 1930, 1931, 1937 and 1999.

Retiree one had two disadvantages in retirements started just before or early in the great depression. Having more money invested he lost more during the market downturn. In addition during the 1930's the value of the dollar went up (deflation) so our investor was paying his mortgage back with dollars that were worth more than when he initiated the loan.

S&P 500 total return 1929 - 1932

Inflation rates 1930 - 1933

During 1937 and 1999, retiree one again had more money invested during a year with a large market downturn. Note: the impact of a market downturn or high inflation early in a retirement is much greater than the impact later.

For our second test we changed our retirees' investments to be 100% in 10-year Treasuries and reran the scenarios. In this case, the retiree with the mortgage had the higher ending net worth for 42 of the 72 (58%) time periods. The retiree with the mortgage came out with more net worth for each of the 34 retirement-time-periods from 1966 on. The retiree without the mortgage came out ahead for every retirement started between 1935-1965. The compound annual return earned by our retirees on the 10-year treasury investment between 1935-1977 was 3.01%. Retiree one is borrowing at 3.3% and getting a return of 3.01% so he falls behind for this entire period. From 1977-2013, the CAGR of the 10-year treasury portfolio is 7.35%, so for retirements encompassing enough years in this range, the retiree with the mortgage comes out ahead.

All of our back tests up till now were run without taking into account expenses. I reran the tests assuming expenses of 0.35%. For the all-stock portfolio, retiree one ends up with higher net worth 65 out of 72 times. The retirement scenario that changes from favoring retiree one to favoring retiree two is a retirement starting in 1969.

For the all treasury portfolios, retiree one and retiree two now split with each having the higher net worth in 36 out of 72 cases. The time spans that favor retiree two now include retirements starting at 1928, 1930, 1931, 1933, 1966 and 1967. When retiree one ended with the highest net worth, his advantage averaged: $174,829. When retiree two ended with the highest net worth, his advantage averaged: $27,449.

I did not back test portfolios that contained both stocks and treasuries. I believe, with a high degree of confidence, that any portfolio that was weighted to stocks 50% or more would heavily favor retiree one.


  1. In general I'm in favor of staying out of debt.
  2. However, if the low inflation, low interest rate of today reverts to the norm, having a mortgage at a low rate will likely work to your benefit.
  3. Back-testing has shown that for most time periods investing money borrowed at today's rates will lead to higher net worth than paying off the mortgage.
  4. This applies much less strongly if the investor is maintaining an all treasury portfolio.
  5. Warning: All of this is irrelevant if the money available because you postponed paying off your mortgage is not invested.

I am not a professional advisor or researcher. I am an individual investor who study investing and share my thoughts. I encourage all investors do their own due diligence and please share your findings. I strongly feel the best thing about Seeking Alpha is the sharing of ideas. Please comment; I value your input. Divergent opinions are welcome.

Historical returns of S&P 500 & 10-year treasuries total return data from:

Historical inflation Data from:

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.