I recently received an email from a lady asking if there is still a point in paying down her mortgage when house prices don’t seem to be increasing.
It’s a very good question. However, she’s confusing the mortgage with the value of her house. They really aren’t connected. The mortgage is the DEBT owed – the value (up or down) is what it can be sold for. The difference is what comes out in cash equity when it’s sold. In a perfect world, the mortgage is tiny – the value is high. So what’s cashed out on sale is huge equity. Or if the mortgage balance is still high and the value hasn’t gone up much – the difference between the two is a much smaller amount of equity.
The value is what you can sell the house for. The mortgage balance determines the cheque you’ll actually get if you sell.
The difference between owing and value is your equity. If you pay down the mortgage – the equity increases. That takes work and money. If you just pay the regular mortgage, equity builds slower. On the “value” side of the house – that is a second increase, but one you can’t control much, as it’s the market and what a buyer is prepared to pay.
All of us, hopefully, will pay off the mortgage. It’s just a question of whether it’s double or triple the original amount when interest is added for 25 years, or whether it’s much quicker and thus, much less interest, by paying weekly payments (that takes about seven years off) or adding a lump sum whenever you can.
She’s right in that it’s the last debt that should be paid as it’s the lowest interest rate. It shouldn’t even happen before paying off a car or credit card. But for someone that’s debt free, except the house, it then becomes a choice. Invest extra money, or pay off the house – or both.
For over six years now we’ve heard that there’s an imminent massive housing price correction. I guess all these ‘predictors’ will eventually be right if you just keep saying it every year. In 2014, prices increased an average of 6% while the Bank of Canada predicted a 30% correction. In 2010, the Economist warned of a 25% reduction but prices increased 6.8%.
Predicting the housing market is a game you’re bound to lose, just like trying to time the stock market. Pay down your mortgage and invest a little money each and every month. If you’re not retiring today, or not selling your house this week – watch all those investment shows for entertainment value, and not specific advice to your financial situation.