How is not paying off mortgage better in normal circumstances?
"The reason is that although the American economy is functioning normally, mortgage rates are stupid-low, and are below a prudent expectation of long-term (30 year) rates of return in the market.   I manage endowments, so I say ""prudent"" in the context of endowment investment, which is the picture of caution and subject to UPMIFA law (the P being prudent).    What's more, there are tax benefits.  Yes, you pay 15% long-term capital gains tax on investment income.  But your mortgage interest is tax deductible at your ""tax bracket"" rate of 25, 28 or 33% - this being the tax you would pay on your next dollar of earned income.  And in the early years of a mortgage, mortgage payments are nearly 100% interest.  So even if it's a wash: you gain $10k in the market but pay $10k in mortgage interest -- you pay $1500 tax on the gains, but the interest deduction redudes tax by $2800. So you are still $1300 ahead.   TLDR: the government pays us to do this." Lets do the math, using your numbers. We start off with $100K, a desire to buy a house and invest, and 30 years to do it.  Scenario #1 We buy a house for $100K mortgage at 5% interest over 30 years. Monthly payment ends up being $536.82/month. We then take the $100K we still have and invest it in stocks, earning an average of 9% annually and paying 15% taxes.  Scenario #2 We buy a house for our $100K cash, and then, every month, we invest the $536.82 we would have paid for the mortgage. Again, investments make 9% annually long term, and we pay 15% taxes.  How would it look in 30 years?  Scenario #1 Results: 30 years later we would have a paid off house and $912,895 in investments Scenario #2 Results: 30 years later we would have a paid off house and $712,745 in investments Conclusion: NOT paying off your mortgage early results in an additional $200,120 in networth after 30 years. That's 28% more. Therefore, not paying off your mortgage is the superior scenario.  Caveats/Notes/Things to consider Play with the numbers yourself: There are several reasons: "In some respects the analysis for this question is similar to comparing a ""safe"" return on a government bond vs. holding the stock market. Typically, the stock market's expected return will be higher -- i.e., there's a positive equity risk premium -- vs. a government bond (assuming it's held to maturity). There's no guarantee that the stock market will outperform, although the probability of outperformance rises (some analysts argue) the longer the holding period for equities beyond, say, 10 years. That's why there's generally a positive equity risk premium, otherwise no one (or relatively few investors) would hold equities." One way of looking at it is that your equity in your house is an investment in a particular class of asset, and investing further in that asset class may drive you away from, rather than towards, your preferred asset mix. It's pretty common here in New Zealand for people's only investments to be their homes and rental properties. I wish those people luck when our current property boom ends. Certainly there are people who do pay off their homes.  Others do not.  It's a question of risk tolerance and preference.  Some considerations relevant to this question: Taxes - Interest on a mortgage is tax deductible.  Particularly for high earners, this is a significant incentive to maintain a mortgage balance and place extra money in the market instead. Liquidity - If you lose your job, you can sell stocks to pay the mortgage.  But if you have made principle payments on your mortgage but still owe some outstanding balance, you are still required to make monthly payments without any source of income. Rates - In recent years it is been common to get a mortgage for 3.2% to 3.5%.  The difference between those rates and 9% rate of return for the market is substantial.   There are other considerations but the answer in the end is that for many people the risk / reward calculus says the ~5% difference in rate of return is worth the potential risks.
The main reason for paying your mortgage off quickly is to reduce risk should a crisis happen.  If you don't have a house payment, you have much higher cash flow every month, and your day-to-day living expenses are much lower, so if an illness or job loss happens, you'll be in a much better position to handle it. You should have a good emergency fund in place before throwing extra money at the mortgage so that you can cover the bigger surprises that come along. There is the argument that paying off your mortgage ties up cash that could be used for other things, but you need to be honest with yourself: would you really invest that money at a high enough rate of return to make up your mortgage interest rate after taxes?  Or would you spend it on other things?  If you do invest it, how certain are you of that rate of return?  Paying off the mortgage saves you your mortgage interest rate guaranteed. Finally, there is the more intangible aspect of what it feels like to be completely debt free with no payments whatsoever.  That feeling can be a game-changer for people, and it can free you up to do things that you could never do when you're saddled with a mortgage payment every month. "A re-financing, or re-fi, is when a debtor takes out a new loan for the express purpose of paying off an old one. This can be done for several reasons; usually the primary reason is that the terms of the new loan will result in a lower monthly payment. Debt consolidation (taking out one big loan at a relatively low interest rate to pay off the smaller, higher-interest loans that rack up, like credit card debt, medical bills, etc) is a form of refinancing, but you most commonly hear the term when referring to refinancing a home mortgage, as in your example. To answer your questions, most of the money comes from a new bank. That bank understands up front that this is a re-fi and not ""new debt""; the homeowner isn't asking for any additional money, but instead the money they get will pay off outstanding debt. Therefore, the net amount of outstanding debt remains roughly equal. Even then, a re-fi can be difficult for a homeowner to get (at least on terms he'd be willing to take). First off, if the homeowner owes more than the home's worth, a re-fi may not cover the full principal of the existing loan. The bank may reject the homeowner outright as not creditworthy (a new house is a HUGE ding on your credit score, trust me), or the market and the homeowner's credit may prevent the bank offering loan terms that are worth it to the homeowner. The homeowner must often pony up cash up front for the closing costs of this new mortgage, which is money the homeowner hopes to recoup in reduced interest; however, the homeowner may not recover all the closing costs for many years, or ever. To answer the question of why a bank would do this, there are several reasons: The bank offering the re-fi is usually not the bank getting payments for the current mortgage. This new bank wants to take your business away from your current bank, and receive the substantial amount of interest involved over the remaining life of the loan. If you've ever seen a mortgage summary statement, the interest paid over the life of a 30-year loan can easily equal the principal, and often it's more like twice or three times the original amount borrowed. That's attractive to rival banks.  It's in your current bank's best interest to try to keep your business if they know you are shopping for a re-fi, even if that means offering you better terms on your existing loan. Often, the bank is itself ""on the hook"" to its own investors for the money they lent you, and if you pay off early without any penalty, they no longer have your interest payments to cover their own, and they usually can't pay off early (bonds, which are shares of corporate debt, don't really work that way). The better option is to keep those scheduled payments coming to them, even if they lose a little off the top. Often if a homeowner is working with their current bank for a lower payment, no new loan is created, but the terms of the current loan are renegotiated; this is called a ""loan modification"" (especially when the Government is requiring the bank to sit down at the bargaining table), or in some cases a ""streamlining"" (if the bank and borrower are meeting in more amicable circumstances without the Government forcing either one to be there). Historically, the idea of giving a homeowner a break on their contractual obligations would be comical to the bank. In recent times, though, the threat of foreclosure (the bank's primary weapon) doesn't have the same teeth it used to; someone facing 30 years of budget-busting payments, on a house that will never again be worth what he paid for it, would look at foreclosure and even bankruptcy as the better option, as it's theoretically all over and done with in only 7-10 years. With the Government having a vested interest in keeping people in their homes, making whatever payments they can, to keep some measure of confidence in the entire financial system, loan modifications have become much more common, and the banks are usually amicable as they've found very quickly that they're not getting anywhere near the purchase price for these ""toxic assets"". Sometimes, a re-fi actually results in a higher APR, but it's still a better deal for the homeowner because the loan doesn't have other associated costs lumped in, such as mortgage insurance (money the guarantor wants in return for underwriting the loan, which is in turn required by the FDIC to protect the bank in case you default). The homeowner pays less, the bank gets more, everyone's happy (including the guarantor; they don't really want to be underwriting a loan that requires PMI in the first place as it's a significant risk). The U.S. Government is spending a lot of money and putting a lot of pressure on FDIC-insured institutions (including virtually all mortgage lenders) to cut the average Joe a break. Banks get tax breaks when they do loan modifications. The Fed's buying at-risk bond packages backed by distressed mortgages, and where the homeowner hasn't walked away completely they're negotiating mortgage mods directly. All of this can result in the homeowner facing a lienholder that is willing to work with them, if they've held up their end of the contract to date." "So here are some of the risks of renting a property: Plus the ""normal"" risk of losing your job, health, etc., but those are going to be bad whether you had the rental or not, so those aren't really a factor. Can you beat the average gain of the S&P 500 over 10 years?  Probably, but there's significant risk that something bad will happen that could cause the whole thing to come crashing down. How many months can you go without the rental income before you can't pay all three mortgages? Is that a risk you're willing to take for $5,000 per year or less?   If the second home was paid for with cash, AND you could pay the first mortgage with your income, then you'd be in a much better situation to have a rental property.  The fact that the property is significantly leveraged means that any unfortunate event could put you in a serious financial bind, and makes me say that you should sell the rental, get your first mortgage paid down as soon as possible, and start saving cash to buy rental property if that's what you want to invest in. I think we could go at least 24 months with no rental income Well that means that you have about $36k in an emergency fund, which makes me a little more comfortable with a rental, but that's still a LOT of debt spread across two houses.   Another way to think about it:  If you just had your main house with a $600k mortgage (and no HELOC), would you take out a $76k HELOC and buy the second house with a $200k mortgage?" Normally interest only mortgages are taken incase one planning to sell off the property after a few years and purchase of the property is for investment. In such a case instead of burdening oneself with a huge EMI, one opts for an interest only mortgage, and towards the end of the term, sell off the house at profit and repay back the entire principal.  I am not to sure if interest only mortgages are encouraged for properties you plan to live in. Although I do not know about the ING scheme, normally there is no prepayment option on interest only mortgages, its Bank way of earning a fixed income for the contracted period and thats the reason why the interest rates are lower than a regular mortgage. If you do the math, you may be paying more in total interest than on a regular mortgage. "You have 1998-2011 income-contingent student loans, where the interest rate is the lower of (1% + base rate) or RPI (retail price inflation). For the next few years the it's likely to be (1% + base rate) as interest rates stay low and inflation shoots up. These loans only need to be repaid in proportion to your salary, and if they aren't repaid for long enough (e.g. the holder takes a career break for children) they are written off. So all-in-all, they are pretty good debt to have: low interest rate, and you might not have to repay them ever. It's likely that your mortgage will have a significantly higher rate than the student loan, so you'd be better off reducing your mortgage. Also, the higher deposit might mean you can get a lower interest rate on the whole mortgage because the lender will see you as a lower risk, so the return from ""investing"" it in your mortgage would be even greater than the raw interest rate. Having the student loan outstanding might make some difference to the ""affordability"" check for your mortgage payments, but lenders will be very familiar with how they work. Reducing your mortgage payments with the higher deposit should easily counterbalance that. Your own suggestion is to invest the £30K in a ""reasonably safe portfolio"" making 5%. There'll inevitably be some risk in that - 5% is a relatively high return in today's climate - but if you're willing to take that risk, you can investigate the effect on your mortgage to see if it's worth it or not." "Respectfully, I am of the opinion that you are mixing issues.  Paying a mortgage off early vs investing is a question that's been well discussed at Money.SE. If you project a higher tax adjusted return on the investments than your current mortgage rate, invest. Else, pay the mortgage down.  If the rent covers the mortgage, you can maintain the investing. It doesn't matter for this discussion if the rent produces a profit, so long as all expenses are covered.  Renting aside, in the US, now, my mortgage is 3.5%. 2.6% after taxes. So long as I expect a return well above this level long term, I'll stay investing, and let the mortgage die its slow death. Another decade or so.  I'm sorry I can offer a formula, it's ""less"" ""about the same"" or ""more."" The mortgage is fixed, right? But the market return is unknown." It's the physiological impact it has. If you took a loan to buy a home for $500k and you recently had it appraised for $450k you are more inclined to skip out on any home remodeling projects.   Also as ShakeyBobWillis pointed out it can be to your financial benefit to just walk away from an underwater mortgage. This creates even more glut in the marketplace. First, let me fill in the gaps on your situation, based on the numbers you've given so far. I estimate that your student loan balance (principal) is $21,600. With the variable rate loan option that you've presented, the maximum interest rate you could be charged would be 11.5%, which would bring your monthly payment up to that $382 number you gave in the comments. Your thoughts are correct about the advantage to paying this loan off sooner.  If you are planning on paying off this loan sooner, the interest rate on the variable rate loan has less opportunity to climb. One thing to be cautious of with the comparison, though: The $1200 difference between the two options is only valid if your rate does not increase.  If the rate does increase, of course, the difference would be less, or it could even go the other way.  So keep in mind that the $1200 savings is only a theoretical maximum; you won't actually see that much savings with the variable rate option. Before making a decision, you need to find out more about the terms of this variable rate loan: How often can your rate go up? What is the loan rate based on? I'm not as familiar with student loan variable rate loans, but there are other variable rate loans I am familiar with: With a typical adjustable rate home mortgage, the rate is locked for a certain number of years (perhaps 5 years).  After that, the bank might be allowed to raise the rate once every period of months (perhaps once every year).  There will be a limit to how much the rate can rise on each increase (perhaps 1.0%), and there will be a maximum rate that could be charged over the life of the loan (perhaps 12%). The interest rate on your mortgage can adjust up, inside of those parameters.  (The actual formula used to adjust will be found in the fine print of your mortgage contract.)  However, the bank knows that if they let your rate get too high above the current market rates, you will refinance to a different bank.  So the mortgage is typically structured so that it will raise your rate somewhat, but it won't usually get too far above the market rate.  If you knew ahead of time that you would have the house paid off in 5 years, or that you would be selling the house before the 5 years is over, you could confidently take the adjustable rate mortgage. Credit cards, on the other hand, also typically have variable rates.  These rates can change every month, but they are usually calculated on some formula determined ahead of time.  For example, on my credit card, the interest rate is the published Prime Rate plus 13.65%.  On my last statement, it said the rate was 17.15%.  (Of course, because I pay my balance in full each month, I don't pay any interest.  The rate could go up to 50%, for all I care.) As I said, I don't know what determines the rate on your variable rate student loan option, and I don't know what the limits are.  If it climbs up to 11.5%, that is obviously ridiculously high.  I recommend that you try to pay off this student loan as soon as you possibly can; however, if you are not planning on paying off this student loan early, you need to try to determine how likely the rate is to climb if you want to pick the variable rate option.