Should you pay off the mortgage early? That question is, without any doubt, the most popular question posed by my readers. And sure enough, the other day I received this note from Lauren regarding the wisdom of paying down the mortgage early:
Len: We’ve been working to pay off our mortgage ASAP, but inflation has us wondering if we should continue doing that. Do you think it is better to divert some of our extra mortgage payments to buy precious metals?
There is always a passionate debate between those who believe paying off the mortgage early is a no-brainer, and folks like me who think it’s better to put your money elsewhere.
Ultimately, you’ll need to make your own decision, but here’s why I’m not paying off my mortgage early:
For many years, I was a huge proponent of early mortgage-retirement. So much so that, between 1997 and 2009, I made approximately $80,000 in additional mortgage principal payments to my lender. But during the spring of 2009, it became apparent to me that the Federal Reserve was no longer committed to protecting the value of the US dollar — so I began to waver on the wisdom of the early-mortgage-payoff philosophy.
Soon after, I became absolutely convinced that paying off my mortgage was no longer in my best interest, because the risk of high inflation, if not an outright US dollar collapse, had become extremely likely — and loan values are essentially inflated away in the presence of a collapsing currency.
Inflation and the Fixed-Rate Mortgage
In his book, When Money Dies, Adam Fergusson chronicles life in Germany during the collapse of the mark between 1919 and 1923. The following chart shows just how quickly Germany’s currency declined relative to gold and silver as the inflation rate increased — slowly at first, but then very rapidly:
As inflation surged, rent control became widespread in in Germany. (In case you’re wondering, rent control is very common during hyperinflation events because it helps reduce the risk of civil unrest.)
As for those who had a mortgage, Fergusson writes:
Mortgage payments (became) no more than a nominal burden to (homeowners) — a consideration which dismayed the mortgage banks.
This was for good reason: Fixed-rate mortgage holders were quickly learning that hyperinflation was truly a debtor’s best friend. As Fergusson notes:
(One woman) went to stay in the country and asked her hosts bluntly what they were doing with all the money they were squeezing out of the townspeople. They replied candidly that they were paying off their mortgages.
By September 1922, inflation was completely out of control, thoroughly decimating the purchasing power of the collapsing mark. So much so that Germans with fixed-rate mortgages were paying off their home loans with a week’s wages.
Financially-savvy Germans who were able to secure loans during the hyperinflation were even more fortunate, as Fergusson explains here:
In February 1922, with a loan from a friendly banker, (a farmer) bought an estate neighboring his own property for (approximately $371,000 in 2023 dollars). He paid the debt in the autumn with the sale of less than half the crop of one of his potato fields.
Of course, this was possible because, as the mark became less valuable over time, the proportion of currency that households allocated to shelter, food, heating and electricity shifted. Before debasement of the mark began in 1913, household expenditures for shelter and food were essentially equal. However, as inflation got worse, the amount of household income required to keep a roof over one’s head became trivial:
As you can see, by 1923 renters and fixed-rate mortgage holders were putting just 0.2% of their income toward shelter. In order to benefit from paying off your mortgage in such a scenario, wages must keep pace with the inflation. The good news is, history shows that wages do keep pace with inflation (albeit with a slight lag). That’s because they have to — otherwise, there would be no incentive to work.
What If Scenarios
I know what you’re thinking: Could the government bail out the banks by passing a law that revalues my mortgage? Perhaps.
In fact, Germany revalued mortgages shortly after that infamous Weimar hyperinflation in the 1920s; I even wrote an article explaining how a similar mortgage revaluation law would work in the US. However, I don’t think that’s likely — at least not in the United States. After all, a mortgage is a contract. And I believe that contract law will remain sacrosanct here.
And what if you’re wrong, Len? What if you’re just being a big worrywart and it turns out that the dollar doesn’t ever collapse?
Well … I’ll still have no regrets. Here’s why: Generally speaking, annual mortgage expenditures become sharply reduced over time for those with fixed-rate mortgages. Of course, the trick is in staying gainfully employed. The following chart shows how the proportion of my paycheck spent on the mortgage steadily dropped. Actually, it plummeted: from 38% in 1997 to just 3% last year. And keep in mind, that is without hyperinflation:
Eventually my mortgage payment was such a small percentage of my total income that it became an afterthought. And that gave me flexibility to allocate more income through the years for investing, and buying precious metals to protect my wealth.
Of course, that 3% figure was made possible via a series of cashless refinances. But as you can see, even if I had kept my original mortgage, the proportion of my income devoted to my home loan would still have been just 7% of my income last year.
So patience earns its reward either way.
The Bottom Line
Don’t get me wrong; there’s still a lot to be said about the advantages of paying off the mortgage early. In a normal world, with low inflation, modest interest rates, and a healthy financial system that rewards savers and punishes debtors, it’s certainly the path I would take.
Unfortunately, I don’t believe that’s the environment we live in anymore.
(Note: This is an updated version of an article that was originally published on 23 June 2014.)
Photo Credit: woodleywonderworks