Last weekend shortly after making my blog post, buoyed by the confidence that I am approaching debt freedom, I spent several hours calculating whether it would be better for me to save money or to pay off my mortgage.

Firstly, there are several viewpoints on whether mortgage debt counts as ‘debt’. Of course it is different to a credit card or a car loan as you have purchased an asset that will appreciate in value and give you ‘equity’, and you pay off a chunk each month which also contributes. However, as that equity is tied up in the home, and when it comes to selling that house, all other houses will have increased a similar amount, is it really an asset?  It’s not like you can shave off a piece of the wall and spend that money right? And it doesn’t generate you an income, so many argue it is a liability.

I am on the side of thinking that a mortgage is a debt, but as you must live somewhere, you might as well be paying your own mortgage, rather than a landlord’s. Eventually, you will own the property.

I have been lucky as I bought my flat for £237,500 in 2012, and now would be able to achieve £450,000 for today.  I would not have achieved this gain had I rented for the same period.

Pay off mortgage or invest?

I couldn’t find a comparison online to see whether investing spare money in an ETF or making increased payments on the mortgage was better. I decided to have a go.

I made a couple of assumptions. Firstly, I will not start investing until June 2019, as, until that point, I will be paying off my actual debts. Secondly, I will be able to find £2000 per month to do this. Thirdly, that I assumed an annual rate of return on ETF investing of 10%. I based this on reading around blogs to see what other people thought and based on past performance of the stock market.

The assumptions I made about my mortgage were that my interest rate would remain the same as it is now at 1.69% (unlikely I know, but it is the current situation and I am unable to predict the future).

The method

I built the spreadsheet with three different options:

1. Put £2000 into my mortgage every month, on top of my normal payment and save nothing;
2. Put £1000 into my mortgage, and £1000 into an ETF; and
3. Put £2000 into an ETF.

I calculated the monthly interest in each case and then added up so I would see the effects of compound interest accurately.

I don’t claim that this is a pinpoint accurate way to calculate it, but it gives me a picture of where I might end up in the future and the best way to start my FIRE journey.

The results

I was very surprised by the results of this exercise as the overwhelming long term best way to go was to put the maximum amount of money into an ETF. I believe this is for several reasons; firstly, the rate of return assumed of 10% is much higher than on my mortgage. For each £2000 I would make £200 annually compared to the £34 cost to borrow at 1.69% rate I pay. That’s a £166 annual difference for each payment without taking into account compound interest.

When it is shown like this, it is an absolute no brainer, but I still find it shocking. I had always believed that paying down a mortgage was the best way to go. In some ways, if you are in your forever home then it may be a good idea, but really I can’t see any way it makes sense to do it.

Should interest rates increase and the rates of return for the ETFs drop then it may make sense to switch over to repaying the mortgage faster.

The other exciting thing I realised was I will have £1,000,000 in savings by age 50. After that, thanks to compound interest, it really takes off.

The graph below is my total net-worth which includes house value, pension, ETF, and mortgage liability.