The Financial Lunacy of the Mainstream Media
While browsing through Twitter I came across the following graphic from The Times newspaper. Here it shows the interest saved and the time that could be reduced paying the mortgage down.
However, they are not giving the full picture here. With the first example with an overpayment of $100 per month over 21 years and 8 months, you would have paid a total of $26,029 extra in order to save just $9,948!! Yes, you may have reduced your mortgage time by 3 years, but that doesn't make much sense at all.
It gets worse when instead of repaying your mortgage which in this example is at 2,5%, you had invested in a typical MSCI All World ETF, which pays say 7%. You would actually gain $34,987 in interest and including your original investment pot, you would after 21 years and 8 months be $60,987. This is a huge $51,039 in missing income!
This is also not factoring in the inflation that works in your favour by holding debt in fiat. In the table below you can see the returns calculated. If you would invest in to crypto the returns could obviously be much more.
The second example is also very interesting. Here the overpayment is $300 and a possible saving of 7 years and 10 months. You would save $23,099 which may sound good, but if you had instead invested in a vanilla ETF paying 7% the returns would be far superior!
Here you would have made a huge $57,903 in interest alone! This already dwarfs the $23,099 in "mortgage" savings. Furthermore, including your original investment over the 17 years and 2 months of $61,800, you would have a total pot of $119,703!! This is $96,604 more than if you had just overpaid your mortgage. When you factor in inflation which works in your favour, the returns are just higher.
Of course, there can be instances where it might make sense to reduce your exposure. This could be that you want peace of mind or have worries about the debt. It is just good to know that the peace of mind will cost you $100k! A practical reason such as you cannot fix the interest rates over the loan period or for most of it, could be another reason to overpay. But generally, listening to the mainstream about financial matters is not good for your wealth.
Thanks for reading.
Resources:
The charts were calculated myself using TheCalculatorSite.com
Title picture created in Canva
