I’ll preface this with the disclaimer I may be missing something obvious but considering these assumptions:
– a person has a mortgage (at say 4.5% today) and they choose to pay that off monthly (not interest only)
– the opportunity cost of this investment would be a conservative 6%/year in ETFs or REITs (of course this is tentative and an average over the long run)
(See for return references: https://www.fool.com/research/reits-vs-stocks/)
Why would a person choose to pay down their mortgage rather than invest in the markets? The pros of greater liquidity in the markets and greater diversification in REITs seem to make it the preferable choice?
For context, I am a 24M considering the best route to financial independence for myself and future family.
Thanks in advance.
In: Economics
Although the maths is correct at 6% return being higher than 4.5% cost, the preference could be psychological. Your mortgage is a known debt that you reduce over time. Provided you have an income which covers it, your position will improve with the reduction of the debt.
Entering into an investment programme might yield returns, but you’re sacrificing a known financial improvement for a speculative one.
Also, not sure where you are in the world but in the UK, property ownership has historically been the most reliable investment strategy (particularly in and around London) because prices have increased consistently and healthily over the period, so it’s also a stable return on investment, just unrealised until you sell. There are periods where homeowners have technically had greater wealth creation from the increase in value of their home compared to their salary. Sucks to get on the ladder in the first place of course.
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