Paying off your mortgage might seem like a great idea, and it can be. But there’s a surprising downside you might not have considered. I paid off my rental property mortgage seven years ago, and at first, it felt amazing. But that feeling didn’t last. Maybe it’s because there was no big celebration or pat on the back. The only real change was an extra $2,500 a month, which I put straight into savings or investments.
Before I took on the mortgage, I had a similar feeling of uncertainty in my early 20s. After working long hours and saving a lot of my income, I started to question the point of it all. My enthusiasm for my finance job faded after the 9/11 attacks. In 2003, I was close to leaving San Francisco for Honolulu until I found a condo in Pacific Heights. Once I took out the mortgage, my motivation to work hard skyrocketed. If I stopped paying my mortgage, I’d lose my down payment and ruin my credit score. Finally, I had something tangible to work hard for.
But here’s the catch. Once you’ve paid off your mortgage, you might lose the drive to improve your finances. You might start to slack off in your career or business, which could affect your earnings and net worth. A mortgage keeps you hungry. If you’re in your prime earning years and still working towards financial independence, be careful. It’s easy to take things easy when you don’t have a mortgage. Your living costs are low, food is cheap, and there are plenty of affordable or free activities. But when life is easy, we can get complacent. We might neglect our relationships and finances, and take what we have for granted. Some of us might even develop a sense of entitlement, which can slowly drain our wealth and happiness.
When you’ve got everything covered, only the most daring people take risks. It doesn’t make sense to work hard if you have no financial burdens. When no one is depending on you, there’s no pressure to provide. You might not be motivated to start your own business or aim for a promotion when you can just enjoy life. But when you’re older, you might regret taking it easy when you had the most energy.
In 2015, I made a resolution to pay off the rest of my mortgage. This motivated me to look for more consulting work. Because of my desire to pay off my mortgage that year, I took on two more consulting jobs and worked 60 hours a week for three months. I was making around $30,000 a month, which I used to pay down my mortgage and invest in the S&P 500. Having a mortgage made me want to increase my income.
But as soon as I paid off my mortgage, my attitude changed. I stopped looking for more consulting work and decided to take a long trip to Asia. Once I paid off my mortgage, I started to slack off. There was little motivation to try and maximize income. Why bother when the mortgage was already paid off? The biggest downside to paying off your mortgage is really the loss of motivation to try new things. Having a mortgage is like a safety net that stops you from slacking off.
If I had focused more on building wealth since 2015, I probably would have been less stressed when the pandemic hit and I had to raise two kids without a job. We never know when the next crisis might hit, and when you have dependents, it’s even more important to have your finances in order.
In 2019, I bought a fixer-upper for cash. I spent time remodeling the house before moving in. Then, in 2020, I found a really nice house at the start of the pandemic. My wife thought I was crazy to buy another house so soon. But it was in the neighborhood and perfect for our growing family. We bought our forever home with a huge mortgage. With a new mortgage, I was motivated to move into the new house immediately.
With our old paid-off house, I took a couple of weeks to prepare it for rent. In the past, I would have done this in a couple of days. Then, I passed on tenants who were willing to pay more because they didn’t feel right. I had no mortgage, so I could afford to wait. By passing on these tenants, I lost about $2,500 in rent over a year. If I had a mortgage on my rental house, I would have tried harder to find new tenants and signed with the first set of tenants. I just didn’t care as much about optimizing returns anymore.
There are other reasons not to pay off your mortgage. You lose your mortgage interest deduction, which is treated like a business expense for rental property and a tax deduction if it’s your primary residence. You lose a low borrowing cost, as interest rates are at all-time lows due to the pandemic. You tie up capital in an illiquid asset, which can be risky if you have a lot of your net worth tied up in property. You decrease your financial returns, as paying off your mortgage reduces the return on your investment. You might start being less efficient with your time. And your credit score might take a hit, which could affect your ability to get the best interest rate for your next loan.
In a strange way, a mortgage motivates you to build more wealth and to pay it off. If your property appreciates in the process, that’s a bonus! Despite losing motivation to hustle after paying off your mortgage, it’s still a worthwhile goal. It feels great to have less debt or no debt. Each extra mortgage payment is a step towards financial independence. With a new mortgage, I’m more motivated to continue building wealth. But the reality is, I don’t need any more motivation. I have two young children that provide the greatest motivation of all.
Ideally, it’s good to have zero mortgage debt by the time you retire or no longer want to make more money. The challenge is to time it perfectly. After playing around with a retirement planning calculator, I feel that paying off all mortgage debt by 2031 is the ideal scenario. Ten years is a long enough time to leverage cheap debt to boost wealth. My motivation to hustle will likely fade in ten years.
Let paying off your mortgage be a great motivator to boost wealth and stay focused. By the time you truly retire, I’m sure you’ll be thrilled at no longer having a mortgage.
