Shall I take out my investment to pay down my mortgage?
Blended Families, Blended Finances
By Jolene Hung
A dear client gave me a call two weeks ago. She has been married for five years with her long time partner. They have a disagreement about how to deal with their mortgage which is due for renewal. In this article, I am going to call them Tom and Shelly.
Like many later-in-life newlywed couples, Tom and Shelly bought a house and consolidated their investments. They have done some financial planning, and they plan to travel the world. Ownership of the house is in Shelly’s name. She loves to decorate the house; she spends most of her money and time to renovate the house. They have an equity line of credit to finance the renovation costs. Finally, this year the home renovation project has been completed.
On the other hand, Tom has control of their investments. He and I have regular meetings to review the interest from their investments, which is paying monthly income to support their lifestyle and mortgage payment.
The only problem is that Tom is 72 years old, and Shelly is approaching 70 years old. Earlier in their lives they had each been told by their parents to pay down debt as soon as they can. Tom is worrying about the monthly income. Shelly has a daughter from her first marriage, and she is worrying about the mortgage, in view of her daughter’s eventual inheritance.
Shelly believes, at this age, they should be debt-free and especially mortgage-free. Without a mortgage payment, she can save $500 per month. She would use the funds to travel and visit her daughter who lives outside of the country.
For Tom, he would prefer not to sell his investments, although we will have to rebalance his portfolio every year.
After listening to their concerns, I point out a few things:
- Tom’s investment portfolio is the main source of income for the family. By reducing the capital of the investments, their monthly income will also be reduced.
- The mortgage will be paid off when they sell their house. It is a three bedroom home located near water. It does require a lot of energy and money to maintain the house. The $500 mortgage payment is a small portion of the house expenses. The real question is: Do they really want to keep the house for the long term?
- What is the real rate of return of their investment? We have concluded that Tom’s portfolio is generating 7% of return; most of his investments are tax-efficient. They are dividends and capital gains.
- What is their mortgage rate? Following our discussion, Shelly contacted her bank. She was able to arrange an under 3% five-year fixed mortgage. After five years, her outstanding mortgage balance is under $25,000.
Now, Tom is pleased to be able to keep his investment portfolio. His investment is generating more return after taxes than the mortgage interest rate. Shelly is also comfortable with the debt-reduction program. She understands that a mortgage payment is only part of the lifestyle cost to keep the house. She is willing to pay the mortgage and stay in the same house for a while. She has also invited her daughter to spend time with them in their beautiful home.
I hope this story can help you with your decision.