A few years ago we bought a house, paid in full with cash. Then I got a small mortgage as an inflation hedge and to invest for fun and profit.
We used a chunk of the mortgage to fund moving expenses and to acquire all of the typical home accoutrements, put solar on our roof, and pay the medium-sized tax bill that comes with selling enough stock to pay cash for a house. The remainder I put back into the market as a lump sum.
It has now been three years out of thirty. Let’s check in on how this investment is doing.
Investing Our Mortgage
Whether to have a mortgage or not is a topic of much debate amongst retirees of both the early and traditional type.
I found myself on the pro side of the argument because inflation was high and rates were low. With inflation and mortgage rates where they are in Dec 2024, I would take the opposite position.
Our mortgage is $250,000 30-year fixed 2.75% interest. Payments are $1,020.60 monthly and I pay property taxes and insurance directly (no escrow.)
In September 2021 I invested $150,147 (60% of the mortgage proceeds) roughly in accordance with our asset allocation since I didn’t want to keep the excess funds lying around in cash.
- 450 shares of VTI @ 222.61 ($100,174.50)
- 475 shares of VXUS @ 63.10 ($29,972.50)
- I-bonds @ $20,000 ($20,000)
This is roughly a 75/25 US/International split on the equity allocation and a small contribution to bonds.
In the subsequent 3.x years, US markets are up and global markets are down. Bond yields are also down.
Allocation changes
With inflation down and short-term interest rates up, I redeemed half of the i-bond position on 10/3/2023 which added $1,208 to our 2023 taxable income. Because I held these bonds less than 5 years, I lost 3 months of interest when redeeming ($94.69) at an effective interest rate of 3.38%.
I redeemed the other half on 1/1/2024 for $11,404 and bought $10k of new ibonds with a higher fixed rate
I will redeem the other half on 1/1/2024 for $11,404, and buy new ibonds at a higher fixed rate (1.3% vs 0%.) I similarly lost 3 months of interest upon redemption ($94.69 at a 3.38% rate.)
The excess cash from these sales has been periodically reinvested in short-term treasuries / held in my Fidelity cash reserve (SPAXX.) Short-term treasuries earn a slight premium over SPAXX which was earning 5.1% at the beginning of 2024 and 4.2x% at the end.
Income
One of the plus sides of investing the mortgage vs holding in cash is that we receive regular dividends and interest.
We have now received 3.5 years of dividend distributions from VTI and VXUS and the monthly interest on the I-bonds/Treasuries. With a longer time frame to look at this now makes more sense in chart form.
Total: $12,325.15
Gain: 8.2%
(Dividends used for current spending, I-bond interest added to principal.)
Unrealized Gains / Losses
One of the potential downsides of investing a mortgage is that the value of that investment changes with market values. Fortunately the long-term trend is generally positive.
Recent prices are from Jan 15, 2025 in late afternoon when the market was still open (my spreadsheet updates automagically, so sums might be off slightly.)
VTI
Purchase price: $222.61
Recent price: $293.57
Gain/Loss(%): +31.9%
Gain/Loss($): +$31,933.49
VXUS
Purchase price: $63.10
Recent price: $59.01
Gain/Loss(%): -6.5%
Gain/Loss($): -$1,942.75
I-bonds
Gain/Loss: 0%
Total gain/loss(%): +23.1%
Total gain/loss($): +$30,010
Expenses
Another downside of investing the mortgage is we are making monthly mortgage payments. Although we get dividends and interest, we pay tax on those distributions (well, they increase our taxable income…)
Mortgage closing costs: -$30.37 (after all expenses and credits, the bank paid us to get a mortgage. Total scaled 60% of total to account for investing 60% of mortgage)
Mortgage interest
After holding the mortgage for ~3.5 years, it has cost us $13,308.28 in interest. We now pay about $25/month less than we did 3.5 years ago.
Again, in chart form.
Taxes
Total: $364.35
2021 – $364.35 (effective tax rate: ~27.4%)
2022 – $0
2023 – $0 projected
2024 – $0 projected
Per Vanguard, an estimated 97.57% of VTI dividends are qualified. For VXUS it is 73.76%.
Our 2021 tax rate for qualified dividends was ~25.8% (15% dividends, 3.8% NIIT, and ~7% California (scaled for part year residents.))
The tax rate for non-qualified dividends was higher, ~37.8% (12% ordinary, 15% dividends pushed out of 0% bracket, 3.8% NIIT, and ~7% CA.)
For 2022 our effective tax rate was 14% ACA tax and 4% CA, applied equally to qualified and non-qualified dividends. We owed zero federal income tax.
However we paid no tax on the income from investing our mortgage. (I originally thought I would pay some tax on 2022 dividends, but they were all offset by tax credits I otherwise wouldn’t have received)
Similarly we paid zero federal income tax in 2023 and expect to pay zero tax in 2024.
We get no federal tax benefit for the deduction of mortgage interest or property taxes, and although we do get a larger deduction on California taxes our tax burden is already $0.
Total expenses: $13,542.27
Additional gain/loss: -9.0%
Expenses exceed income, reducing total return by 0.8%.
Inflation
Inflation is great for debt holders and was one of the motivating factors in getting a mortgage in the first place.
According to this inflation calculator, the $150,147 that I invested on 9/17/2021 is worth $20,329 LESS on 1/15/2025, a reduction of 13.5%. Meanwhile my mortgage payment remains the same.
This doesn’t help much today, as our investments have a similarly reduced purchasing power, but in 10+ years I will probably appreciate having a healthy chunk of inflation front-ended.
A Chart, Just Because
Historically, dividend income has increased over time. The SP500 dividend in 2023 was almost 2x what it was when I quit work in 2012, for example.
In the short term, with minor dividend growth and the natural walk down the amortization table (where interest is a smaller part of each subsequent mortgage payment), income just about offset total interest at the end of 2024.
Assuming dividends grow at a 5% rate going forward (about the growth rate in the decade pre-covid), income will likely exceed the entire mortgage payment a little over half way through the 30 year mortgage duration.
Oops
It is nice that investing our mortgage has now produced a solid positive return.
But another way to look at it… all that stock we sold to buy the house originally is worth substantially more than the house. I guess we should have remained Renters For Life.
Summary
We got a small mortgage ($150,147) and invested the proceeds.
After 3.x years, our investment is up $28,810, +19.2%, which is very respectable.
Cap gain (unrealized): +30,027, +20%
Mortgage interest: $13,208, -8.8%
Dividends / Interest: $12,325, +8.2%
Taxes: $364.35, -0.2%
Inflation reduction in mortgage value: -$20,329, 15%
Principal paid to date: $10,976
If I sold everything and paid off the mortgage immediately, today, we would receive $44,570.
($10,976 in principal reduction + $30,027 in unrealized gains on stock sales + a bit of i-bond accumulated interest (already counted as part of “income”))
What happens next? Will our investments go up or down? Will this be a profitable venture or one of my many terrible ideas? Dunno.
But going forward investment income will most certainly exceed mortgage interest and that gap will grow over time.
Thanks for sharing Jeremy! It’s interesting following along with your journey. We purchased a home in Roseville and took out a ~720k mortgage at 6.875% in 2024. Our assets keep appreciating nicely so I’m hesitant to sell stocks, pay capital gains, and reduce or eliminate the mortgage. It’s also right at the level where we’ll itemize for 2024 taxes since the interest paid is > than the $30k standard deduction for MFJ.
If you were in my shoes and planned on continuing working for the foreseeable future (and have a very long investment horizon) what would you do?
Hard to say – this is only 1 piece of a very large puzzle. I would probably analyze and re-analyze, then over analyze, before finally deciding to make no changes because it is easier that way. Maybe just refinance in a year or 5.
That was a smart move that worked out wonderfully for you and anyone with a near 100% equity portfolio, high risk tolerance, and low SWR.
However I wouldn’t have suggested it at the time for anyone with a more conventional bond heavy portfolio. For example, in 2021 I suggested to my parents that they dump their bonds only paying 1% and pay off their 3% mortgage while keeping their equity position fixed. It doesn’t make sense to borrow at a 3% fixed rate and lend it back out at 1%. It would’ve changed their asset allocation from 70/30 to 90/10 but would’ve removed the negative carry cost on the bonds.
However, someone who has managed to avoid bonds when they paid <3% and is still holding on to their low interest mortgage, it would be a good move to invest it in 5% paying bonds and equities.
Very good job.
We got a mortgage 3 years ago (fixed, 30 years, 2.85% for $220.00). I do pay $250 extra for the principal every month, so that I pay it off in 21 years and not 30.
Was thinking about selling our properties back in Romania, which would be about 200K in value and pay if off instantly (as we hate the idea of debt), but, come tax season, I realized it’s actually better to keep it as I do get better results.
Haven’t yet started investing, we’re still new to all this, but maybe this is the year to start :)
Why not put the $250/month in short term treasuries earning 4%+. I would love to borrow an infinite amount of money at 2.85%
Some similarities to what we did. Moved from Thailand to Florida Sept 21. Couldn’t bring myself to sell stock so took the $360k 2.75% 30 year with 5% down.
Bought the Sienna 0.9% for 4 years.
Happy I did it.
Met the Fidelity advisor and he tells me that my Value Dividend Growth portfolio has been lagging Growth and that I should buy some. I looked at it in the fall of 2021 and it looked expensive to me. 2022 the market was going down and it was the first time my wife had a mortgage and it scared her. November I made an attempt to appease her.
My value portfolio was only down 5%. I sold $360k of value stocks and bought Googl, META, APPLE I ran out of money before I bought msft and ironically Bill Gates is the reason I decided to buy growth. I told her that my life insurance more than covered the mortgage and it will be in force until 2030. That I bought growth stocks that had already fallen so I really didn’t think I would lose any money on them and I couldn’t figure out why they fell other than sentiment and I hoped to maybe double that money by 2030 and I would pay off the mortgage.
Shorty after AI was announced and I’ve made a fortune on that investment. Interest rates are up and I’ve gone from 100% equities to 84%/16% bonds.
I still own my growth and my new plan is to have the mortgage balance in bonds by 2030 so I don’t have to sell it.
Oh why did I want to buy msft! I’ve watched Gates diversity out of msft for decades so when I found out that he BOUGHT 8 Billion dollars worth of msft in 2022 I figured he knew something.
Why didn’t I buy msft first… because the stocks I bought had lower PE.
Why move from Thailand to FL? Live in Fl and currently visiting Thailand. I would gladly swap there for here..
Curious if you considered transferring your ibond proceeds to a 529 to avoid paying any taxes (https://thefinancebuff.com/cash-out-i-bonds-tax-free-college-529-plan.html). I assume it’s moot since you already don’t pay taxes but maybe to provide more buffer for more with conversions?
I will probably do this one day, but not for just $1k… I have a lot of tax-deferred gains in i-bonds I bought 20+ years ago and they will mature around the time Jr goes to college. It’s probably worth putting those funds into a 529 so I can move out of bonds and into equities.