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Comment by odiroot | Hacker News Reader

Probably makes sense to pay off your mortgage if you have one.

In times of uncertainty and volatility and especially inflation, if you have enough money to pay off your mortgage, you might not want to actually pay it off.

Assuming you have a fixed rate mortgage at a low interest rate, not only will the value of your debt be inflated away, but you retain optionality. Meaning you can use that big chunk of money as a hedge against a job loss or other negative event, you can use it to invest as your see opportunities, etc.

Of course the flip side of this argument is if you do pay off the mortgage, you get a guaranteed rate of return equal to your mortgage interest rate.

30 year fixed rate mortgages is specifically an American thing. Not sure this is the case in all European countries but I’ve heard that they typically have much shorter terms and/or variable rates.

At least in France 15-25 year fixed rate housing loans (technically it's not a mortgage because you don't guarantee the loan with the housing directly, there's an intermediary insurance to guarantee that will fight you over the housing if you stop paying) is pretty much the norm.

Poland is great example of this - fixed rate mortgages are almost nonexistent here. When inflation hit and the Monetary Policy Council rose intrests rates by 6,5 percent it doubled monthly installments of many people. And rates are still off by 10 points from real inflation. If they would rose those rates to the real values it would probably bankrupt hundred thoused people here.

Why would you do this in a time of high inflation?

Ideally, so you have a place to live, regardless of the outcomes and influences of inflation et al.

Sure, buying real estate is seen as an investment, but it's also a spot to live and to keep all stuff to help or hedge your enjoyment of life.

Some people just want to live, debt free, and be left alone.

I am concerned with having a place to live, as distinct from preserving my current home.

If I ever have to leave my doomed home with only what I can carry, I'd rather owe as much as possible at that point in time. I think that debt owed to human beings is strictly better than the same amount of equity just vaporized with no possible recourse.

During an inflation your salary is likely going up, and so are all other assets that you own or buy.

Let's say you owe 100000 EUR for a 200000 EUR house, pay 2% interest, inflation rate of 10%. Your net worth is 100000 EUR in the first year.

If you repay 8000 EUR, the next year you owe 92000+2%*92000=93840 EUR and your net worth is 220000-93840= 126160 EUR.

If you repay 4000 EUR and invest 4000 EUR in gold, next year you owe 100000-4000+2%*96000=97920 EUR, your gold is worth 4400 EUR after inflation and your net worth 220000-97920+4400=126480 EUR. Plus you have improved liquidity.

If the inflation rate is higher than the interest of your loan, it's often better to invest in inflation-proof assets.

If paying your energy bill or losing your job is going to be an issue you don’t want to put a huge sum of cash into an illiquid asset like a house. You want that cash to remain available.

Unless you have a fixed mortgage. In that case the bank takes the hit for you.

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