The JFF Blog Q’nD Generic Answer Series re: Hanging on to Asset’y Liabilities

Tuesday, August 14, 2012 at 2pm
By John Friedman

Here’s the setting: Fictional Terry is nearing retirement.  Fictional Terry has a mortgage and is wondering whether, given the lousy returns in the bond market these days, it makes sense for Fictional Terry to reduce Fictional Terry’s cash and/or sell some of Fictional Terry’s bond holdings to pay off Fictional Terry’s mortgage.

Without knowing more, it’s hard to say. But, hey, this is the first in the JFF Blog Quick ‘n Dirty Generic Answers Series (the QnDGA Series), so here’s a Quick ‘n Dirty generic answer:

I continue to think that in many contexts a mortgage with a low interest rate (say, 4.5% or below) is likely to be a net positive over the long-term (a decade or more) — an asset’y liability, if you will. If we assume that Fictional Terry is someone who (a) currently has a steady income, and (b) has the power to increase that income if need be (e.g. something unexpected happens), and (c) has a balance sheet that is likely to be robust enough over the next ten years to pay off the mortgage whenever it appears to be a good time, and (d) has, most importantly, always shown an ability to be smart about spending, then to Fictional Terry I say:

Let it ride, Fictional Terry, let it ride. If you ever want to pay the mortgage off, you always can. If and when you do, then some of your bond prices very well might have fallen (remember the Vice Versa Rule: interest rates up —> bond prices down, and vice versa, and consider that what most likely seems to lie ahead is interest-rates-up), but, hey, your mortgage is the mirror image of that, and, as your bonds devalue some, the implicit value in your mortgage will go up, too.

6% APY years will roam the earth again.  When they do, that 4.5% mortgage will look like a cashflow pump.


Note well: this answer is most definitely not for people who have spending problems.

312 words.

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