If you can borrow money at 4% and use it to make 10% or more, well that’s a no-brainer. We have watched gold go up 20% a year and more whilst the cost of borrowing that money through a mortgage is typically 4% (or less for some lucky people).
So why do I suggest you reduce the size of your mortgage on a regular basis?
Well, it is all to do with the bit that says “you can borrow money at 4%”. If that rate were guaranteed then we wouldn’t have a problem but the truth is, low mortgage rates are not guaranteed. Historically, the low rates we are currently experiencing are very unusual.
At some point, unless you have a fixed rate for a very long period, those rates will go up – and this gives us two problems. First of all, the repayments will increase dramatically (this may or not be a problem depending on your cash holdings).
But secondly, and this is the big one, when your current mortgage deal comes up for renewal you may not be able to get a new mortgage at all. Mortgage providers can change the amount of equity they demand on a whim and while most lenders remain cash poor themselves I do not see them being generous with over-exposed borrowers either now or in the future.
Many people are in, or near to negative equity. These are the people most at risk of falling off the log.
For this reason I believe all property owners should pay down their mortgages to a point where there is a generous amount of equity in their property. The very minimum I would suggest is 30% but obviously this should be increased as you get older.
This should be done on a steady and regular basis. Even people with interest only mortgages can normally pay off 10% a year without penalty.
Of course you do not need to put all of your savings in to the mortgage as this in itself can leave you exposed if you have no cash reserves to protect you. My recommendation is to go for a spread – some into the mortgage, some into gold and some into silver. The percentages will depend on your own individual circumstances but don’t sweat the detail. The main thing is that your mortgage is coming down each year and your gold and silver holdings are going up.
I know many people have used cheap bank money to buy gold and silver and have been laughing all the way to the bank as a result. I just want to make sure that when interest rates go up or your mortgage deal comes up for renewal, the banks do not end up having the last laugh.