Is a Mortgage a Great Way to Force Savings?


I’ve been thinking about mortgages and savings a bit more than usual lately, and with good reason. My father recently retired from his nearly 40-year career as a physician, and in trying to be a good son, I’ve been helping him prepare for the transition financially. This involved taking an account of what he has saved up, his investments, and his expected cash flow. For him, the future that many of us scrimp and save for has come, and since he no longer works a day job, planning is all the more important.

Unfortunately, my father didn’t have the benefit of having resources like the White Coat Investor and Physician on Fire. In fact, though he would have benefited greatly from having one, he never even sought advice from a financial advisor. He just scraped together things from what he heard in doctors’ lounges. Although he provided an amazing upbringing for which I’m extremely grateful, he unfortunately didn’t plan well for his own retirement.

Fortunately though, he recently sold the home we grew up in, and it had long been paid off. The cash from that sale ended up being more than the amount he had in all his investment accounts combined.

Great Forced Savings Vehicle

All I remember thinking was thank God he had the mortgage. It actually forced him to save. Mortgages are often thought of as terrible things – after all, no one likes making monthly payments on anything. But there are quite a few reasons why having a mortgage is very beneficial from a savings standpoint. For example:

It’s Easy

Most experts suggest at least a 10% savings rate, with some, like the White Coat Investor, even recommending 20%. The truth is, thanks to life’s little expenses, many of us fail to come close to those percentages. But how many people forget to pay the mortgage every month? When the alternative is homelessness, most of us make it an easy priority.

Creates Long-Term Wealth

Statistics show that the average homeowner has a higher net-worth than a renter. The US Census Bureau puts out statistics and the last time they did in 2013, they stated that homeowners have a median net worth of $199,557 vs. $2,208 for renters. That’s a 90x difference!

Why is this? This is a chicken or the egg situation – is it that homeownership leads to higher net worths or just that higher net worth people buy homes? I think it’s a little of both. Homeowners are typically older making higher salaries than younger renters with lower salaries. On the other side, over time, the homeowner’s property will appreciate 3-4% on average a year while they’re paying off the mortgage and gaining equity in the home. Most homeowners use leverage (put down 20%) to gain the benefits of the appreciation on the full value of the home, leading to an increased net worth over time.

A simple example of this: If a $500,000 home appreciates at 4% a year, then after one year, the home is now worth $520,000, a gain of $20,000. However, if you had only put down 20% ($100,000), your return on investment is 20% ($20,000 gain / $100,000 down payment). Over time, you can see how that multiplies your gains. (Admittedly this is a very simplified illustration without accounting for taxes & fees.)

Tax Deductions

Interest on your mortgage can be deducted at tax time, which means more money in your pocket. Although with the new tax care plan, this benefit has been reduced for some people, particularly in high cost of living areas. Mortgage interest can now only be deducted up to a $750,000 loan (for new loans) instead of up to $1 million as before.

Not Pay Capital Gains Taxes

Yes, it’s possible that you could pay nothing in taxes on the sale of your home even if you realize a nice gain. You also don’t have to wait until you’re 60 years old to realize this tax benefit. How many other investment vehicles can you say that for? This is a tremendous benefit, particularly for those in higher tax brackets. If you’re single and have lived in your home for at least 2 of the last 5 years, up to $250,000 in gains is tax-free ($500,000 if you’re married).

Not Great as a Savings Vehicle?

Since nothing is perfect, there are some cons to thinking of a mortgage as a savings vehicle. For example:

Better Places to Save and Invest

This can absolutely be true. If you’re disciplined and save well, you can definitely make better returns on your investment than using your own primary residence. Unfortunately, with the nation’s abysmal savings rate and high credit card debt, discipline just doesn’t seem to be our forte.

Liquidity Issue

True savings, some say, should be liquid – something we can tap quickly if needed. A mortgage, therefore, shouldn’t be used as an emergency fund. So lack of liquidity is a valid issue. However, one way to remedy this is by having a home equity line of credit (HELOC) open and available to tap in the case of an emergency. Honestly, that’s what I do. I don’t like to keep a lot of cash sitting in savings. I like my money to work. So I have a HELOC in place just in case of an emergency. I just have to be disciplined not to use it as a credit card for home renovations or to buy a Tesla.


Utilizing a mortgage to help you save may not be ideal for everyone, but I know for a good number of people, a mortgage is a great forced savings vehicle. It was for my dad, and I’m grateful. Now we just have to be smart and figure out what to do with this savings and his other investments for the rest of his retirement. But that’s a story for another post.

How do you feel about a mortgage? Do you feel like it’s a great way to force savings? 


  1. There is something to be said about discipline in any area of your life making you more disciplined in other areas of your life. I know, for me, this is the case with exercising. When I started doing this regularly, I noted that it was easier for me to be more disciplined with my family time or with finances. It was easier for me to wake up, work out, and then get work done even on my days off.

    A mortgage forces you into financial discipline, which is a good thing regardless of how good of an investment vehicle it is.

    I would love to hear more about HELOC and what you think about the pro’s/con’s on using it. Not something I have a ton of knowledge on.

    Thanks for the post!

    • Great point. Similar to when I go through stretches when I have a defined morning routine, instead of snoozing and rushing to work. Every other part of my life seems to fall in place.

      I love having a HELOC in place. It does cost me $75 a year regardless of whether I use it or not but it’s a big part of my “emergency plan.” It deserves its own post but it’s a tool just like anything else – if used well, it has great benefits, if used poorly (as simply a credit card to fund expensive renovations, trips, cars), then it can lead to financial ruin.

  2. I’m not a big fan of debt for any reason. Although I guess I see the arguments here, I don’t agree. People need to save and invest. If you spend all you have you won’t have a lot of extra money in the future. Do we really need debt to save? I’m not sure we even need WCI, PoF or PIMD to tell us to save. My Grandmother saved and never had a mortgage. She didn’t have much education or much money but she knew to save for a rainy day.
    I do agree that the reality of human behavior is more important than theoretical investing, but the behavior to address here is the need to save from every check. Make it automatic. Advanced advice, an advisor, or a mortgage isn’t needed.
    For those reading this, just know: Automatic savings/investing is the only habit needed.

    • One of my favorite books, the Automatic Millionaire speaks to the power of having an automated savings habit. So I agree with you, that’s the ideal way to go and you’re a great example of what that discipline can result in. Unfortunately, it falls counter to our culture and it’s evident in the sad amount of average savings the average American family holds. In comparison to other forms of debt, at least it’s for an appreciating asset for the most part (vs cars, boats, tvs, etc). Not the best way to save, but it will end up positively impacting a good number of people, like my father. The assumption, of course, is that the mortgage is a reasonable one that the buyer can “afford.”

      However, I’m not afraid of debt either and think it can be a great tool for wealth creation.

  3. I have a HELOC as well and I read just yesterday that HELOC interest will no longer be tax deductible with the new tax bill laws. The deductible interest of the HELOC makes it one of the best loans to have for a high income earner. I actually used it to pay off some student loan debt. Now I think the interest rates are essentially the same for me on the two loans since I can’t deduct the interest.

  4. Love it, My mentor in residency taught me to put a small amount of money automatically and ten years later it’s a good sum of money.
    Automatic investing is good and then having other areas where you can benefit is good too. Especially if it comes to something you are going to need to live.

    • If I didn’t need to use debt, I probably wouldn’t. However, living where I live and the timeline to reach my financial goals, the use of some smart leverage is extremely helpful. My goal isn’t to reach ultra high net worth status either, otherwise I’d probably have to take some ultra high risks.

  5. I agree with “wealthy doc”. I will never understand why so many doctors who practiced during the “golden age” of medicine over the past 40 years failed to save sufficiently in good investment vehicles. My parents, who were not doctors, and together probably made 25% of what the typical doctor made during that time period (and did not read any financial blogs or have a financial advisor) nonetheless saved enough to have a comfortable retirement doing pretty much whatever they want to do. They plan to live in their house until they no longer can, so I’m glad they don’t need its value. They also live in a part of the country where housing values have only appreciated 2% on avg per year over the past 25 years. Their house is a tiny fraction of their total savings, which is the approach I’m taking as well.

  6. While I don’t think a mortgage is a great savings vehicle, I do agree that it forces you to save and be more mindful of your budget. At least it was in my situation. Because Southern California is so expensive, taking out a mortgage to purchase our house a few years ago forced my wife and I to examine our overall finances and to find ways to save and cut other expenses. In the end, we made the right choice as our house has appreciated quite a bit and we are much happier living there (as opposed to continuing to live in the semi-crappy downtown apartment we were renting); and happiness is priceless 🙂

    • Sounds like we followed similar paths. Buying our house when we did was simple luck when it came to timing. The equity doesn’t mean much unless we sell, but knowing it’s there in a worst case scenario is comforting.

  7. A mortgage is also a hedge against inflation. Where else can you lock in the value of x amount of dollars for 30 years. Put aside the mortgage versus rent and debt debate, even real estate investors at the end of the day are taking advantage of the mortgaging mechanism by having renters pay their mortgage and build equity. I see so much false equivalency when people get into the “Is a mortgage also bad debt?” debate.
    Of course a mortgage is forced savings. Whether that is a good or bad thing is completely down to the context of the person paying the mortgage. You’re paying for something that is presumably going to be worth something if you wanted to sell it at some future point if you make your payments and you are living in it while you build equity. Not every one can afford to both pay a mortgage and save, or pay rent and save. Lots of people are living pay check to paycheck because they simply cannot afford otherwise. NOT because of spending. So if I am looking at someone who for some reason has a mortgage and is making payments and is not otherwise saving because they either can not or lack the knowledge to do so, then the mortgage payment is a positive. This assumes that the individual can afford the payment and was rational about their original purchase. To compare that to other debt like a credit card or a consumable like a car is a false equivalent.

    I’m amazed by the number of people I encounter around me on a daily basis who know very little about things readers of this site take for granted such as compounding or the value of time or the rule of 72 or many of the other core principals of WHY saving is good. For all of these people, a mortgage is for the most part forced savings. And then there are all the people who have been exposed to these principles but deliberately choose to live in the moment. Again, for these people a mortgage is forced savings and is positive.

    For all the rest of us (most readers of this site), it is situational and part of a larger strategy of living how we choose to while saving for the future in an efficient manner by reducing future expenses. For some it is renting, for some it is flipping while living in the home, for some it is a home purchase with a full term mortgage at a low rate (using money not spent to earn income elsewhere) and for others it is a home purchase with a quick and an early pay off.

  8. I believe it was the author William Nickerson said the worst thing about real estate is that it is not liquid. He goes on to say, the best thing about real estate is that it is not liquid. He explains that it hard times it is easy to liquidate stocks/bonds, but you find a way to keep your real estate.
    So it may not be the best way to save, but it is also has its place in the portfolio.

  9. Ooh great topic and great post! I’m not a fan of using mortgage as a savings plan. I’m more frugal than that and liquidity is such a big issue. If anyone is banking their mortgage as the main source of savings…ummm, they can do better for sure 😉

  10. We also tend to forget upkeep costs of home ownership. Broken furnace, water main…etc. These costs add up. What doesn’t get factored in the financial equation for some people is the psychological comfort of owning property.

    • True, upkeep costs are no joke. Seems like everything that breaks in the house seems to cost at minimum $2000. The good thing is, for a bunch of those replacement costs (ones that have a useful life of > 1 yr if I’m not mistaken) can be factored into the cost basis when selling the home lowering your capital gains taxes.

  11. It’s not a great one, but it is a way to save, for sure. Property taxes and other associated cost make it an inefficient way to save. Even ignoring these costs, home equity is not a savings vehicle that is likely to keep up with inflation (i.e. maintain purchasing power). What you make in price appreciation, you likely have given up in mortgage interest over the years, and then some.

    It’s better than nothing. But to think of a home as a savings vehicle is, I think, the wrong framework. If you sell the home, you have to replace it with somewhere to live. Which almost certainly will cost money. Perhaps even more so given long term trends in housing prices (not to mention more expensive independent or assisted living situations).

    • Even more inefficient with the property tax cap as part of the new reform. Really hurts those of us in high cost of living areas. You’re right about the savings, you can only realize that equity if you sell. Works well for people looking to downsize or retire to a lower cost of living area.

  12. It is a graphic example. My dad who never made more than $40k in a year died at 90 with a net worth of nearly $2 million and that was increasing every year while a 40 year physician has probably less than that even though he no doubt earned much more. Not criticizing, your dad probably saved hundreds of lives while my dad sold insurance and accumulation of wealth is no measure of the value of a life. But it does show that financial independence is possible at lower incomes yet not assured at even very high incomes.