Subject: Re: OT: Berkshire or mortgage
If you could, would you rather pay cash for a house or invest that cash in Berkshire and get a ~6.7% 30-year fixed-rated mortgage?



A lot of us are probably thinking about this right now, with our mortgages coming due for more expensive renewals and our Berkshire shares looking at us and daring us to sell them to pay off our mortgage.

Here's how I've been thinking about it. First of all, a lot depends on where you are. I understand that US-Americans often get a tax deduction for their mortgage payments, while this is certainly not true in Canada and probably not true in most places. So that will bear on what anticipated return is necessary for Berkshire to be a better choice. In my case, with no mortgage deduction available, I figure if I have to renew a mortgage this year, with 5-y rates at about 6%, and given my marginal income tax rate (about 50%), a 12% before tax return on Berkshire will only give me 6% if it is not tax-sheltered. If it is tax-sheltered, then the breakeven rate depends a lot on how long it is tax sheltered for, so to keep things simple, let's say I need an 8% return to break even with my 6% mortgage rate.

The other major consideration for mortgage vs Berkshire, as an investment destination, is the certainty. I am certain to save 6% on my mortgage if I pay it off; I am far from certain of making 8-12% on my Berkshire investment, and I think it is fairly unlikely that Berkshire's return will be higher than 8-12%.

As a result, I have been selling down my stock positions (not just Berkshire) and freeing up cash to pay off mortgages as they come due. Your calculation will be different since you are probably in the US (judging from the fact that 30-year fixed rate mortgages are available) and so you probably get a tax benefit from your mortgage payments. You might come out ahead by owning Berkshire shares, but the difference is probably small enough that it is not worth the substantial risk of doing worse. Munger's aphorism comes to mind: leverage is one of the 3 ways smart investors go broke.

Regards, DTB