Should You Tap Your Study Fund to Pay Off Mortgage Debt?

An individual with NIS 400,000 in a study fund, which has become liquid, is considering using the money to pay down a mortgage with a 4.5% interest rate. While the instinct to eliminate debt is strong, financial experts advise caution, as this could mean forfeiting the significant long-term advantages of a study fund. Typically, general track study funds, which are about 40% stocks and the rest bonds, can yield an average of around 6% annually over the long term. This potential return, while not guaranteed and subject to market fluctuations, offers a projected advantage over the mortgage interest rate.

Leaving NIS 400,000 in a study fund and assuming a 6% annual growth could result in approximately NIS 716,000 after 10 years and nearly NIS 959,000 after 15 years, without any additional contributions. Crucially, profits within a study fund are tax-exempt until withdrawal, unlike regular investment portfolios where capital gains are typically taxed at 25%. This tax advantage makes study funds particularly effective for long-term wealth accumulation.

Conversely, paying off NIS 400,000 of a mortgage over 10 years at 4.5% interest would save approximately NIS 97,000 in interest and free up about NIS 4,146 monthly. While this offers a certain, risk-free saving, it represents a lower return compared to the potential growth of the study fund. If the freed-up monthly payments are reinvested, the study fund still shows a significant advantage over 10 to 15 years, even after accounting for taxes on regular investments.

The decision also hinges on liquidity needs and peace of mind. A liquid NIS 400,000 serves as a substantial emergency fund for unexpected expenses or opportunities. However, for families struggling with high monthly mortgage payments, a partial withdrawal to reduce the loan could significantly improve cash flow. A middle ground involves withdrawing a portion, such as NIS 100,000 or NIS 150,000, to lower the mortgage while retaining substantial funds in the study fund for continued growth and liquidity.