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

An individual with NIS 400,000 in a now-liquid study fund is weighing whether to withdraw the money to pay down a mortgage with a 4.5% interest rate, or to leave the funds to grow. While the instinct to eliminate debt is strong, experts suggest that keeping the money in the study fund may offer a greater long-term financial advantage.

Study funds, particularly those in a general track with approximately 40% stocks and the rest bonds, have historically yielded an average annual return of around 6%. This projected return, while not guaranteed and subject to market fluctuations, offers a potential advantage over the 4.5% mortgage interest. Over 10 years, NIS 400,000 left to grow at 6% could reach approximately NIS 716,000, and after 15 years, it could approach NIS 959,000, all without incurring capital gains tax, which typically applies to other investment profits.

Conversely, paying down the mortgage offers a certain saving of 4.5%. For a NIS 400,000 mortgage over 10 years at 4.5%, the total interest paid would be around NIS 97,000, and the monthly payment would be freed up. However, if this freed-up amount is spent rather than reinvested, the family forfeits the growth potential of the study fund. Even if the monthly mortgage payment is reinvested, the study fund is projected to yield tens of thousands of shekels more over 10 to 15 years compared to reinvesting the mortgage payment savings.

The decision also hinges on the time horizon and liquidity needs. For those with a short-term need for the funds (2-3 years) or who experience financial hardship, paying down the mortgage might offer valuable peace of mind and improved cash flow. However, for longer investment horizons (10+ years) and stable financial situations, the tax advantages and growth potential of the study fund present a compelling case. A middle ground, such as withdrawing a portion of the funds to reduce the mortgage while leaving the remainder in the study fund, is also an option to balance debt reduction with continued investment growth.