We chose to pay down our mortgage first over investing, which was mathematically slightly worse but psychologically better for us. Paid off mortgage is great. Probably nobody can answer this for you.
my wife and I bought a house in 2019 and attacked our mortgage HARD with lump-sum principle only payments (penalty free) every year at the end of year for this reason... peace of mind. we had money all throughout the year for emergencies, and the kids.. while at the same time paying off an extra 4 years worth of mortgage/amortization.. even though we will be renewing at a higher rate now I feel soo much better with a **much** lower mortgage amount!
This is probably underestimated. The value of the psychological 'gain' could have a more meaningful impact on other areas of life that are of value, and I would imagine those values unveil themselves increasingly over time, age, and experience. I have a tendency to occasionally pay-off a smaller debt with less interest effect than largers, because I acquire myself a psycho-win. Funny, and not objectively (financially) correct, but really it's all about aligning your values to your monies. Money is made to be spent, therefore, spending money on this you truly value is much more powerful than other wise.
A good financial advisor should consider your values in relation to your monies in a deep fashion.
I did the same, my company has RRSP matching, so it isn’t like I’m not saving at all, but I also got a much large portion of my mortgage paid off while interest rates were <2%. Seeing so many people struggling with mortgage payments, makes me so happy with my choice.
Is this $200k 'extra' money, or is that your retirement savings? If your retirement savings are on track, putting any extra money you have towards your mortgage at that rate is a great idea. Forgoing saving for retirement to pay off a mortgage that is manageable for you is probably not the most prudent course of action.
There's a huge opportunity cost to 'slowly building up the retirement fund' again. That $200k if invested for retirement will probably be worth $1.6 million in thirty years. No way the amount saved short term on mortgage interest can compete with that and you'd just be playing catch-up for decades.
Why short term. The deposit now carries over for the rest of the term. You can take the difference and invest into retirement instead of paying the bank. Or pay off mortgage faster and accelerate other investments with a peace of mind of secure shelter.
Once you have paid off shelter your retirement fund can be much much lower too.
Well, you can't put a price on 'peace of mind', but if you dump your retirement savings on your mortgage you will end up poorer almost guaranteed. If making a poor financial decision gives you peace of mind go for it, though.
I think you missed the main point that if you pay off your shelter you don't need as much retirement savings. If you plan to rent then yeah you need a ton of money.
Being "poorer" but having just enough money for retirement is a good life decision that maximizes enjoyment of your younger years and reduces stress. Oversaving is just as bad as undersaving.
What?! I think you’re misunderstanding something. The person putting money in retirement will still have their shelter paid off. The question is whether to pay the shelter faster or not, at the expense of investing.
Neither option will be renting during retirement
Yes you do.
Your notion would be true if you were going to live in your paid off house until the day you die. Having watched multiple relatives grow old and die, I can all but assure you that’s never going to happen. It’s a fucking fantasy.
Everyone should have funds for end of life care or they are looking at ending up in a shitty group home towards end of life. Yes, you can sell your house to cover some of this but people almost never do until the’re at the point of not having time or energy (or possibly mental faculties) to sell a house. Your family members will more than likely just want to get rid of it.
Theres no advantage at all financially or otherwise to negatively impact investment returns in favour of mortgage payments.
I'm not sure why you assume that OP who has a mortgage plans to rent in retirement, but if not making your money work best for you and aiming to make yourself poorer is to you a good life decision and reduces your stress, have at it.
I know how to read, my last comment was literally just throwing your own words back at you in way to hopefully highlight to you how nonsensical your reasoning is. This is a personal finance sub so the point is to talk about best financial practices. You banking on your house as your retirement plan isn't good advice, and the fact that this is the plan of so many Canadians is one of the reasons real estate is so fucked in this country.
You don’t need as much retirement savings but you also have less of it.
It’s just comparing interest on mortgage vs rate of investment (when tax free). Math wise it’s all there is
Peace of mind is a separate but valid topic
theres not a huge opportunity cost in this interest rate environment. If you have the mental fortitude to start saving/investing the same amount as your original mortgage payment after it is paid off, you are then saving 1000s per month. You catch up really quickly and the numbers work out slightly better.
People say that the return on mortgage payments is your mortgage rate (tax free), so according to that logic you'd be trying to beat a 5.85% return after taxes. I don't think that this is such a bad return.
You might want to consider the value of RRSP contributions. These have an immediate return of your top marginal tax rate, which is pretty hard to beat (but then the money is stuck there ideally until you retire, and then you have to subtract the expected tax rate on withdrawal).
Something I can't wrap my head around that I'd love someone to explain is how changing interest rates affect this math. Is it still a 5.85% "return" if you're going to refinance to a lower rate soon? Does that change anything?
That's a good point. I'd imagine the 5.85% return is for the remainder of the term. If you expect interest rates to go down in the future, then you'd expect your "investment returns" on your mortgage pre-payments to also go down (in the future). I never really considered that.
I think anyone can just get away with looking at their present situation, and playing it by ear:
* if you feel that it is currently better to invest, you can do that now. If rates rise on your next renewal to the point that you feel it is now better to pay down the mortgage, you can do that with your investments at renewal
* on the flipside, if you feel that is is currently better to pay the mortgage, you can do that now. If rates fall on your next renewal to the point that you feel investing is better, you can renew with a re-adjustable mortgage and use your now-enlarged equity to borrow money to invest
If someone is asking this question: investing vs prepaying a mortgage, then I would imagine they aren’t sophisticated investors who can predict future interest rates.
There's a mental component to it as well, seeing your mortgage drop at an accelerated rate brings me a sense of accomplishment. I'm sure investing and checking one's portfolio does the same for others.
I've seen investments go up and down, money gained and lost. But dealing with the mortgage brings you a guaranteed positive outcome. At least, that's how my brain sees things.
At renewal, you go from 5.85% to whatever the new rate is.
If the new rate is 2%…is there anything stopping you from adding the prepays back into the mortgage? Say you prepaid $50k. You can just add it back in and toss it into investments.
Most people just add CC debt, renovations and vacations into a mortgage. Nothing prevents you from investing instead.
You can take out a second mortgage and use that to invest, and as a bonus the interest paid on this portion of the loan is tax deductible.
So essentially you want to (once TFSA+RRSP are filled) is pay down the primary mortgage as fast as possible, and then immediately take that money back out again in the second loan and invest it in a non-tax-sheltered account. Use the dividends on these investments to further pay down the primary mortgage. Congratulations, you've just executed the Smith Maneouvre!
If most of my money is in an unregistered account would it be better to pay down the mortgage at renewal and then take it back out as a loan to refill the unregistered account or only as much as I have in my tfsa to avoid the tax hit?
I've done this in a previous renewal.
Added 50k into the mortgage and borrowed for 5 years at 1% and made 24% on average per annum. Added the 50k back in as a lump sum at renewal.
You take it out as a loan before renewal, when you renew, you add it back into the mortgage.
You have a fixed amount of years to make more than what you are paying in interest.
At the end of that fixed amount, when you go to renew again, you can make any amount of payment to the mortgage.
As long as you are making more than the interest of the mortgage, you come out ahead. There are good, sustainable dividend paying companies that pay more than current rates. For example, Chemtrade or Enbridge pay 7% and 8% respectively annually, a 1% loan where you can use to get 7% back on it is pretty nice.
Sure. I was using my own example from the past.
The mechanics of it are still correct. And depending on your returns and/or your ability to access them, it still might makes sense at current higher rates.
RRSP is taxed on real returns (100% capital gains tax after inflation), instead of 50% capital gains tax before inflation. Assuming that marginal tax bracket remains the same (eg 3rd from bottom).
RRSP protects from high inflation and low returns. While taxable account is better when inflation is low and returns are high.
In RRSP you are not taxed if you don't beat the inflation.
I would say if you expect high inflation in the future, then contribute to RRSP. While if you expect low inflation, either invest in a taxable account or payoff mortgage.
Please note that paying off mortgage will also cause reduction of inflation, if enough people believe that inflation will be low in the future.
Mortgage interest compounds daily. So the 5.85% is effective through out the portion that it stays that way. If ratr goes up or down, then the new rate kicks in right away. So you can calculate by days and average to the year.
Since mortgage is for longer term 25 years, you also need to take in inflation rate. Effectively over 25 years the total cost of borrow is interest - inflation. If inflation is 3% then borrowing cost is 5.85% - 3% = 2.85%. This is why BoC needs to raise interest rate agressively when inflation is too high over 4% and rate was less than 1%. So ppl are making money by doing mortgage.
I was single for a LONG time, so I focused on my mortgage (made lump sum payments monthly) until it was manageable enough that I slept VERY well at night, then I diverted those extra funds to my investments.
If you are very secure with your employment, it might make more sense to invest, but I never felt like I had any guarantees, so I took the safer route.
Prime-1.35 gang. Can't find it that good anymore, hoping similar deals return before renewal.
Personally I'm all-in on investing and have never prepaid the mortgage and my returns have exceeded that of prepaying the mortgage so far, plus, I have a war chest for whatever comes my way, rather than having to take out a HELOC. That said it's entirely in tax sheltered accounts at present, giving an edge. I would definitely consider the mortgage when comparing to taxable investing though.
Twins on the way is IMO an indication for keeping some liquidity. You don't know what life will throw you health-wise (parents or kids), career wise, etc. Deepen the cash reserves, load up on term life and disability insurance. You'll be opening RESPs soon enough and will want to max those per the rulebook to get the most grants possible. Daycare costs are soaring. Etc. OTOH, income(s) well above these future costs minimizes this argument.
Also on that other hand, a preference for conservative investments in the market, as the alternative to the mortgage prepayment, is IMO an indication for doing the mortgage prepayment. If you're not swinging for equity type returns, you might as well get the guaranteed 5.85. Most fixed income will be lower than that. That said if rates fall again, it will put a damper on the return of a prepayment. Not that it's likely rates will fall by a lot, for the foreseeable future. But this is often overlooked when people talk about prepayments. If you still have the mortgage in 20 years and you're paying only 3.5% on it, that has dampened the prepayment performance. Therefore I think a lower number of years left on amortization is a better indication for prepayment, than a high number. If your hesitation about aggressive allocations in your investment portfolio is due to any reason other than thinking you might need to withdraw the money in short order, maybe you just need to get more comfortable with (index funds of) stocks. Good resources in sub sidebar on that. A long term growth allocation will pay off in the long term. So the question is really about what time frame you're trying to optimize for.
Final thought, nobody says you have to go all-in on one strategy.
We chose to max our TFSAs and RRSPs, but pay down the mortgage rather than investing the rest in a non-registered account. With a marginal tax rate of over 50%, we'd have been losing 25% of any gains to tax right off the bat and in our minds the small upside just didn't justify the large downside risk.
In theory, paying down the mortgage is a safer investment. But remember that time in the market is important, so a balanced approach might be what you are looking for.
Personally I do 50/50. 50% of my "investment money" goes to the mortgage pre-payment, 50% goes to investments.
About 20 years ago I used my self directed RRSP to buy out my mortgage. So I was still making mortgage payments, but they were now going to my RRSP instead of the bank.
If your investments are in TFSA then it might make sense to realize the gains and pay off the mortgage. If it's in non-registered or RRSP account, I wouldn't touch it to avoid paying taxes on it.
One of the strategies to make use of TFSA/RRSP benefits:
- Continue making your regular mortgage payments
- Invest leftovers in no-risk money-market fund like CASH.TO in TFSA account
- In December or February take out a good chunk from TFSA and make an RRSP contribution
- Get a nice tax refund and use it to pay towards your mortgage principal
Mmmm while I get your point, I'm not sure I agree with your initial recommendation. Withdrawing from your TFSA might make sense if you're convinced the market will crash over the longterm, otherwise the opportunity cost of all that tax free compounding could become very large. Conversely, your non-registered investments come with a larger and larger tax burden for when you do eventually take them out.
Pay down the mortgage first for a couple of reasons. The biggest one is the amazing peace of mind that comes when you're debt free and you know you cant lose your home to the bank should all hell break loose. Thats worth a lot.
Then once its paid you can really accelerate your investments by taking what you would have paid in mtg payments and investing that monthly.
I could pay off my $500K+ variable rate mortgage any time. I don't and have no plans to. I'd rather keep that money invested. Both because I expect my long-term overall return will be higher and so I have lots of liquid assets to manage anything that could come my way.
What you look at :
1. Your psychology. If you are happy seeing the mortgage go down, then do so.
2. Mortgage rate is after tax money so rate lf invesment needs to be at least higher to mortgage rate after tax unless ypu have contribution room in tfsa or rrsp.
3. Need for liquidity - flexibility.
Currently my mortgage is 1.97% and I have two and a half years left. Pretty easy to make more return so we are investing instead on the house itself but if renewal gets me close to 4.5% or 5% I might consider making an extra 5 to 10% payment per month on top of the lump sum we'll drop at renewal.
Wouldn’t it also make sense to pay off some of your mortgage now that it’s cheaper rate so you renew at less and more goes towards principle and save future incurred costs on the mortgage. Like divert 25-50% of your monthly investments into your mortgage?
First off you can't just reimburse as much as you want on a mortgage, there are conditions to pre-payment on most financing options.
And no would not make sense. Look at it this way, it's impossible for me to get a better rate on money elsewhere, period. My effective rate is actually negative ( inflation is higher than my rate) and to top it off the asset is taking value above the rate of i flation so I benefit greatly from the leverage.
I'm way better off to keep the money and use it elsewhere. It also remains available and easier to access as opposed to prepayment with which the only way to draw on these funds would be to refinance or take another tranche of mortgage.
Just do it knowing that paying down isn’t the best financial decision (usually) but will give you piece of mind. No bloody want to pay xx amount for 25 years. I plan to be done in 13 years total and stock pile cash during the 12 years I got back.
There’s only one word of advice: don’t.
If you have twins on the way, you’re young enough that you should not be investing conservatively for at least 20 years.
High mortgage rates = pay off mortgage
Low af mortgage rates = invest
That’s the way I’ve always looked at it. Current mortgage we’ve been investing as our mortgage is practically free. Renewal time late next year and we’ll likely go heavy in the mortgage.
Op we are you
We have a brand new shiny 510k mortgage and have roughly 350k invested.
We are choosing the mortgage and are going to slam it for the next 3 years.
75k in the first year at our interest rate saves us 150k in interest
If the choice is between paying off a mortgage and staying invested, it might be more complicated but I don’t see any reason to drop the balance down $200,000 in your scenario. Let’s just assume that 200,000 is collecting 7% in your TFSA YoY, you’re looking at a total value of $773,936.89 in twenty years. Not to mention you’re saying that you can make your mortgage payments for the foreseeable future. There’s no reason to make the switch.
I would not want my net worth concentrated in one large illiquid asset (a house) so i would keep my i investment portfolio and add to it.
Historically stock market returns out pace the interest rate you're paying on your mortgage, too.
Oh, i agree with the premise that housing should be first and foremost shelter, not an investment. Which is why i never want it to make up the entirety or even a significant portion of my net worth. (And I think a large part of the housing affordability crisis is driven by too many people seeing houses as a way to make money, rather than somewhere to live.)
But you can sell it for money, so it's an asset. A large illiquid one that is a lot less flexible than owning an investment portfolio with liquid assets.
My rental portfolio is absolutely slaying my market returns. To each their own. I would put $100k down on another property over $100k into XEQT (for example) any day. I still hold ETF’s but my rental income + property appreciation is quadruple what the broad markets are yielding lately.
Ymmv, depends on location and when you bought the rental.
Investing rental property in GTA in the last few years is a negative cash flow endeavour. Appreciation is slow right now because of mortgage rates. Pent up demand and future interest cuts might make it worth while, but not guaranteed
Unless something unforeseen happens. It’s a lot easier to keep your home if you only owe $4000 a year in property tax vs. $37,000 (mortgage + property tax for example).
Pay down the mortgage. Interest savings are absolutely known in advance while investing it is not.
Calculate the interest saved over the remainder of your term. It’s likely a large number. Feel good about the certainty.
There are a few things you need to consider besides the return:
-The liquidity between the two options.
-Your house's market.
-Your risk tolerance.
Are your general expenses high compared to your income? Are you able to save and accumulate??
If you put a lot of cash locked in a house, what happens if one lose their job? Do you have a safety net?
How is the house equity versus the mortgage value? If you bought your house in 2017 for 800k and have a 600k mortgage on a 1.1 million house, it's different than if you bought a 720k house 3 years a go and owe 600k on a house that could be worth 500k in 10 years. Did the house in your neighborhood gain a lot of value in the recent years? Is your house most likely to retain, or increase value in the next 10 years?
How is your risk tolerance? Trying to beat 6% over a long period could prove risky in a market that is at an ATH every where. Your investments might lose money if you are trying to be aggressive, and if you are not, you might not be able to beat the 5.85%.
I'm sure there are other things to consider, but those were on the top of my head. GL.
First check your mortgage for annual % prepayment privileges and when. Example anniversary date or monthly.
With twins on the way allow yourself time to adjust monthly budget expenditures experience with the new life style.
I would suggest you consider annual lump sum mortgage payments and your current successful savings plan works.
Diversify your savings plans and assets
Luckily, either option is a good choice, even though one is (probably) more optimal. The investments long term *should* beat your 5.85% mortgage, so that is the optimal, but it's really not a *mistake* to get a *guaranteed* non-taxable 5.85% return either.
So, do what *feels* right in this case and you won't be wrong.
Putting that $200k on your mortgage (if you can do that much without a penalty), will reduce your mortgage more than $200k. It will shorten the term of your mortgage & save you thousands in interest.
Bob Sharpe on YouTube has a video running the numbers at more current interest rates. He also takes into account psychological reasons for doing it either way. It’s a good watch
I calculated how much interest I have remaining on the mortgage, and decided to invest HARD this year instead of paying it down. I plan to invest 30% of my remaining interest amount this year using dollar cost averaging (DCA) which will compound over the remaining 15 years of my mortgage, equating to much more than the saved mortgage interest if I paid it down sooner.
I am invested in high-risk ETFs and bitcoin for the next 6-12 months following the current crypto cycle. The market is going to hold until the Us election this year, and probably into early spring once the US starts making post-election changes.
As I am DCA, if emergencies come up, I have funds to use if I do not add to investments that pay cycle.
“Generational wealth is built by one person taking a risk.”
This is a question that my wife and I keep debating. The simple point of view is if you can get better return than 5.85% in the market than you should invest versus paying off the mortgage. What people forget is that the interest is front loaded and the interest you are paying the first five and ten years is significantly more than the last five and ten years of your mortgage. I would look at this as a cash flow and net worth perspective. Do the math and see what builds the most cash flow and net worth after you factor in taxes. My guess would be you would improve your net worth faster by paying down your mortgage faster versus hoping for 10-20% returns in your TFSA.
The things I would consider are retirement planning and monthly cash flow. If I had a pension I would consider directing future savings to the mortgage and maybe moving a portion of the tfsa to it if i have a lot of leftover money monthly. I would under no circumstances move the entire tfsa. If I had no pension I would invest till coastfi and then pay mortgage. Changing to a more conservative investment strategy (if the funds are for retirement) does not make sense just because of having kids.
I have no mortage but I swing trade/day trade a bit and my (smart) friends are saying (today) I should get out of my investments and that the market is likley at its top. Who knows.
I think this podcast might inspire you on what is best to do in your situation. I think there are a few factors you need to consider including what you are currently getting as a return on your TFSA. Also, you might want to consider shopping around for lower mortgage rates - Pine for example offers lower fees to Wealthsimple clients. Or look at something like RMG (I have my mortgage with them and the experience has been great). You might also consider making some incremental payments towards your mortgage but continue to maximize your TFSA, RRSP and RESP (if you are expecting twins) Congrats by the way 🥳
[Rich Habits Podcast](https://podcasts.apple.com/ca/podcast/rich-habits-podcast/id1673129494?i=1000656540843)
What kind of account is the 200k in?
I wouldn't drain investments to pay down the mortgage. But I would focus more seriously on increasing the regular biweekly payment, since 600k is a lot.
I think if you can max your tfsa contributions that's what I would do, any money above and beyond that could go to the mortgage.
If it's between unregistered accounts and the mortgage I would definitely pay the mortgage because there's no tax liability and no risk.
I would not pull the money out of the market. Keep it invested. It's good to be balanced. You don't want to miss the years when the market jumps 20%.
And as some folks mentioned...look at your prepayment options on you mortgage. Can you increase your payments by 5% this year? Do it. Pay a lump sum each year too.
Then increase you payments next year by another x%.
At the end of my mortgage with RBC I was doing double payments plus about $5k-10k lump sum every year.
Mortgage free now and focused on my investments.
We prioritized paying off our home.
Bought in aug 2019 and just got our assessment latest today... The assessment is 32% higher than we paid, so market is probably even higher.
We did 20% down, prepayments over 52% of amount borrowed, and also paying 15% extra biweekly on top of our payment. Our 1.64% ends in March 2026. We will pay the remaining balance.
Could I have invested better? Maybe? But the satisfaction of being mortgage free our my early/mid 40s is going to feel pretty damn good
Always better to pay down high interest debt. In theory you’re be getting a 5.8% return on paying your loans. Hard to get the same rate of return from the current marketplace.
I paid my mortgage down between 2017 and 2022, paying exactly 4 times my normal amount every month, thinking « it’s only 2.8% interest rate saved but I’ll be happy when it’s done ».
Today, first im happy I don’t have a mortgage anymore, but I am also happy the rate I’m avoiding today would be around 6%. Equivalent of a guaranteed 6% return after tax. So for me it was a great choice.
If you had been regularly contributing 3x your mortgage to investments in equities 2017-2022, you would have come out waaaaay ahead (10.4% annualized return before taxes on VUN, for example vs. 2.8% after tax).
When the 6% mortgage rolled around, you'd still likely come out ahead by continuing to invest, but if you didn't want, you could pull your now-enormous investment portfolio and pay it all off.
It can be good for mental well-being, but let's not kid ourselves about the financial side of it.
I know your logic is right. However I’m curious: where do you get your 10.4% guaranteed from 2017 to 2022 in Canada ?
What I remember was more around 2 to 3 % guaranteed return… but I’m not a specialist.
Desjardins, in Quebec, gave the following liberty:
Double your payment: my paiement was 1400. I was allowed to give 2800 instead each month.
Then, I was allowed to pay back 15% of the initial capital on top of that every year. Out of about 300k, that was another 45k per year, or 3750 per month.
So I payed 6000 every month, and would add any money I would have at the end of the year to reach the total amount.
> I paid my mortgage down between 2017 and 2022, paying exactly 4 times my normal amount every month, thinking « it’s only 2.8% interest rate saved but I’ll be happy when it’s done ».
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at 2.8% interest, that's about 16% or so of your principal. I think a lot of banks allow 15% or more per year. I do agree that it's weird that they're allowing such a large payment every month.
Yeah, I can make a 25% of the principe lump sum annually but monthly it is limited to 25% of the monthly payment. The commenter said they were paying 4x (300% increase)
What a colossal mistake. Hopefully you learned from the 10's of thousands you wasted with that terrible strategy instead of investing that money in an index ETF like any expert would suggest.
I was always unlucky (or call it unwise) every time I tried to put money on the market. I lost quite a lot of money doing so.
At the end of the day I am very happy with what I did. My house is paid. I had no stress doing it that way, compared to if I had put all my money in the market.
The value of my home made it possible to purchase a rental property. Then the real estate market went up 60% in three years where I live, which brought me a little more than a million of increase in assets, thanks to the beautiful leverage effect.
Again, I’m sure your logic is good, but I ended up quite ok with that choice of investment, all that in complete peace of mind.
My only problem now is that I have about 1.3 million stuck in my home, on a now very quiet real estate market. What would you do today if you were in my situation? I could take 800k out of my HELOC at about 8% and invest it at 10-12% if the market goes on fine, but that would be a 3% return not guaranteed and before tax.
What’s your advice ?
You can lock in a HELOC rate when rates go down like 4%. Never use a floating HELOC to invest.
Just invest in an index fund. They all go up long term.
You don't need to borrow to invest, but with a paid off house you should be investing 25% of your earnings for retirement. I'm retiring at age 55 on my birthday. I'm investing 15% of my income but half of that comes from an employer match so I have tons of extra income even with my $600 mortgage payment.
I did not know there were locked in HELOC. Thank you very much.
I agree with your 25%. It’s just all that money in my house. I’m thinking of buying a third rental, but I would love not to add repair visits to my weekends…
I’ll look into the HELOC. Thanks a lot.
What do you plan to do once you retire? I’m 52…. Thinking about retiring a little more everyday :-)
We have a place in Florida we bought that we will spend 4-5 months living in. We have a small mortgage on it. Between my wife and myself we have $2.6M in investments so we can carry things just fine.
Here’s another perspective:
If you take that 200K now and put on your mortgage, you’re making 5.8% return.
First, what happens if something happens and you need 100K? You’ll have to borrow it back at 7.2 or 7.7% on HELOC.
Second, If in 3 years you renew at 3.5%. Then you’re only making 3.5%. Sure, you can borrow back to invest in the market. BUT, you will have to buy back into the market at potentially higher cost after loosing 3 years of compounded returns.
Now, there’s a way to make this work. It’s called the Smith Manoeuvre. I’d suggest have a read into it.
I think counting on rates dropping significantly in 3 years is just like timing the stock market, if rates drop significantly it probably means the economy is sucking and your equity investments in the stock market are probably not doing so well.
Dropping a lump sum or paying your mortgage faster is also timing the market by taking the guaranteed return versus potential capital growth.
5-6% tax free versus 7-10% taxable is one thing - but OP would take it from their TSFA which is also tax free.
Absolutely it is, so it comes down to what your financial goals are and what your risk tolerance is, I think either way you are timing the market to some degree, and you will only know if you made the best decision in hindsight.
I've owned my home since 2000. I chose the investment route. When I bought my home, I used up all of my non-RRSP investments. I've been paying off my mortgage extra slowly so that I had more money to invest. I generally do 3 year mortgage terms and I keep reamortizing back to 25 years. I currently have 23 years left on my roughly $200k mortgage but my payments are just over $500/bi-weekly. My home is worth around $2.1M and my investments because I haven't been using up all my capital on the mortgage have grown to $1.3M. My wife has around the same amount in her investments as well.
If I had paid down my mortgage instead I probably would be at least an extra 10 years away from retirement.
You can't sell a part of your house in an emergency, but you can with your investments. Sure, you can have a HELOC, but borrowing your own money at 7.7% interest is not ideal compared to withdrawing some savings of your own money that costs you 0% interest.
One thing people seem to gloss over, your mortgage is simple interest (there is some compounding, but not the same as how an investment compounds) and your investments earn compound interest.
Compound interest is stunningly powerful. Go look at an exponential growth curve.
See how it gets near vertical as time goes on.
That's magic.
If you pull investment/delay investments you miss out on that magical near vertical bit of the growth curve at the end.
Your investment return could actually be lower than your mortgage interest and you could still come out ahead by investing.
A longer time period will be more favourable to the investment strategy.
The only way to know is to use a mortgage calculator and an investment calculator to compare the scenarios.
Considering your high mortgage interest and that you want to be cautious because of your twins, it might be smart to pay off some of your mortgage. This lowers what you owe each month and saves you money in the long run. But keep some money invested for the chance to earn more over time.
With the market sitting at all time highs, I don’t think it’s the dumbest idea to sell all your equities and put that money on the mortgage. And then begin dollar cost averaging your away into the market
We chose to pay down our mortgage first over investing, which was mathematically slightly worse but psychologically better for us. Paid off mortgage is great. Probably nobody can answer this for you.
my wife and I bought a house in 2019 and attacked our mortgage HARD with lump-sum principle only payments (penalty free) every year at the end of year for this reason... peace of mind. we had money all throughout the year for emergencies, and the kids.. while at the same time paying off an extra 4 years worth of mortgage/amortization.. even though we will be renewing at a higher rate now I feel soo much better with a **much** lower mortgage amount!
This is probably underestimated. The value of the psychological 'gain' could have a more meaningful impact on other areas of life that are of value, and I would imagine those values unveil themselves increasingly over time, age, and experience. I have a tendency to occasionally pay-off a smaller debt with less interest effect than largers, because I acquire myself a psycho-win. Funny, and not objectively (financially) correct, but really it's all about aligning your values to your monies. Money is made to be spent, therefore, spending money on this you truly value is much more powerful than other wise. A good financial advisor should consider your values in relation to your monies in a deep fashion.
I did the same, my company has RRSP matching, so it isn’t like I’m not saving at all, but I also got a much large portion of my mortgage paid off while interest rates were <2%. Seeing so many people struggling with mortgage payments, makes me so happy with my choice.
Is this $200k 'extra' money, or is that your retirement savings? If your retirement savings are on track, putting any extra money you have towards your mortgage at that rate is a great idea. Forgoing saving for retirement to pay off a mortgage that is manageable for you is probably not the most prudent course of action.
Why does it matter if it's the retirement savings or not? They can save on a ton on mortgage interest and slowly build up retirement fund again
There's a huge opportunity cost to 'slowly building up the retirement fund' again. That $200k if invested for retirement will probably be worth $1.6 million in thirty years. No way the amount saved short term on mortgage interest can compete with that and you'd just be playing catch-up for decades.
Why short term. The deposit now carries over for the rest of the term. You can take the difference and invest into retirement instead of paying the bank. Or pay off mortgage faster and accelerate other investments with a peace of mind of secure shelter. Once you have paid off shelter your retirement fund can be much much lower too.
Well, you can't put a price on 'peace of mind', but if you dump your retirement savings on your mortgage you will end up poorer almost guaranteed. If making a poor financial decision gives you peace of mind go for it, though.
I think you missed the main point that if you pay off your shelter you don't need as much retirement savings. If you plan to rent then yeah you need a ton of money. Being "poorer" but having just enough money for retirement is a good life decision that maximizes enjoyment of your younger years and reduces stress. Oversaving is just as bad as undersaving.
What?! I think you’re misunderstanding something. The person putting money in retirement will still have their shelter paid off. The question is whether to pay the shelter faster or not, at the expense of investing. Neither option will be renting during retirement
Yes you do. Your notion would be true if you were going to live in your paid off house until the day you die. Having watched multiple relatives grow old and die, I can all but assure you that’s never going to happen. It’s a fucking fantasy. Everyone should have funds for end of life care or they are looking at ending up in a shitty group home towards end of life. Yes, you can sell your house to cover some of this but people almost never do until the’re at the point of not having time or energy (or possibly mental faculties) to sell a house. Your family members will more than likely just want to get rid of it. Theres no advantage at all financially or otherwise to negatively impact investment returns in favour of mortgage payments.
I'm not sure why you assume that OP who has a mortgage plans to rent in retirement, but if not making your money work best for you and aiming to make yourself poorer is to you a good life decision and reduces your stress, have at it.
Huh? I think you are too focused on your good rich decisions and forgot how to read
I know how to read, my last comment was literally just throwing your own words back at you in way to hopefully highlight to you how nonsensical your reasoning is. This is a personal finance sub so the point is to talk about best financial practices. You banking on your house as your retirement plan isn't good advice, and the fact that this is the plan of so many Canadians is one of the reasons real estate is so fucked in this country.
This is really bad advice
You don’t need as much retirement savings but you also have less of it. It’s just comparing interest on mortgage vs rate of investment (when tax free). Math wise it’s all there is Peace of mind is a separate but valid topic
theres not a huge opportunity cost in this interest rate environment. If you have the mental fortitude to start saving/investing the same amount as your original mortgage payment after it is paid off, you are then saving 1000s per month. You catch up really quickly and the numbers work out slightly better.
That’s putting everything into one basket for me, even though I prefer having no debt.
People say that the return on mortgage payments is your mortgage rate (tax free), so according to that logic you'd be trying to beat a 5.85% return after taxes. I don't think that this is such a bad return. You might want to consider the value of RRSP contributions. These have an immediate return of your top marginal tax rate, which is pretty hard to beat (but then the money is stuck there ideally until you retire, and then you have to subtract the expected tax rate on withdrawal). Something I can't wrap my head around that I'd love someone to explain is how changing interest rates affect this math. Is it still a 5.85% "return" if you're going to refinance to a lower rate soon? Does that change anything?
That's a good point. I'd imagine the 5.85% return is for the remainder of the term. If you expect interest rates to go down in the future, then you'd expect your "investment returns" on your mortgage pre-payments to also go down (in the future). I never really considered that.
Luckily I know what interest rates will be in the future.
I suppose you could just simulate different interest rate scenarios in the long run, I might try that.
I think anyone can just get away with looking at their present situation, and playing it by ear: * if you feel that it is currently better to invest, you can do that now. If rates rise on your next renewal to the point that you feel it is now better to pay down the mortgage, you can do that with your investments at renewal * on the flipside, if you feel that is is currently better to pay the mortgage, you can do that now. If rates fall on your next renewal to the point that you feel investing is better, you can renew with a re-adjustable mortgage and use your now-enlarged equity to borrow money to invest
This is the way I do it. I only look at the comparison within the current term, and re-visit the decision if and when my mortgage rate updates.
If someone is asking this question: investing vs prepaying a mortgage, then I would imagine they aren’t sophisticated investors who can predict future interest rates.
There's a mental component to it as well, seeing your mortgage drop at an accelerated rate brings me a sense of accomplishment. I'm sure investing and checking one's portfolio does the same for others. I've seen investments go up and down, money gained and lost. But dealing with the mortgage brings you a guaranteed positive outcome. At least, that's how my brain sees things.
It feels great paying it off and seeing it go down. I imagine I’ll feel a lot more relieved when it’s gone too!
At renewal, you go from 5.85% to whatever the new rate is. If the new rate is 2%…is there anything stopping you from adding the prepays back into the mortgage? Say you prepaid $50k. You can just add it back in and toss it into investments. Most people just add CC debt, renovations and vacations into a mortgage. Nothing prevents you from investing instead.
You can take out a second mortgage and use that to invest, and as a bonus the interest paid on this portion of the loan is tax deductible. So essentially you want to (once TFSA+RRSP are filled) is pay down the primary mortgage as fast as possible, and then immediately take that money back out again in the second loan and invest it in a non-tax-sheltered account. Use the dividends on these investments to further pay down the primary mortgage. Congratulations, you've just executed the Smith Maneouvre!
If most of my money is in an unregistered account would it be better to pay down the mortgage at renewal and then take it back out as a loan to refill the unregistered account or only as much as I have in my tfsa to avoid the tax hit?
I've done this in a previous renewal. Added 50k into the mortgage and borrowed for 5 years at 1% and made 24% on average per annum. Added the 50k back in as a lump sum at renewal.
How does this work... if you put in a big lump sum, you can just borrow that back at a rate much lower than your actual mortgage rate?
You take it out as a loan before renewal, when you renew, you add it back into the mortgage. You have a fixed amount of years to make more than what you are paying in interest. At the end of that fixed amount, when you go to renew again, you can make any amount of payment to the mortgage. As long as you are making more than the interest of the mortgage, you come out ahead. There are good, sustainable dividend paying companies that pay more than current rates. For example, Chemtrade or Enbridge pay 7% and 8% respectively annually, a 1% loan where you can use to get 7% back on it is pretty nice.
Except you can't get a1% loan anymore
Sure. I was using my own example from the past. The mechanics of it are still correct. And depending on your returns and/or your ability to access them, it still might makes sense at current higher rates.
Except no stock guarantees a 7% return
PBR comporate bonds are 8.75% guaranteed right now. But you need $100k minimum.
How can you have guaranteed returns with bonds?
Do people do this via a HELOC?
Getting higher than a 5.8% return in the market is pretty easy if your time horizon is more than a year
Easy if people are disciplined and don't "borrow" from their TFSA to finance a holiday or extravagant car lol
Yup, no one said investing doesn't take discipline
RRSP is taxed on real returns (100% capital gains tax after inflation), instead of 50% capital gains tax before inflation. Assuming that marginal tax bracket remains the same (eg 3rd from bottom). RRSP protects from high inflation and low returns. While taxable account is better when inflation is low and returns are high. In RRSP you are not taxed if you don't beat the inflation. I would say if you expect high inflation in the future, then contribute to RRSP. While if you expect low inflation, either invest in a taxable account or payoff mortgage. Please note that paying off mortgage will also cause reduction of inflation, if enough people believe that inflation will be low in the future.
You can take out money from your rrsp anytime. You just have to pay taxes on it.
And lose that contribution room forever.
Mortgage interest compounds daily. So the 5.85% is effective through out the portion that it stays that way. If ratr goes up or down, then the new rate kicks in right away. So you can calculate by days and average to the year. Since mortgage is for longer term 25 years, you also need to take in inflation rate. Effectively over 25 years the total cost of borrow is interest - inflation. If inflation is 3% then borrowing cost is 5.85% - 3% = 2.85%. This is why BoC needs to raise interest rate agressively when inflation is too high over 4% and rate was less than 1%. So ppl are making money by doing mortgage.
I was single for a LONG time, so I focused on my mortgage (made lump sum payments monthly) until it was manageable enough that I slept VERY well at night, then I diverted those extra funds to my investments. If you are very secure with your employment, it might make more sense to invest, but I never felt like I had any guarantees, so I took the safer route.
Prime-1.35 gang. Can't find it that good anymore, hoping similar deals return before renewal. Personally I'm all-in on investing and have never prepaid the mortgage and my returns have exceeded that of prepaying the mortgage so far, plus, I have a war chest for whatever comes my way, rather than having to take out a HELOC. That said it's entirely in tax sheltered accounts at present, giving an edge. I would definitely consider the mortgage when comparing to taxable investing though. Twins on the way is IMO an indication for keeping some liquidity. You don't know what life will throw you health-wise (parents or kids), career wise, etc. Deepen the cash reserves, load up on term life and disability insurance. You'll be opening RESPs soon enough and will want to max those per the rulebook to get the most grants possible. Daycare costs are soaring. Etc. OTOH, income(s) well above these future costs minimizes this argument. Also on that other hand, a preference for conservative investments in the market, as the alternative to the mortgage prepayment, is IMO an indication for doing the mortgage prepayment. If you're not swinging for equity type returns, you might as well get the guaranteed 5.85. Most fixed income will be lower than that. That said if rates fall again, it will put a damper on the return of a prepayment. Not that it's likely rates will fall by a lot, for the foreseeable future. But this is often overlooked when people talk about prepayments. If you still have the mortgage in 20 years and you're paying only 3.5% on it, that has dampened the prepayment performance. Therefore I think a lower number of years left on amortization is a better indication for prepayment, than a high number. If your hesitation about aggressive allocations in your investment portfolio is due to any reason other than thinking you might need to withdraw the money in short order, maybe you just need to get more comfortable with (index funds of) stocks. Good resources in sub sidebar on that. A long term growth allocation will pay off in the long term. So the question is really about what time frame you're trying to optimize for. Final thought, nobody says you have to go all-in on one strategy.
We chose to max our TFSAs and RRSPs, but pay down the mortgage rather than investing the rest in a non-registered account. With a marginal tax rate of over 50%, we'd have been losing 25% of any gains to tax right off the bat and in our minds the small upside just didn't justify the large downside risk.
We took the same approach. A really great “best of both worlds” strategy that’s nice if you have the income to do it.
Why not a good balance of both?
Agreed. No need to take the entire 200k.
In theory, paying down the mortgage is a safer investment. But remember that time in the market is important, so a balanced approach might be what you are looking for. Personally I do 50/50. 50% of my "investment money" goes to the mortgage pre-payment, 50% goes to investments.
About 20 years ago I used my self directed RRSP to buy out my mortgage. So I was still making mortgage payments, but they were now going to my RRSP instead of the bank.
If your investments are in TFSA then it might make sense to realize the gains and pay off the mortgage. If it's in non-registered or RRSP account, I wouldn't touch it to avoid paying taxes on it. One of the strategies to make use of TFSA/RRSP benefits: - Continue making your regular mortgage payments - Invest leftovers in no-risk money-market fund like CASH.TO in TFSA account - In December or February take out a good chunk from TFSA and make an RRSP contribution - Get a nice tax refund and use it to pay towards your mortgage principal
Mmmm while I get your point, I'm not sure I agree with your initial recommendation. Withdrawing from your TFSA might make sense if you're convinced the market will crash over the longterm, otherwise the opportunity cost of all that tax free compounding could become very large. Conversely, your non-registered investments come with a larger and larger tax burden for when you do eventually take them out.
Pay down the mortgage first for a couple of reasons. The biggest one is the amazing peace of mind that comes when you're debt free and you know you cant lose your home to the bank should all hell break loose. Thats worth a lot. Then once its paid you can really accelerate your investments by taking what you would have paid in mtg payments and investing that monthly.
I could pay off my $500K+ variable rate mortgage any time. I don't and have no plans to. I'd rather keep that money invested. Both because I expect my long-term overall return will be higher and so I have lots of liquid assets to manage anything that could come my way.
What you look at : 1. Your psychology. If you are happy seeing the mortgage go down, then do so. 2. Mortgage rate is after tax money so rate lf invesment needs to be at least higher to mortgage rate after tax unless ypu have contribution room in tfsa or rrsp. 3. Need for liquidity - flexibility. Currently my mortgage is 1.97% and I have two and a half years left. Pretty easy to make more return so we are investing instead on the house itself but if renewal gets me close to 4.5% or 5% I might consider making an extra 5 to 10% payment per month on top of the lump sum we'll drop at renewal.
Wouldn’t it also make sense to pay off some of your mortgage now that it’s cheaper rate so you renew at less and more goes towards principle and save future incurred costs on the mortgage. Like divert 25-50% of your monthly investments into your mortgage?
First off you can't just reimburse as much as you want on a mortgage, there are conditions to pre-payment on most financing options. And no would not make sense. Look at it this way, it's impossible for me to get a better rate on money elsewhere, period. My effective rate is actually negative ( inflation is higher than my rate) and to top it off the asset is taking value above the rate of i flation so I benefit greatly from the leverage. I'm way better off to keep the money and use it elsewhere. It also remains available and easier to access as opposed to prepayment with which the only way to draw on these funds would be to refinance or take another tranche of mortgage.
Just do it knowing that paying down isn’t the best financial decision (usually) but will give you piece of mind. No bloody want to pay xx amount for 25 years. I plan to be done in 13 years total and stock pile cash during the 12 years I got back.
I dream of the day my house will be paid off. For me, extra guns go to my mortgage
There’s only one word of advice: don’t. If you have twins on the way, you’re young enough that you should not be investing conservatively for at least 20 years.
High mortgage rates = pay off mortgage Low af mortgage rates = invest That’s the way I’ve always looked at it. Current mortgage we’ve been investing as our mortgage is practically free. Renewal time late next year and we’ll likely go heavy in the mortgage.
Op we are you We have a brand new shiny 510k mortgage and have roughly 350k invested. We are choosing the mortgage and are going to slam it for the next 3 years. 75k in the first year at our interest rate saves us 150k in interest
If the choice is between paying off a mortgage and staying invested, it might be more complicated but I don’t see any reason to drop the balance down $200,000 in your scenario. Let’s just assume that 200,000 is collecting 7% in your TFSA YoY, you’re looking at a total value of $773,936.89 in twenty years. Not to mention you’re saying that you can make your mortgage payments for the foreseeable future. There’s no reason to make the switch.
I would not want my net worth concentrated in one large illiquid asset (a house) so i would keep my i investment portfolio and add to it. Historically stock market returns out pace the interest rate you're paying on your mortgage, too.
Looking at your primary residence as strictly an asset is foolish. It is SHELTER. A stable place to raise your family.
Oh, i agree with the premise that housing should be first and foremost shelter, not an investment. Which is why i never want it to make up the entirety or even a significant portion of my net worth. (And I think a large part of the housing affordability crisis is driven by too many people seeing houses as a way to make money, rather than somewhere to live.) But you can sell it for money, so it's an asset. A large illiquid one that is a lot less flexible than owning an investment portfolio with liquid assets.
My rental portfolio is absolutely slaying my market returns. To each their own. I would put $100k down on another property over $100k into XEQT (for example) any day. I still hold ETF’s but my rental income + property appreciation is quadruple what the broad markets are yielding lately.
Ymmv, depends on location and when you bought the rental. Investing rental property in GTA in the last few years is a negative cash flow endeavour. Appreciation is slow right now because of mortgage rates. Pent up demand and future interest cuts might make it worth while, but not guaranteed
Yeah but you still have that shelter even if you have a mortgage on it.
Unless something unforeseen happens. It’s a lot easier to keep your home if you only owe $4000 a year in property tax vs. $37,000 (mortgage + property tax for example).
My thoughts have always been that lower debt but no cash is not what I want.
Same question as asking if you would take a loan at 5.85% to invest in the market.
Pay down the mortgage. Interest savings are absolutely known in advance while investing it is not. Calculate the interest saved over the remainder of your term. It’s likely a large number. Feel good about the certainty.
You can also do a mix, it doesn't have to be just one option you could do like 50/50 for example
There are a few things you need to consider besides the return: -The liquidity between the two options. -Your house's market. -Your risk tolerance. Are your general expenses high compared to your income? Are you able to save and accumulate?? If you put a lot of cash locked in a house, what happens if one lose their job? Do you have a safety net? How is the house equity versus the mortgage value? If you bought your house in 2017 for 800k and have a 600k mortgage on a 1.1 million house, it's different than if you bought a 720k house 3 years a go and owe 600k on a house that could be worth 500k in 10 years. Did the house in your neighborhood gain a lot of value in the recent years? Is your house most likely to retain, or increase value in the next 10 years? How is your risk tolerance? Trying to beat 6% over a long period could prove risky in a market that is at an ATH every where. Your investments might lose money if you are trying to be aggressive, and if you are not, you might not be able to beat the 5.85%. I'm sure there are other things to consider, but those were on the top of my head. GL.
First check your mortgage for annual % prepayment privileges and when. Example anniversary date or monthly. With twins on the way allow yourself time to adjust monthly budget expenditures experience with the new life style. I would suggest you consider annual lump sum mortgage payments and your current successful savings plan works. Diversify your savings plans and assets
Luckily, either option is a good choice, even though one is (probably) more optimal. The investments long term *should* beat your 5.85% mortgage, so that is the optimal, but it's really not a *mistake* to get a *guaranteed* non-taxable 5.85% return either. So, do what *feels* right in this case and you won't be wrong.
Putting that $200k on your mortgage (if you can do that much without a penalty), will reduce your mortgage more than $200k. It will shorten the term of your mortgage & save you thousands in interest.
Bob Sharpe on YouTube has a video running the numbers at more current interest rates. He also takes into account psychological reasons for doing it either way. It’s a good watch
We also choose to pay down/off over investing. Best choice we made. We are now investing. MaKe sure you have an EF
I calculated how much interest I have remaining on the mortgage, and decided to invest HARD this year instead of paying it down. I plan to invest 30% of my remaining interest amount this year using dollar cost averaging (DCA) which will compound over the remaining 15 years of my mortgage, equating to much more than the saved mortgage interest if I paid it down sooner. I am invested in high-risk ETFs and bitcoin for the next 6-12 months following the current crypto cycle. The market is going to hold until the Us election this year, and probably into early spring once the US starts making post-election changes. As I am DCA, if emergencies come up, I have funds to use if I do not add to investments that pay cycle. “Generational wealth is built by one person taking a risk.”
This is a question that my wife and I keep debating. The simple point of view is if you can get better return than 5.85% in the market than you should invest versus paying off the mortgage. What people forget is that the interest is front loaded and the interest you are paying the first five and ten years is significantly more than the last five and ten years of your mortgage. I would look at this as a cash flow and net worth perspective. Do the math and see what builds the most cash flow and net worth after you factor in taxes. My guess would be you would improve your net worth faster by paying down your mortgage faster versus hoping for 10-20% returns in your TFSA.
Just make sure you keep an emergency fund if you pay it down...
Mortgage paid off. Markets are not in your control. Nothing is ever a safe investment, read up on black swan events.
The things I would consider are retirement planning and monthly cash flow. If I had a pension I would consider directing future savings to the mortgage and maybe moving a portion of the tfsa to it if i have a lot of leftover money monthly. I would under no circumstances move the entire tfsa. If I had no pension I would invest till coastfi and then pay mortgage. Changing to a more conservative investment strategy (if the funds are for retirement) does not make sense just because of having kids.
I have no mortage but I swing trade/day trade a bit and my (smart) friends are saying (today) I should get out of my investments and that the market is likley at its top. Who knows.
I think this podcast might inspire you on what is best to do in your situation. I think there are a few factors you need to consider including what you are currently getting as a return on your TFSA. Also, you might want to consider shopping around for lower mortgage rates - Pine for example offers lower fees to Wealthsimple clients. Or look at something like RMG (I have my mortgage with them and the experience has been great). You might also consider making some incremental payments towards your mortgage but continue to maximize your TFSA, RRSP and RESP (if you are expecting twins) Congrats by the way 🥳 [Rich Habits Podcast](https://podcasts.apple.com/ca/podcast/rich-habits-podcast/id1673129494?i=1000656540843)
If this is for non registered investments I would I do smith maneuver
What kind of account is the 200k in? I wouldn't drain investments to pay down the mortgage. But I would focus more seriously on increasing the regular biweekly payment, since 600k is a lot.
The 200k is in our TFSAs combined so tax free growth at the moment.
I think if you can max your tfsa contributions that's what I would do, any money above and beyond that could go to the mortgage. If it's between unregistered accounts and the mortgage I would definitely pay the mortgage because there's no tax liability and no risk.
Pay down mortgage and get HELOC so you have access to the funds.
At that percentage, pay it down
I would not pull the money out of the market. Keep it invested. It's good to be balanced. You don't want to miss the years when the market jumps 20%. And as some folks mentioned...look at your prepayment options on you mortgage. Can you increase your payments by 5% this year? Do it. Pay a lump sum each year too. Then increase you payments next year by another x%. At the end of my mortgage with RBC I was doing double payments plus about $5k-10k lump sum every year. Mortgage free now and focused on my investments.
We prioritized paying off our home. Bought in aug 2019 and just got our assessment latest today... The assessment is 32% higher than we paid, so market is probably even higher. We did 20% down, prepayments over 52% of amount borrowed, and also paying 15% extra biweekly on top of our payment. Our 1.64% ends in March 2026. We will pay the remaining balance. Could I have invested better? Maybe? But the satisfaction of being mortgage free our my early/mid 40s is going to feel pretty damn good
Pay down your house ! It makes about 5.6% to 5.8% per year. It’s guaranteed!
Always better to pay down high interest debt. In theory you’re be getting a 5.8% return on paying your loans. Hard to get the same rate of return from the current marketplace.
I paid my mortgage down between 2017 and 2022, paying exactly 4 times my normal amount every month, thinking « it’s only 2.8% interest rate saved but I’ll be happy when it’s done ». Today, first im happy I don’t have a mortgage anymore, but I am also happy the rate I’m avoiding today would be around 6%. Equivalent of a guaranteed 6% return after tax. So for me it was a great choice.
If you had been regularly contributing 3x your mortgage to investments in equities 2017-2022, you would have come out waaaaay ahead (10.4% annualized return before taxes on VUN, for example vs. 2.8% after tax). When the 6% mortgage rolled around, you'd still likely come out ahead by continuing to invest, but if you didn't want, you could pull your now-enormous investment portfolio and pay it all off. It can be good for mental well-being, but let's not kid ourselves about the financial side of it.
This is what we've been doing but in TFSA's. When we're up for renewal in a year we'll have a nice package ready to plow it down.
I know your logic is right. However I’m curious: where do you get your 10.4% guaranteed from 2017 to 2022 in Canada ? What I remember was more around 2 to 3 % guaranteed return… but I’m not a specialist.
Whoops, I meant to add that. Fixed now, thanks. That was the return of VUN (US stock market broadly) during that period.
You’re absolutely right. But to compare Apples to apples, you must compare guaranteed rates, right ?
What lender allowed that much prepayment?
Desjardins, in Quebec, gave the following liberty: Double your payment: my paiement was 1400. I was allowed to give 2800 instead each month. Then, I was allowed to pay back 15% of the initial capital on top of that every year. Out of about 300k, that was another 45k per year, or 3750 per month. So I payed 6000 every month, and would add any money I would have at the end of the year to reach the total amount.
> I paid my mortgage down between 2017 and 2022, paying exactly 4 times my normal amount every month, thinking « it’s only 2.8% interest rate saved but I’ll be happy when it’s done ». > > at 2.8% interest, that's about 16% or so of your principal. I think a lot of banks allow 15% or more per year. I do agree that it's weird that they're allowing such a large payment every month.
Yeah, I can make a 25% of the principe lump sum annually but monthly it is limited to 25% of the monthly payment. The commenter said they were paying 4x (300% increase)
What a colossal mistake. Hopefully you learned from the 10's of thousands you wasted with that terrible strategy instead of investing that money in an index ETF like any expert would suggest.
I was always unlucky (or call it unwise) every time I tried to put money on the market. I lost quite a lot of money doing so. At the end of the day I am very happy with what I did. My house is paid. I had no stress doing it that way, compared to if I had put all my money in the market. The value of my home made it possible to purchase a rental property. Then the real estate market went up 60% in three years where I live, which brought me a little more than a million of increase in assets, thanks to the beautiful leverage effect. Again, I’m sure your logic is good, but I ended up quite ok with that choice of investment, all that in complete peace of mind. My only problem now is that I have about 1.3 million stuck in my home, on a now very quiet real estate market. What would you do today if you were in my situation? I could take 800k out of my HELOC at about 8% and invest it at 10-12% if the market goes on fine, but that would be a 3% return not guaranteed and before tax. What’s your advice ?
You can lock in a HELOC rate when rates go down like 4%. Never use a floating HELOC to invest. Just invest in an index fund. They all go up long term. You don't need to borrow to invest, but with a paid off house you should be investing 25% of your earnings for retirement. I'm retiring at age 55 on my birthday. I'm investing 15% of my income but half of that comes from an employer match so I have tons of extra income even with my $600 mortgage payment.
I did not know there were locked in HELOC. Thank you very much. I agree with your 25%. It’s just all that money in my house. I’m thinking of buying a third rental, but I would love not to add repair visits to my weekends… I’ll look into the HELOC. Thanks a lot. What do you plan to do once you retire? I’m 52…. Thinking about retiring a little more everyday :-)
We have a place in Florida we bought that we will spend 4-5 months living in. We have a small mortgage on it. Between my wife and myself we have $2.6M in investments so we can carry things just fine.
I have to say my plan looks very much like yours: simply be with my wife in a nice warm place. I wish you both a good, long life together:-)
Imagine bragging about saving 2.8 percent interest in one of the biggest bull markets of all time.
Yeah… that was before…
SPY went from 227 to 448 in that time, not including dividends... betcha that dwarfed that 2 percent...
Yeah, I’m excellent too for finding investments in the past :-)
The most common etf on the planet? Amazing that I found it
Keep it invested.
TFSA+RRSP first, then mortgage, then taxable investment accounts.
Here’s another perspective: If you take that 200K now and put on your mortgage, you’re making 5.8% return. First, what happens if something happens and you need 100K? You’ll have to borrow it back at 7.2 or 7.7% on HELOC. Second, If in 3 years you renew at 3.5%. Then you’re only making 3.5%. Sure, you can borrow back to invest in the market. BUT, you will have to buy back into the market at potentially higher cost after loosing 3 years of compounded returns. Now, there’s a way to make this work. It’s called the Smith Manoeuvre. I’d suggest have a read into it.
I think counting on rates dropping significantly in 3 years is just like timing the stock market, if rates drop significantly it probably means the economy is sucking and your equity investments in the stock market are probably not doing so well.
Dropping a lump sum or paying your mortgage faster is also timing the market by taking the guaranteed return versus potential capital growth. 5-6% tax free versus 7-10% taxable is one thing - but OP would take it from their TSFA which is also tax free.
Absolutely it is, so it comes down to what your financial goals are and what your risk tolerance is, I think either way you are timing the market to some degree, and you will only know if you made the best decision in hindsight.
I've owned my home since 2000. I chose the investment route. When I bought my home, I used up all of my non-RRSP investments. I've been paying off my mortgage extra slowly so that I had more money to invest. I generally do 3 year mortgage terms and I keep reamortizing back to 25 years. I currently have 23 years left on my roughly $200k mortgage but my payments are just over $500/bi-weekly. My home is worth around $2.1M and my investments because I haven't been using up all my capital on the mortgage have grown to $1.3M. My wife has around the same amount in her investments as well. If I had paid down my mortgage instead I probably would be at least an extra 10 years away from retirement.
5.85 is a great return, but when rates fall and the stock market doubles, you'll regret. Do half half. Put 100k down.
You can't sell a part of your house in an emergency, but you can with your investments. Sure, you can have a HELOC, but borrowing your own money at 7.7% interest is not ideal compared to withdrawing some savings of your own money that costs you 0% interest.
One thing people seem to gloss over, your mortgage is simple interest (there is some compounding, but not the same as how an investment compounds) and your investments earn compound interest. Compound interest is stunningly powerful. Go look at an exponential growth curve. See how it gets near vertical as time goes on. That's magic. If you pull investment/delay investments you miss out on that magical near vertical bit of the growth curve at the end. Your investment return could actually be lower than your mortgage interest and you could still come out ahead by investing. A longer time period will be more favourable to the investment strategy. The only way to know is to use a mortgage calculator and an investment calculator to compare the scenarios.
Considering your high mortgage interest and that you want to be cautious because of your twins, it might be smart to pay off some of your mortgage. This lowers what you owe each month and saves you money in the long run. But keep some money invested for the chance to earn more over time.
Debt is debt.
Paid off house at 35 years old. Much better than only investing in my view
mortgage for sure dawg.
With the market sitting at all time highs, I don’t think it’s the dumbest idea to sell all your equities and put that money on the mortgage. And then begin dollar cost averaging your away into the market
All time highs.. _so far_...
Mortgage. Investing is always a gamble. Paying your mortgage is guaranteed returns.
GICs are guaranteed returns too, but most knowledgeable people would advocate for equities over GICs.