Comments on: A Home is a Nest, Not a Nest Egg

By: A tuneup to skip | Canadian Capitalist

A tuneup to skip | Canadian Capitalist — Wed, 04 Aug 2010 22:52:37 +0000

[...] Take for instance, the suggestion that one should not view one’s home as an investment (let’s be charitable and assume that the sloppy math that ignored the imputed rent from owning a home is an oversight). It sounds perfectly reasonable because as any homeowner will tell you, houses cost a bundle in property taxes, insurance and maintenance every year and we pretty much hold the same opinion that a home is a place to live and rise a family, not an investment portfolio. [...]

By: FinancialJungle.com

FinancialJungle.com — Mon, 09 Jul 2007 17:26:46 +0000

CC – Mathematically speaking, it’s the same thing. When you buy bonds inside RRSP, you can reinvest future income back to bonds. If you make a lump sum mortgage payment today, a greater percentage of your future mortgage payments goes toward paying down the principal. (i.e. buying super bonds.) The net effect is the same. Your net equity rises in both cases.

By: Bob

Bob — Mon, 09 Jul 2007 14:31:26 +0000

@ Phil S,

Our mortgage is $280,000 the interest 0n that is currently around $1,400 per month.

I think that is about average for 2 income families these days given the price of homes across Canada. Especially in the west where we are living.

By: Canadian Capitalist

Canadian Capitalist — Mon, 09 Jul 2007 13:50:27 +0000

FJ: A mortgage pay down and investing in bonds aren’t exactly the same thing (like you said, one is defensive and the other offensive). The savings you realize from a pay down won’t normally result in extra cash flow for many years (could be longer than 10 years). Mortgage interest savings is funneled toward the principal balance, not to the investment portfolio until the mortgage is paid off. Bonds give you regular cash distributions that can be reinvested, which provides stability to your investment portfolio. That said, we are arguing if cake is better than ice cream. I’d have either, but I am a bit partial to ice cream

By: Phil S

Phil S — Mon, 09 Jul 2007 11:28:58 +0000

Wow Bob. I’m hoping that you actually meant to say that your total mortgage PAYMENT is $1400 per month, not that your INTEREST portion is $1400 a month! That would be totally crazy!

By: FinancialJungle.com

FinancialJungle.com — Mon, 09 Jul 2007 01:47:58 +0000

CC – Yup, I agree with you that renters are also -$200k in bonds.

Just for the record, I never said homeowners shouldn’t have bonds. I said making lump sub payments against the mortgage is the same as buying bonds. If your intention is to flip $10k worth of savings into bonds, then paying down your mortgage by $10k accomplishes that. It’s not nessary nor desirable to overweight more bonds inside RRSP.

I was arguing against the statement, “Whether you have a mortgage or not is immaterial to where you should put your bonds. “

By: Bob

Bob — Mon, 09 Jul 2007 00:01:06 +0000

We currently pay $1,400.00 of mortgage interest per month to the bank. That equates to $16,800.00 per year.

Just imagining what I can do with an extra $1,400.00 of extra money per month, on top of the $1,000.00 per month that we currently invest, spurs us on to paying the mortgage off ASAP.

A paid for house is an awesome springboard into wealth creation. (Ahem. Not to be used for leverage I might add. I like to sleep at night)

By: Canadian Capitalist

Canadian Capitalist — Sun, 08 Jul 2007 22:27:05 +0000

Aghhhh. We’re talking in circles here. My point is everyone has a -200K bond, including renters. I simply disagree with your contention that anyone with a mortgage should not have any allocation to bonds (at least that’s what I am inferring).

By: FinancialJungle

FinancialJungle — Sun, 08 Jul 2007 20:04:52 +0000

Phil – A house and a mortgage aren’t interchangeable. One never finishes paying off a house; he finishes paying off a mortgage. A house isn’t part of the equation. It can burn down, but you still owe the mortgage. When you buy a stock on margin, you still pay the margin interests irrespective of what the stock does. The performance of the stock or the house doesn’t erase your obligation to repay the debt.

Do you disagree with “a dollar saved is a dollar earned”? If you paid off a 200k mortgage, you’re saving 5.79% tax-free. In effect, you’re earning 5.79% tax-free.

Why anchor around $0 bond? Homeowners are born –$200k in bonds. If you set -$200k as the baseline and pay it all off, then you increase your bond position by $200k. While having a paid off mortgage doesn’t add to your revenues, it improves cash-flow. Every 5.79% not squandered in mortgage interests is an extra tax-free 5.79% contribution toward your investment portfolio. Mortgage and investment portfolio do go hand in hand.

>>” A mortgage is an expense, not an investment. It is on the negative side of the balance sheet.”

Why would that matter? Do you focus only on the positive side of the balance sheet instead of the net equity? If you owe a $200k mortgage and purchase a $50k bond, you’re still $150k in the hole. If instead, you pay down the mortgage by $50k, you’re again $150k in the hole.

CC – Why so fixated in stabilizing your investment portfolio? Why not stabilize the bottom line?

Everything comes out of the same pocket, so one can’t conveniently separate expenses from investments. If I have $60,000 in my pocket, I have several options below but they all similar effects on the net equity:
- Invest in equities (increase income)
- Buy bonds (increase income)
- Pay down my mortgage (decrease expense)

Increasing income is an offensive thinking. Cutting expenses is a defensive thinking. The bottom line is the difference between how much you earn and how much you spend. The name of the game is to maximize and stabilize the bottom line, rather than the individual accounts. Often you can take one step back in one account (investment portfolio), and two steps forward in another account (mortgage).

You can stabilize your bottom line either by purchasing more bonds or paying down bond-like expenses such as your mortgage. If you just paid down $60k worth of mortgage, why not diversify into equities in your investment portfolio?

While paying down the mortgage doesn’t stabilize your investment portfolio directly, but it stabilizes your bottom line. Indirectly, paying down the mortgage does stabilize your investment portfolio, because interests saved from the mortgage can be funnelled to the portfolio.

By: Canadian Capitalist

Canadian Capitalist — Sun, 08 Jul 2007 14:14:45 +0000

FJ: We’ll have to agree to disagree. While I am in favour of looking at all *investment* accounts as one pot, I think mortgage interest is an expense, just like food, clothing etc. I don’t know what mini pockets you are talking about. There are only two pots: one for purely financial assets and everything else goes in the other pot.

Paying down the mortgage does nothing for the stability of your investment portfolio; it simply reduces your housing costs over time.