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moneysense.ca, 27/03/06
Pre-pay Your Mortgage
Jonathan Chevreau, writes in his blog about the single best investment that most people can make:
And it’s not Tim Horton’s or any individual stock. Instead, it’s an investment with a GUARANTEED high return and highly tax efficient. And it’s nothing fancy. It’s simply paying off your home mortgage as quickly as possible.
Mortgage pre-payment is especially important in the initial years when most of the mortgage goes towards interest. Take a hypothetical $200,000 mortgage on a fixed 5% interest rate amortized over 25 years. The monthly mortgage payment works out to $1,163.21 and after the first year the principal balance is still $195,845.49. After five years, the balance is still $177,015.00 or 88% of the original mortgage is still outstanding. In those five years, a total of $46,807.61 in after-tax dollars has been spent to carry the mortgage.
Now imagine that an extra $200 can be paid towards the mortgage principal. After the first year the principal owing is $193,390.30 and after five years it has shrunk to $163,431.59. The loan period will be 6 years shorter and interest savings of $41,255.47 can be realized.
The beauty of prepaying the mortgage is that an extra payment reduces the mortgage balance and a little bit of every future mortgage payment that would otherwise have serviced the loan will now go towards reducing the loan. And over time every little bit adds up to a lot of money.
moneysense.ca, 27/03/06
I am a huge fan of paying off your mortgage quickly. You should try and maximize your mortgage payments (even at the cost of your RRSP).
The investment industry is great. They want you to take as long as possible to pay off your mortgage, yet they want you to start investing for your retirement at 20. Of course they do, this way they get money from you both ways! Interest on your mortgage payments for 25 years and management fees on your investments for 40+ years. It is a win-win for them.
And once the mortgage is paid off they want us to take a reverse mortgage to make even more money
(This is the same “Required” from another series of comments).
Average Joe, you say “You should try and maximize your mortgage payments (even at the cost of your RRSP)”. Are you serious? This is the worst advice I’ve ever heard in my life.
And why are you paying management fees? If you can’t manage your own portfolio, should you be out on the internet spouting nonesense?
Required,
You are definitely entitled to your own opinion.
As for management fees, I was using a typical example. The example was someone having a 25 year mortgage and investing their money in mutual funds. However, I am not immune to fees. I believe in indexing (both in eFunds and ETFs) and these carry fees. I also invest fee-free by investing in DRiPs.
As for the RRSP advice, I personally (that’s me) believe that the financial industry brainwashes the average investor. They want a 20 year old thinking that if they invest now, they will have a gazillion dollars by the time they retire. Well, how many gazillionaires do you know? Meanwhile, these young people are starting families, buying homes and carrying a ton of debt.
I think people should try and be debt free as quickly as possible, and then you will have plenty of available cash to fund your retirement.
I am not a financial advisor. This is my personal thinking. This is my plan. You have to make your own decisions.
Doh. Wish I could edit my comments and correct typos.
I have to agree with Required, anyone paying down their mortgage at the expense of the RRSP is foolish. Management fees should be negligible, further, the compounding effect of your rrsp in 25 years will be worth tens of dollars for every penny you tried to pump into an RRSP. Capiche?
Maybe we can reach a negotiated settlement of this issue and agree to put your tax return (from a maxed out RRSP) against your mortgage.
Cheers.
That was supposed to read “pump into a mortgage.”
Gazillionaires, no, i don’t know many. Ask me how many young people I know who saved, *invested*, and are well on there way to being millionaires by 30 (net worth of excess 250K and growing). I know a half-dozen. Some are more heavily in real estate, some are more havily into stocks, but all are diversified. In fact, now that I think of it, the ones who are busy dumping everything into their house are the least financially savvy people I know.
You can erroneously believe that real estate is the best investment, but it’s not. It’s not a bad investment, but to throw all your money into your home at a young age, especially if you are getting a really low (historically low) interest rate is just not good advice. Sorry. Get a spreadsheet and work it out. You’ll see how bad it is. (Warning anecdodal evidence folows) It’s what my parents did. They tried as hard as they could to pay off their mortgage as soon as they could. Through the 80s they put all the money they could into their house (and another real estate property), and had nothing invested in anything else. They missed a huge stock market boom, because they weren’t diversified. Sure their house was paid off, but they would be WAY better off today if they hadn’t been so eager to pay off the house, and diversified. I estimated their net worth would be almost 50% higher today if they had a more diversified portfolio.
It gets worse. Since they spent a life worrying about paying off their homes, cause they didn’t like the risk of carrying some debt, once they had paid off the house they were still not accustomed to market risk. Moreover, when the market crashed in 87 they were happy that they weren’t involved. They then missed the 90s market boom.
The point of this diatribe is that your house may be a place to live and you may feel secure paying it off, but it’s also an investment. (The equity you dump into it isn’t lost.) And suggesting people spend 10-15 years of their lives dumping money into one investment (regardless if it’s real estate, bonds, stocks, etc.) is in many people’s opinions very poor advice.
Average Joe said: “They want a 20 year old thinking that if they invest now, they will have a gazillion dollars by the time they retire.”
Um, I actually think that is true. Everyone should do this.
Average Joe: “Well, how many gazillionaires do you know? Meanwhile, these young people are starting families, buying homes and carrying a ton of debt.”
I agree there aren’t many gazillionaires that started investing when they were 20. Why? because as you said, they are buying homes and carrying a ton of debt. All of my 20-something friends’ first priority is living day-to-day (sometimes too extravagently). Their second priority is getting a house. Their last priority is putting money into RRSPs. I tend to think that if they had taken the “financial industry”’s advice, as you say, and started investing earlier that would be a good thing.
Average Joe: “I think people should try and be debt free as quickly as possible, and then you will have plenty of available cash to fund your retirement.”
Having debt in the first place necessitates becoming debt free. Without debt, there is no need to become “debt free” because you were never in debt in the first place. I think people should focus on their RRSPs first, then focus on what is leftover. Use whatever is left over to determine how much debt (or rent) you can take on. I don’t agree with the a) take on debt, b) start paying off debt, and c) think about RRSPs approach. a) means taking on debt without considering c). Instead one should consider c) first, then take on less debt in a) (ie. a smaller house/apartment). I don’t think it’s healthy to have to choose between RRSP and mortgage. You should set yourself up wherever possible such that the mortgage can be paid down as fast as possible while still maximizing the RRSP.
Anyways, I don’t agree with AJ’s comment: “You should try and maximize your mortgage payments (even at the cost of your RRSP).”
I agree Weh has a good suggestion: “Maybe we can reach a negotiated settlement of this issue and agree to put your tax return (from a maxed out RRSP) against your mortgage.”
Max out the RRSP first. Use the tax refund to help pay down the mortgage after.
I was thinking about what to do do after the RRSPs are maxed out. I have some interest in having a more expanded stock portfolio but I also wanted to pay down my mortgage. I was thinking that it is probably best to pay down the mortgage and then take out a secured line of credit to invest with. I understand leveraging is risky but if it was the same money I was going to invest with before wouldn’t it be better to have the interest tax deductable?
Bryce: Paying down the mortgage and then borrowing to invest is not exactly the same as just paying down the mortgage. Since there is leverage involved in the first case, please be aware of the risks and rewards. You are right that interest costs are tax deductible if you borrow to invest.
Average Joe, Required: The RRSP vs mortgage debate goes on forever because both sides have valid arguments. If we can do both, that would be ideal. Personally, I max out the RRSP first (but then I don’t have a pension), but I realize that for people with different circumstances (like having a defined benefit plan), a mortgage paydown is suitable.
The bottomline: BOTH strategies (contributing to a RRSP and a mortgage paydown) are WINNING strategies!
Great discussion people.
Wem and Dave: Can I agree that contributing to your RRSP and using your refund towards the mortgage is a good idea? Of course I can. It is a great idea. That is a perfectly valid and balanced approach.
If someone is in a high tax bracket and can afford to do both, even better! Hmm. I guess that goes without saying.
Maybe people are taking on too much debt when they are young. Buying homes that are just too expensive for them and forcing them to live on “the razors edge” just to make their mortgage payments.
I definitely don’t advocate that. Those people are living outside their means. The bank will always lend you plenty of money to hang yourself. So, of course I don’t want people concentrating on their mortgage solely for the next 15-20 years. To me, that implies they took on too much debt. If you concentrate on paying off your mortgage, I would hope you could do it in 7-10 years.
Personally, I don’t consider my home an investment. I live there. It doesn’t generate me any income. Even if prices go up 50%, does that really help me? I don’t think so. Because if I sell my house, then I will just have to pay the 50% premium to the next person I buy my house from.
At my work, I know a few people that have put in enough time to retire with a full pension. However, they can’t retire. Why? Because they are still paying off their mortgages. That just boggles my mind. Maybe they squandered their money. I don’t know.
I also know another couple that concentrated on paying off their mortgage when they were young. They paid their mortgage off by the time they were 31 yrs old. And they have been living well ever since. With no mortgage, they were very easily able to max out their RRSPs, invest in taxable accounts, take trips and enjoy life. Maybe seeing them succeed is what really made me think that this can work.
Is there a right answer? Probably. The key is to think about it and do what is best for you. Your advisor doesn’t earn any money if they suggest you pay off your mortgage.
Once again, great discussion. Let the debate rage on.
I think interest rate has a lot of influence on which stradgedy works best. In a very low interest rate environment you may want to skew things to the RRSP side a bit more, but if you are paying 8% or more on a mortgage it’s hard to beat the absolute after tax return investing.
Great discussion.
My own $0.02 is that while I’m a fan of RRSP’s, I just can’t shake the instinct that getting ridding of that albatross of a loan (you may know it as a mortgage) ASAP is a good idea.
The way I see it, the less I have to give the bank for my hypothetical $300K home, the better.
I don’t yuet own a home, so my plan for now is to keep socking away any excess money into my RRSP, and then take out the 20K the CRA allow me to buy a home with it. That’s my completely uninformed middle approach.
CC, AJ: Yes, they are both winning/good strategies. Saving and investing in anything is much better than blowing away all your money.
I’m just pointing out that saying you should try and maximize your mortgage payments even at the cost of your RRSP is not good advice for most people.
AJ, your house is an investment, if only by the fact that most everyone else thinks it’s an investment. It’s true, you don’t make income of it, but another owner may have rented it out for income. You dont have to think of it that way, but I fell you’ll appreciate the economics of the matter more if you do. You’re right and it is likely that you will have to pay the “50% premium” to someone else if it does appreciate, but if you downsize when you get older/retire, or move to cheaper place maybe because you don’t need to be close to work, that 50% gain does show up in the excess tax-free capital gain.
And AJ, my first post reads a lot harsher than I meant it to be. My Apologies.
Required,
No need to apologize. You felt very passionate about your point of view – and you should be.
We were able to have a very informative discussion on the topic with lots of input from everybody.
This is how we will all learn – together.
Good discussion.
This is what we know:
1. Your house is your single largest investment
2. Your house is highly tax efficient
3. Real estate is a fairly solid market and doesn’t drop like the Stock Market
4. Your house is essential
From these the conclusions that we could/should draw are:
1. Your house should require the most attention
Therefore, invest time and money in your house first and foremost. Time in the sense of educating yourself by getting familiar with your target neighbourhood and trying your best to negotiate your best real estate deal possible.
If you still don’t agree with paying off the mortgage first then why not do both. Contribute to your RRSP enough to get you to the lower tax bracket then with your tax rebate – dump it all in your mortgage.
Personally, I’m for debt reduction (even though a mortgage is considered “good debt” according to the “experts”. But to each his own.
Iam paying a mortgage at 4.6% my interest is at least five hundred dollars a month,why would I invest in a RRSP that pays little if any interest and give the bank five hundred dollars a month in interest to keep the mortgage going longer.
I favour the housing prepayments vs RRSP, at least initially, I’ll give you my story:
Started working at 18 (1992), bought a house(Toronto)->250K, 235,000 mort. I put half my disposable against mortgage prepayments(1,000/mth) No other investments. Blew other half on good-times.
Got married at 24 (1998), moved out to burbs, sold old flat for 325,000. I owed 130k (rather than 210 without prepayments), plus 75k in appreciation pocketed –> TAX FREE! New house cost 400K(1998), new mortgage was 200K, put away half disposible still (about $1,500-$2,000)
Sold that house in 2003 for $725K. You know what I owed by paying about 2k? nothing. Again, I lived there so monster tax savings.
I moved to Brooklin, which is a nice suburb about 35 mins east of Toronto, bought a new 4,200 sq. ft house for $400,000 that is three times the size of the one I sold which was 20 mins east of Toronto. Pocketed over 300,000 to boot…NO MORTGAGE.
Now as you know your RRSP contribution availability doesn’t disappear if you don’t take advantage of it, but rather it accrues. I now make about 135k a year, so I max out high tax portion thru RRSP availability from prior years at the HIGHEST return…
So now, at 32, earning 135k:
A) Own a 500,000 home, free and clear
B) 400,000 non-RRSP investments
c) 200,000 RRSP investment
Today, I save ZERO, NADA, I make about 8,500/mth clear, fixed bills are about 1.5, I blow the entire 7k a month on riduiculous things.
Why don’t I save now? I’m earning about 9 percent on my investments (conservative portfolio). Assuming same 9 percent and converting current non-rrsp to rrsp over next several years, that gives me about 2.4 million at 45…which is when I plan to retire…giving me over 200k/year to live on…with ZERO bills…hey if I want more, I wait another 5 years and I’m close to 4 million.
MY POINT –> YOU HAVE TO LIVE YOU LIFE!
If you spent 20 years building a massive retirement/investment portfolio and make just making payments on your mortgage to ‘maximize’ your return for ‘future you’ is crazy (IMO)
The ‘NUMBERS’ might make sense, but sacrificing years 25-55 is just not smart…you not a corporation that is gonna go on for 150 years.
Industry has taught us that the ideal investor is hard-working, saving, just put his daughter thru med school grey haired guy that at age 50, 55 sails off on his yacht.
WTF? This guy is a total loser, he blew his whole life so he can have a coronary on his boat on his 60th birthday party.
My point is RRSP may net you a couple ‘points’ better on the spreadsheet…but your more likely to screw your entire life up in the long run.
Interesting story Statik. Good job…you’ve done well. But you seem a bit arrogant in your storyline, especially near the end. It is easy to tell people to live their life and that they sacrificed their life and that they are a total loser when you’ve made it big, but for the majority of us it takes a very long time to make enough money to retire with wealth. To you, it seems easy, simply because you did it. But statistics show this is not the norm. Most people I know that started work at 18 right after high-school are making closer to $35k than $135k. Those that aren’t unemployed or seasonly employed, that is. In fact, only a couple percent of people make $135k or more. You know that, right? You also got about a 12.5% return on your 2nd home, well above the long-term rate of appreciation for homes…and I’m not so sure that if someone went out today and bought a house they’d get that over the next 5 years. They might get close to nothing, and if they had invested in RSPs they might have got 10% or even 15% per year if they were lucky. One never knows exactly.
Don’t get me wrong, I think yours is a wonderful success story. As it turns out, you did the right things at the right time. If only we all could be so fortunate. Most are not. Other people just as sure of themselves bought Nortel in 2001 and lost 90% of their money. Following your steps might prove disastrous to another 18 year old. I think you are the exception to the rule, so unfortunately I can’t agree with your approach in general.
My own philosophy is much the same as Investing Intelligently’s. Pay yourself first. Save some money each month…inside your RSP, outside your RSP, or both (remember, income generating inside and capital gains generating outside). Set an amount and stick with it, no matter what. Don’t treat it as income…pretend you didn’t have the money in the first place. And buy a home for yourself to live in, which thankfully almost always goes up in value and thus is more like an investment. If you can’t afford to save any money, then in my opinion you need to set your sights on a less expensive home. And have a good time, without being excessive or wasteful. Take at least one good vacation each year. As Statik infers…you don’t know how much time you have left to enjoy yourself.
Statik: The mortgage vs RRSP debate boils down to what is sensible for your personal situation. If you can do both, it is great.
But say you are a doctor. You finish school in your late twenties and right off the bat you are in a high tax bracket. Contributing to your RRSP first ain’t a bad choice for him, IMO.
The point like BTW says is to pay yourself first.
By the way:
I hear you about the timing on my houses. Looking at it historically I am probably 4-5 years ahead of where it would be on a average basis. And I also started out at about 65k at 18 which is higher than the norm…only been around 135 for 5-6 years (ok, I’m pulling straws now, lol)
I reread it and I can see where I might come across as ‘arrogant’. Although your point about people being sure as me when they invested in Nortel and losing 91 percent, well is a little extreme, but I get you….anyone who invests heavy into 1 company deserves to either A) lose it all or B) become extremely wealthy.
I think what happened there is my own story got me worked up (and a little off topic). I have a professional friend that I vacation with, who always talks retirement. He is mid 40s, makes about 125k, he has already saved up over 2 million (saving and a inheritence), hates his job, works way too much…but just keeps saving…drives me nuts.
Pardon my French, but your friend is nuts
Statik:
My point about Nortel was intended to be an extreme example. What I was referring to is that one never knows what will necessarily happen when putting your money into something. If I bought a house today, it may not increase in value for the next 5 years. If I bought an investment, it also may not increase in value, and may even decrease. Or either or both may go up to varying degrees.
So that’s why I believe in diversification. Save some money. And buy a house as opposed to renting. And pay down your mortgage in a reasonable time. Spread the money between the two investments. If you invest and the bubble bursts and you lose some money…well you still may have gained on your house. If your house doesn’t appreciate in value for the next 5 or 7 years, well then the money you invested may have done really well instead.
Either way, paying down your mortgage faster or saving…they are both good. I just prefer a mix of the two…but that’s just me.
One thing that troubles me a little though is that it seems you are telling your story as if you think anyone can do what you did (perhaps you aren’t though, in which case please disregard my concerns). It is wonderful what happened for you. But how could I recommend what you describe to an 18 year old as something to try to repeat? Do you believe it is realistic for others to expect to accomplish what you have? Are you suggesting that they should not go to college or university? That they should instead go out and get a job and if they work hard they can make $135k/yr within 10 years? And that they can get a job right out of school when they are 18 that will pay them $90k/yr (which is about $65k/yr in 1992 dollars, as you indicate you were making)?
Most students strive to go to college or university these days. They can’t start work until they are in their early 20’s as a result, and a large number have student loans to pay off which takes some time. Many 20’somethings I know still live with their parents, or are renting, trying to scrape up enough money for a downpayment on a house or condo. At the same time, they are in their social prime, which costs money. Many can’t move out or stop renting until they are 30. Which is about the time that people typically get married, followed by children, and of course the need to purchase furniture and other items. And lets be honest, most will never make the kind of salary you were making when you were 18 years old…and certainly not if they didn’t go to college or university. I can sight my own family members to back that up.
So while I am glad to hear how well things worked out for you in your career, I find it extremely risky to recommend that a young person who may read your story duplicate the details of your story in their own life. I feel your situation was somewhat unique, and not easily duplicated.
There are many people like your friend, I’m afraid. Someone in my family who was a multi-millionaire worked into his early 70’s…he liked his job, but still that’s a long time to work. He invested and invested and invested…and then he retired in his early 70’s…and shortly after he started having health problems…and in about 5 years he passed away. His retirement time was spent trying to make more money and watching the ticker on the financial channel.
But everyone has their goals I suppose. Perhaps the lifestyle your friend feels he wants to live when he retires requires more than 2 million dollars? One person I know in their 60’s lives quite comfortably in retirement on about $25k. Another goes through $125k. I guess everybody is different, eh.
Your main point Statik…YOU HAVE TO LIVE YOU LIFE!…that’s what anyone reading this should walk away with.
Try to pay down your mortgage. Try to save some money for later. But you have to live your life too!
[...] Related: Pre-Pay Your Mortgage [...]
Oh dear…reading this thread is making me even more confused! I think we may be doing it all wrong…can I tell you our story in hopes of receiving your advice?
Hubbly and I are early 40’s, bought our home for $89,000 and put in approx. $40k in improvements over the years, we can now sell for around the $225K mark. Our dual income is $134K and we bought a 4 season cottage (which will become our home upon retirement) and now owe a whopping $230K (amalgamated our home and cottage). Cottage if sold today would run around the 190K mark. We don’t have pensions per se, so we have been maxing out our Group RRSP’s (and outside mutual funds et al) and have $320K in our portfolio. We have also been carrying $34K in our high interest savings as we don’t know what we should do with that money. We have a young son and we put away money for him each month ($150) in an RESP. I suspect our tax refund should be around $4K. We travel to a warm destination each year (sometimes twice) and expect to spend 10K on our beach holidays outside of going to the cabin. I figure we invest $23K between the two of us each year but still have a little wiggle room in our RRSP’s from previous years. We would love to able to retire in 10 years…are we doing it right or waaaaay wrong? Thanks ever so much!
Needadvice: I’ll assume that you want to know what you want to do with your $34K in a savings account. I would personally keep a little bit and put the rest against the mortgage principal. I don’t know what returns the market gods are going to give in future years, but I do know that you can generate a guaranteed after-tax return equal to the interest rate on your mortgage.
If you are worried that you need the money to cover emergencies, you may want to take out a secured line of credit that you use strictly for emergency purposes.
I to am very confused and could use some advice.
My husband and I are both 31 years old. Combined we have an annual salary of 100 k (equally split). We purchased our house last year for 435 000 and are carrying a mortgage of 260 000. Our mortgage is amortized over 15 years. With pension and RRSPs we have socked away 80 k. We have a 1 year old boy and are putting away $ 150 a month into his RESP. To put a new wrinkle into the dilemma, I’m pregnant with our second child. Ideally, I would like to only have to work part-time. We have some extra cash (approximately 10 000 and another expected 30 000 in September). Should we concentrate on the mortgage or on our RRSP?
Confused
There is no right or wrong answer: both are very good options and you can only tell which would have been a better option in the future. My personal preference is we put money in our RRSPs first and then use any windfall to pay down the mortgage. Your mileage may vary.
[...] You should also note that some financial planners argue that it is better to pay down all forms of debt, including mortgage debt, before contributing to a RRSP. If you are more comfortable making a pre-payment on your mortgage then you may want to tune out the messages and skip the RRSP contributions. [...]
To Expectant Mamma:
Congratulations. I have heard that paying down your debt / rrsp is more important than your resp. Your children, if necessary, should be able to get student loans to fund their education. You, on the other hand, might not be able to fund your retirement by working, even if necessary. There are things you can do, like let your children live at home longer, that can ease the burden on them – there is little that THEY will be able to do to ease the burden on you. Harsh, yes, but pragmatic.
To Statik:
The most important parts of your posts were left out – how did you make $65k / year at age 18???
i’m retired. what if you pay 12 payments at one time, say each january, for the rest of the year and do this ever year, based on a 30 year loan. I can not figure out how to calculate this but it would have to reduce your interest wouldn’t it.
People wake up and smell the coffee. RRSP’s ,more specificicaly paying into mutual funds will take you no where. We just saw the result of this with the financial colapse of 2008. I have stopped all contributions into my RRSP (Mutual funds) and am putting “real money” into a TFSA AND PAYING DOWN MY MORTGAGE
I have 15 years to work, so I want something tangible at the end, mutual funds are not worth the paper they are written on.
Now here’s a mature woman’s opinion. I have to make the money last on average 7 years longer than most of you (speaking strictly to you gentlemen). You can do it all and have it all. You do need time for investments to compound and ride out stock market blips like our recent drop. Invest in RRSPs however you feel comfortable, depending on your risk tolerance there is no one recipe for all. However, now is a great time to go back into your equity and stock mutual funds or just stocks because the stock market is on sale. Don’t bail now, this is just before the rise if not past it right now. Use your tax return to pay down your mortgage. My husband and I just paid our’s off (10 years total) and there is an emotional connection with paying off a mortgage. We also contributed to the RRSP each year maximizing and additional money was put on the mortgage because we did not have any consumer debt. A house is more than an investment, it is where you live and raise your kids. Don’t leverage it because it is different than just any other asset. How do you explain to your children that they lost their room with the house in the stock market crash. Interest bearing investments should be in your RRSP ideally and low cost capital gain investments and dividends should be outside tax shelters. The TFSA is new and I think since you don’t have to remove it within any particular time, it may be the switch for many if they are not in a high tax bracket. I can’t resist free money though and I think I will always max our my RRSP first. When I retire, I will keep rolling it over into my TFSA and if I am in a higher tax bracket, so what. At that time I’ll spend it all!!
Very interesting to see how attitudes to investing have changed between 2006 and 2009.
Paying off a mortgage is a guaranteed 4-5% return (depending on your rate). Investing in stocks is a risky 6-9% return with the potential to lose half your money in a 6 month period.
I wonder how many people who got decimated in 2008 wish they had plowed their money into paying off their debts.
I’m quite new to the whole financial planning/investing/saving philosophy, but here’s my complete novice’s opinion on the mortgage pre-pay vs. investing dilemma.
Ultimately, both are winning strategies at financial security, but as to how I determine which one is ‘more winning’ depends on risk tolerance, cash flow security, and mortgage interest rate.
I’ll start with mortgage rate. I figure if I can get a better return on my investments than my mortgage interest rate (MIR), investing wins out.
As for risk tolerance, in order for me to maintain a rate of return higher than my mortgage rate, I must be willing to accept certain levels of risk. Obviously, the lower my mortgage rate, the lower exposure to risk I need in order to get my ROI>MIR.
Further to that, I need to ensure I have secure cash flow in order to maintain my regular contributions to my base mortgage payment, and my monthly investment contributions in order to take advantage of dollar cost averaging.
My personal situation is that at a MIR of 1.5% with 10 years left in my amortization, I don’t feel justified in paying any more on my mortgage than I already do. The additional contributions I could make could serve me better by investing, since even now a 5 year GIC is around 3%. Other securities should be able to do even better than that.
Am I completely out to lunch?
As was just pointed out, very interesting to see the comments 3 years prior and now. Would love the hear some of those individual opinions now after what we have all lived through.
For me the choice is simple. It may be the less “sexy” option but it is to aggressively pay down the mortgage as fast as I can.
Jobs are not secure.
Investments are not secure (barring GICs at very low interest).
Yes, even housing prices are not secure.
Picture this though…
What would you do if you had to sell your house in a rush, accepting less money than you needed to because you had problems paying the monthly payments? Then having to pay another $10K to relocate, pay a Land Transfer Tax or whatever else is involved?
What if your spouse was suddenly ill?
You found out you were expecting another child?
Would you move into a smaller house and spend all that stress and expense to do so knowing you can’t afford the house you and your kid(s) have lived in…
Simply put, make hay while the sun shines, because it doesn’t always shine forever.
(I can just see the reponses now telling me I’m too paranoid, or concerned or I should lighten up!)
Fact is I have made and lost in the stock market and I have made and lost in my choice of houses.
The larger issue is that I have to live somewhere and my family needs a roof over their head and I will not risk that for any “gamble” on the hopes of a big investment lucky strike or giving me a couple percent more than the interest on the mortgage or the risk to my family’s habitat.
I have been dumping every extra penny into my house and have cut down our family debt by over $110,000 in 16 months. This may seem like its not getting us ahead because I can’t see some big # in my account, but this debt is real, the payments owed are real and MUST be paid with after tax dollars whether my “investment” is worth it or not.
Of course those that are putting in 5% down or have no equity into their houses should re-think doing this, because if they lose their house to the bank, they would likely lose whatever money was added prior to losing it! I am referring to “traditionally” uninsured mortgage holders for this suggestion.
Early income earners usually fall into lower tax brackets. One must remember that RRSP contributions can be made later and probably should be made later, when you are in a higher tax bracket and have more to gain. Even without this ocurring, if you have been aggressively paying off your house, say with a goal of less than 10 years for repayment, you should be able to dump all the money you want into RRSPs or TFSA’s or whatever suits your fancy later!
Laslty, it is very important to set up a secured Line of Credit on your property. It is only for use in an emergency situation. The interest is low and this is your protection against job loss and/or other sudden need for money. It is the cheapest source of cash allowing you to avoid RRSP redemption penalties or other dipping into loced in savings or stocks which are lower in value than purchased.
Just some (probably too many) thoughts!