# TFSA vs. Mortgage prepayment



## groceryalerts (May 5, 2009)

I am at the point where I could prepay our mortgage to an amount that would make us mortgage free within 2 years (conservatively). 

I am looking at our current interest rate (variable @ 2.3%).

Wouldn't it be a better idea to invest in a TFSA with some dividend paying stocks and take the profits to pay down mortgage?


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## I'm Howard (Oct 13, 2010)

IF, you have made a decision to invest in Stocks, the question is whether to use your own cash or to borrow.

You could use your own cash to prepay the mortgage and use borrowed cash with the deductible interest to buy the stocks.

Expenses and potential losses using Borrowed monies and outside a TFSA are deductible,


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## larry81 (Nov 22, 2010)

I have the same rate as you do, personally at this rate i dont see any reason to rush the mortgage payment. putting 20% more than i should do the trick to me


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## groceryalerts (May 5, 2009)

I never thought about the possibility of borrowing the money.

The interest I could deduct as well.


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## Oldroe (Sep 18, 2009)

Life changes with no mortgage. For the better


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## Karen (Jul 24, 2010)

I agree with Oldroe. One of the happiest days of my life was the day I paid my mortgage in full. Sometimes there are other factors besides financial ones that should be taken into consideration and, in my case, the psychological high of getting rid of my mortgage was incredibly worthwhile. I do realize, however, that the decision might be different for different people.


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## crazyjackcsa (Aug 8, 2010)

What timeline are you looking at on your mortgage if you go with the TFSA?
Normally I'd say mortgage, but at 2.3% there isn't much reason. At the same time, a two year difference on investing isn't that big a deal either.

As per usual, it probably doesn't really matter which one you do, as long as it's one of them.


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## I'm Howard (Oct 13, 2010)

So Karen, the Mortgage Payment has stopped, but you still have Property Taxes, Utilities, Maintenance, etc, you will always have payments, so what is the big deal if one is not for Home Ownership??

I would rather have a $200,000 Mortgage on a $900,000 House than be Mortgage Free in a $300,000 one.

I see zero wrong with debt, as long as your ca$h flow will handle it, and when we die a very large amount of Non Taxble monies will be inherited.


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## groceryalerts (May 5, 2009)

The problem I have is that in the next 2 years we will buy a bigger place and I want to have a significant down payment for the next house.

Future house: $600,000 

I want to have a down payment of $150,000 to give me flexibility on where I want to live to a point. I live on the West Coast and am considering the move back to Ontario (more house value).

In preparing for the down payment I was thinking that the TFSA might be the best idea to save up.


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## crazyjackcsa (Aug 8, 2010)

I'm Howard said:


> So Karen, the Mortgage Payment has stopped, but you still have Property Taxes, Utilities, Maintenance, etc, you will always have payments, so what is the big deal if one is not for Home Ownership??
> 
> I would rather have a $200,000 Mortgage on a $900,000 House than be Mortgage Free in a $300,000 one.
> 
> I see zero wrong with debt, as long as your ca$h flow will handle it, and when we die a very large amount of Non Taxble monies will be inherited.


Sure, but I'd rather have a $300,000 home paid for and 400k invested in something that doesn't cost me in Property Taxes, Utilities and Maintenance.


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## I'm Howard (Oct 13, 2010)

crazyjacksa, don't forget Capital Apperciation on your principal residance is Tax Free, so a 2% increase is worth a 3% dividend, plus the more expensive home should afford you a certain quality of life.

I could be downtown TO in Ten Minutes, not ninety.

The fact is that you could have a Mortgage Free Home take a loan against it, invest the proceeds and write off the interest.

A Mortgage can be Forced Savings.


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## Rysto (Nov 22, 2010)

groceryalerts said:


> The problem I have is that in the next 2 years we will buy a bigger place and I want to have a significant down payment for the next house.


If you want to use the money in 2 years stay completely out of stocks. There's too much uncertainty in the stock market over the short term to risk money that you need. You need to have a much longer investment horizon in order for stocks to be worth the risk.


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## Karen (Jul 24, 2010)

Howard, of course I have taxes, utilities, and maintenance payments on my house - I'd have those whether I had a mortgage or not. If I didn't have those expenses, I'd have to pay rent. I didn't claim that my preference is right for everyone, but it is for me.


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## I'm Howard (Oct 13, 2010)

I started with a $26,000 home in Lucan, I am now in a $650,000+++ in the Georgian Triangle, we are looking to move into a Gated Community for about $350,000 and will put the rest to work in Long Term Investments.

I still believe that climbing the Property Ladder is a good way to go.

The thing about money in the bank is that most people do not realise it is not there money, one day it will be a bequest in a will and that rather than investing from their time frame, they should be investing based upon the actual owners who will eevntually receive those monies.


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## Karen (Jul 24, 2010)

> The thing about money in the bank is that most people do not realise it is not there money, one day it will be a bequest in a will and that rather than investing from their time frame, they should be investing based upon the actual owners who will eevntually receive those monies.


Howard, I can hardly believe what I'm reading. My money is mine, and what I choose to do with it is my decision, and my kids would be the first to agree with this. In fact, they're always nagging me that I should spend my money, and not feel that I have to save it for them. Of course I hope to have plenty left to leave them in my will, and I'm sure I will, but in the meantime it is mine, and I absolutely disagree with you that they are the "actual owners."


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## andrewf (Mar 1, 2010)

I feel the same way. My parents worked hard for what they have, they should enjoy it. It's easier to say that when I am financially secure. I'd worry about my sister who, for whatever reason, is substantially less well-off than the rest of my siblings. I'd be okay with them helping her out.


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## the-royal-mail (Dec 11, 2009)

What's with all the shell games lately?

Keep it simple. Make your payments. If you want to pay off the mortgage, then do it. Forget about the TFSA shell game idea.


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## Karen (Jul 24, 2010)

> ...my sister who, for whatever reason, is substantially less well-off than the rest of my siblings. I'd be okay with them helping her out.


I agree, Andrew, and I do help out my kids at times - but I do it because it's my choice to do so, not because they are the "actual owners." as Howard put it.


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## Plugging Along (Jan 3, 2011)

I have to admit, I find it odd to look at an inheritence as the beneficiaries being owners.

I still view their estate is theirs to do with what they please. If they choose to give us a GIFT of an inheritence then it is only that, a gift. There is no expectation or claim on what should be done with that prior. However, my parents have always told us everything will become ours when they pass, and we do alot of estate planning as they do want to make the most of their 'gift'.


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## Financial Cents (Jul 22, 2010)

I'm with royal_mail and others, pay off the mortgage. 

If I could, I would.

If < 2 years to go, forget the TFSA games, especially buying stocks. They (stocks) should be for the long-run but that's just me.


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## realist (Apr 8, 2011)

While most good advice tells you to avoid investing emotionally, but I think in this case you should do exactly that. 

Are you like Karen, in that you will feel great having paid down the mortgage regardless of a percentage or two of potential "lost" profit you could have had investing? For me that feeling of paying it off would be worth a lot to me. Obviously Howard does not share that feeling. Where do you fit?


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## Plugging Along (Jan 3, 2011)

I think it comes down to how much risk are you willing to accept.

Paying off your mortgage will be the least risky. Perhaps you can make more money elsewhere by investing and then taking the money and then paying it off. Then you have to take a look at the big scheme of things. How much more will you make if you do this? How much risk is there in doing so? Is it worth the effort?

I think there's a lot to be said regarding being mortgage free. It gives you a lot more freedom and options, and in my mind like having cash on hand. Having investments does not equal the same amount of freedom or security. 

If you were to loose your job, not having to pay the mortgage is a larger relief, than having to liquidate your investments which you may have planned for long term, or they may be down in value, and you don't want to sell yet. 

I found when my spouse was laid off right after my second child was born, and I was on leave, that the large investments that I had were of less security or ease of mind than I had imagined. Even though we had a high net worth, I did not want to sell my investments at a 40-50% lost (I wouldn't have wanted to sell them for a 10% even). We ended up lowering our mortgage payments (all variable open) for the timeframe so we would need to withdraw less cash out of our reserves. If we didn't have any mortgages, that would have been even a larger relief. 

Having no mortgage helps you with your cashflow, which is criterical when you lose your job or something. Investments don't always do that.


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## Eclectic12 (Oct 20, 2010)

realist said:


> While most good advice tells you to avoid investing emotionally, but I think in this case you should do exactly that.
> 
> Are you like Karen, in that you will feel great having paid down the mortgage regardless of a percentage or two of potential "lost" profit you could have had investing? For me that feeling of paying it off would be worth a lot to me. Obviously Howard does not share that feeling. Where do you fit?



There is also a numbers calculation as well. 

The posting makes it sound like there is currently nothing in a TFSA. If so, the maximum allowed to be invested is $15K x number of people (i.e. Husband and Wife would make $15K x 2 = $30K).

If an exceptional dividend of 10% is assumed for the full $30K, the maximum amount that can pre-pay the mortgage from the dividends is $3K per year. Likely this would be at one time of the year as most brokerage Tfsa accounts allow only one free withdrawal a year.

The only other source of mortgage pre-payments is capital gains. Does groceryalerts have the investing knowledge/strategy or have a trusted advisor to deliver capital gains?


Personally - assuming the investing knowledge/strategy has been taken care of, I'd arrange for a Home Equity Line of Credit, pay off a good chunk of the mortgage and use the HELOC to carefully move into the dividend paying stocks. 

The advantages are that mortgage interest costs are cut up-front. The HELOC should provide a favourable interest rate. Done properly, the HELOC interest costs are tax deductible from income. The dividends can be used for additional mortgage prepayments or to payoff the HELOC. If a stock becomes a loss, the loss can be written off against capital gains. In a TFSA a loss has no benefit.

The end result is two assets that could grow in value - the house and the dividend paying investments - where the total debt has not changed. 

There are risks to think through such as if interest rates go up, both the mortgage and the HELOC costs will go up. 


Cheers


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## Jungle (Feb 17, 2010)

groceryalerts said:


> I am at the point where I could prepay our mortgage to an amount that would make us mortgage free within 2 years (conservatively).
> 
> I am looking at our current interest rate (variable @ 2.3%).
> 
> Wouldn't it be a better idea to invest in a TFSA with some dividend paying stocks and take the profits to pay down mortgage?


Well the TSX comp is paying that in distributions right now. So you could look at that as pretty much breaking even, if the index holds it's value.


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## Eclectic12 (Oct 20, 2010)

Jungle said:


> Well the TSX comp is paying that in distributions right now. So you could look at that as pretty much breaking even, if the index holds it's value.


If using the TFSA, then yes.

Though - unless the total pre-payment amount fits in $15K (individual) or $30K (husband/wife) TFSA, then income tax will come into play. The distributions are pre-income tax and will generate a tax bill. 

At that point, either higher distributions or some pool of tax deductions would be needed.


Another option to consider would be to max the TFSA and use the amount left to pre-pay the mortgage. 

Cheers


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## PannyPanny (Jun 13, 2011)

*TFSA/Mortgage*

I think paying off mortgage is better that putting money in TFSA. The Savings in paying interest is sure but return on investment in TFSA is not.


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