# Mortgage or Invest



## Franky Jr (Oct 5, 2009)

Hello,
Contrary to the easy title I am looking for opinions for my personal case:

I live in AB, 3 kids and 1 more on the way. I make 50K and that will continue to slowly rise (est in 10 years probably 85K). Wife is stay at home trooper.

Mortgage is variable 2.4%. 

I like investing and feel I can exceed 2.4% with the market but I am concerned with the cost of raising 4 teenagers in the future and wonder if I should just focus on the mortgage now hoping to free up cash in the future when the kids get expensive. (up until now I have been doing about half mortgage paydown and half investing).

I've thought about it lots and would like to hear from others.
Thanks


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## KaeJS (Sep 28, 2010)

We are in different situations.

I am single, no kids, I make $36k/year.
My mortgage is at 2.99% Fixed.

I returned 17.58% in the market from January 1 - July 31, 2012.
I returned 4.05% in 2011 when the TSX returned -11%.

Yet, I still pay down the mortgage. Why?

Well, because when you pay down the mortgage, it is a guaranteed 2.99% for me.
Also, I do not have to pay tax on this 2.99%, nor does it make filing my taxes harder.

The main problem with investing is that you need to first beat the mortgage rate and make sure you are still winning after your taxes have been taken into consideration.

Not only that, but your mortgage rate is only low for now. If you are investing and not paying off your mortgage, you will probably have to go into another term in the future. The term you go into in the future will most likely bear a higher interest rate. That means your effective interest rate is actually higher than the rate you carry now. You must blend all of your future mortgage interest rates to get your real rate. This is the rate you actually need to make in the market, after tax.

With all that being said - for me, it just makes more sense to pay down the mortgage. After all, it _is_ guaranteed.

I do play a little in the markets, but I apply $125/week in lump sum payments to my mortgage, plus I'm on an Accelerated Weekly payment plan.
I do not contribute this much to my investment portfolio.

Although we are in different situations, I hope this has helped.


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## Sampson (Apr 3, 2009)

Do both. Don't focus on one over the other.

One will never be able to predict either the mortgage interest rate, nor the returns from your investments. Take a middle of the ground, balanced approach and you will not miss out either way.

Don't follow the rhetoric of mortgage paydown alone. If you had done this from 2009 onwards, you would have missed enormous market gains. The monies we invested during that period easily exceed the amount of interest we will pay over the 5 yr term of our mortgage.


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## KaeJS (Sep 28, 2010)

I forgot to add, one more thing to consider is that if you have paid down your mortgage, you will have equity within your home.

If the markets ever pull a 2008/09 again, you will have a pretty nice chunk of change you can re-bborrow from and buy some equities on sale!


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## slacker (Mar 8, 2010)

The 2.4 % "return", is tax free, and it's guarantee return.

Do you think you can still do better?


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## My Own Advisor (Sep 24, 2012)

If you have job security, do both. If job future is uncertain, focus on mortgage.


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## Just a Guy (Mar 27, 2012)

The mortgage is not a tax free return, as it is paid with after tax dollars.


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## KaeJS (Sep 28, 2010)

Just a Guy said:


> The mortgage is not a tax free return, as it is paid with after tax dollars.


So is everything else, except an RRSP.

Unless the OP wants to invest solely into the RRSP... then what's the difference?

Plus, OP will be in a different tax bracket in 10 years, as indicated by the OP, so it probably wouldn't be the wisest to invest through an RRSP, depending on the contribution room available.


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## Dmoney (Apr 28, 2011)

I'm doing a bit of both, but definitely accelerating my mortgage payments beyond the base requirement. I figure I pay off non-deductible debt that bears ~2% interest and then I can take out a home equity line of credit at ~3%, that is tax deductible.


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## marina628 (Dec 14, 2010)

I am impressed that a family of 5 (soon to be 6) can afford to pay extra and save on $50,000 a year .I would split the extra cash between the mortgage and Investing.


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## Ethan (Aug 8, 2010)

I struggle with the mortgage vs. investment decision as well. I believe that a balanced approach is best. If you put all of your excess cash into the mortgage and none into investments you are leaving yourself completely exposed to your local real estate market.


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## mrPPincer (Nov 21, 2011)

Mortgage all the way
imho you were already 100% exposed to the local RE market the minute you signed the papers unless bankruptcy is a factor at play.
Frank you mentioned you expect your income to rise over the the next 10 years so it could be beneficial to save some RSP room and go full on at the mortgage, after all it is a 100% guaranteed return and that is worth something.


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## Echo (Apr 1, 2011)

This is probably a question you need to ask yourself every few years, perhaps as your mortgage term is set for renewal. Market conditions change and your financial situation will change every few years.

It's great that you're in a position to be able to make this decision and either choice is a good one. I'd suggest that whatever you do, leave yourself some breathing room with your monthly cash flow. 

I have about $2,000 left over after all my bills are paid and so I split that up between extra mortgage payments and TFSA and RRSP contributions.

http://www.boomerandecho.com/should-you-pay-off-your-mortgage-early-or-invest/


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## dogcom (May 23, 2009)

I would build up enough money in my TFSA for emergency funding. Some in RRSP that I would use to invest in solid ETF's or stocks. Most of it however I would use to pay down the mortgage. I should also mention you should take advantage of RESP's for the kids as well.


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## Franky Jr (Oct 5, 2009)

Love the input. We do have RESPs going, as well as a 3-4 month Emer fund set up in a HISA. I have a DB at work so that covers my RRSP department, I think I will continue with the balanced approach - splitting between mortgage and TFSA.


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## realist (Apr 8, 2011)

KaeJS said:


> Not only that, but *your mortgage rate is only low for now*. If you are investing and not paying off your mortgage, you will probably have to go into another term in the future. The term you go into in the future will most likely bear a higher interest rate. That means your effective interest rate is actually higher than the rate you carry now. You must blend all of your future mortgage interest rates to get your real rate. This is the rate you actually need to make in the market, after tax.
> 
> With all that being said - for me, it just makes more sense to pay down the mortgage. After all, it _is_ *guaranteed*.


Two very good points. In my opinion you should not be comparing the potential returns of paying down a mortgage to stock investments but GICs. They are not the same level of risk. The extra potential "market return" is in some ways the payment for taking on more risk. Not many bonds or GICs out there that are paying out more than a mortgage costs these days are there?


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## Jungle (Feb 17, 2010)

I think about this all the time as well. We do a 50/50 mix like some above. Best of both worlds.


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## randomthoughts (May 23, 2010)

Conservative bias: I prefer the mortgage, due to the reasons stated above.

In addition, because you are the provider for a family, I feel like stability is more important than wealth. You already have some measure of stability - you work for a large company with a defined benefit pension.

The other way to increase stability is by ensuring that your fixed expenses are as low as possible - and that means eliminating the mortgage payment. I get a certain comfort in knowing that I could subsist on a minimum wage job, even though I hope it won't come to that. (The alternative is having a butt ton of money, which is much harder to do in the short term.)

Once stability is 'maxed out' then you can focus on growing/accumulating wealth. I think you can catch up with that once your fixed expenses are super low.


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## Rusty O'Toole (Feb 1, 2012)

Paying down the mortgage is a tax free investment. You paid no tax on the money you borrowed. When you pay it down you pay no tax. If you sell your house and collect your equity in cash, it is tax free if it is your principal residence.

The money you pay down with is after tax but it is the same if you invest it. But your investment returns (if any) are taxed.

If you can make substantially more than 2.9% by investing, you are better off to keep the mortgage and invest the money. 

On the other hand, owning your home free and clear and having no payment is awfully nice.

So, it is a judgement call. A shrewd investor might even increase the mortgage and use the money to invest (Smith maneuver)


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## 44545 (Feb 14, 2012)

Another option:

While there's no predicting when and by how much interest rates will move, consider locking in to a fixed rate mortgage, since rates are as low as they'll ever get. Then, if/when rates rise, your mortgage will look even more attractive to "keep on the books" while you take some of the money you could have used to pay it down and invest it.

EDIT - Merry Christmas!


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## Jungle (Feb 17, 2010)

I go bi-polar with this sometimes. 

I read an article from the freedom 45 book author how he paid his mortgage off. A picture showed him burning the papers in the fireplace and having a party with family and friends. 

I looked at the annualized return from our oldest portfolio and did the rule of 72. If the average returns continue over the next two years, money will double. 

Mortgage rates are so low right now, making it easier to beat the return with a sound strategy.


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## Cal (Jun 17, 2009)

Jungle, do both, vary your tactics depending upon rates and market conditions. I have no doubts you will be successful with whichever route you choose at the time.


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## Jungle (Feb 17, 2010)

Thanks Cal.


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## feetfats (Jan 3, 2013)

KaeJS said:


> Not only that, but your mortgage rate is only low for now. If you are investing and not paying off your mortgage, you will probably have to go into another term in the future. The term you go into in the future will most likely bear a higher interest rate. That means your effective interest rate is actually higher than the rate you carry now. You must blend all of your future mortgage interest rates to get your real rate. This is the rate you actually need to make in the market, after tax.
> 
> With all that being said - for me, it just makes more sense to pay down the mortgage. After all, it _is_ guaranteed.


Yes, but... if the future mortgage rates go up to the point where they are higher than what you are confident in being able to beat with your investments, then you can start to ease money out of those investments and pay down the mortgage. As long as you did better than the mortgage rate up until this point you would be ahead. 

This is a tricky trade off that I am facing as well. I can hammer on the mortgage to save a guaranteed 3.19% tax free or I can invest in the market within a TFSA to earn ??% tax free. The dividends alone generated by my TFSA at this point in time are about 3.8%. If my stocks stay flat I still win vs paying down the mortgage.

Still not a guarantee like paying down the mortgage though. I have decided to do a bit of both.


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## rikk (May 28, 2012)

Franky Jr said:


> I like investing and feel I can exceed 2.4% with the market but I am concerned with the cost of raising 4 teenagers in the future and wonder if I should just focus on the mortgage now hoping to free up cash in the future when the kids get expensive. (up until now I have been doing about half mortgage paydown and half investing).


Fwiw ... the kids don't necessarily have to get expensive, as teenagers they can or rather should be encouraged to help pull their own weight so perhaps that concern can be mitigated. Here's an example, one of my brothers in law has teenagers that do basically nothing ... the brother in law has suffered some setbacks (no help from the teenagers) and as a result has been forced to sell the home ... probably up there in a parents worst nightmares scenarios. You're currently ok with half mortgage, half investing ... why not continue until some event causes you to reconsider, perhaps rebalance.


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