# Mortgage paid off - what to do?



## ziggyindelta (Mar 18, 2010)

Hi,

Our mortgage will be paid off this summer. My husband and I are about 10 years from retirement and have, between us, approximately $150,000 in unused RRSP contributions. Originally, we had thought to take our mortgage payment amount (approximately $2,000 per month) and buy RRSPS until we were caught up, as well as investing in TFSAs. But now we are wondering if we would be better off buying an investment property (either a condo in Vancouver or a house out in the suburbs). We would use a HELOC on our house to use for the 20% down payment on the investment property. Once we have paid off the HELOC (approximately 4 years), we would then take the $2,000 and start buying RRSPs and TFSAs. Any ideas on which is the better way to go?


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## MoneyGal (Apr 24, 2009)

You will get a diversity of opinions from the posters on this site. 

I'll tell you my thoughts, for what they're worth: a single investment property is insufficiently liquid and insufficiently diversified to provide appropriate risk-hedging for retirement income. 

If you like real estate as a sector, I'd consider REITs. Or, if you could somehow buy a property with a bathroom in Kelowna, a kitchen in Toronto, a dining room in Montreal and a living room in Halifax, I might say "go for it." 

In addition, if you buy in Vancouver, you are absolutely at risk of buying during a market high. This really violates the "buy low, sell high" maxim of investing...and at 10 years out from retirement, I don't personally think you have enough time to wait out a correction (should one ever arrive). 

Just my thoughts; worth what you are paying for them.


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## Jon_Snow (May 20, 2009)

I really think anyone buying in Vancouver right now is off their rocker...

Don't get me wrong, Vancouver real estate has been wonderful asset to own for the past 8 years... a 50% return for us. But this market has to be tapped out.... makes no sense.


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## MoneyGal (Apr 24, 2009)

J - is it worthwhile or just completely annoying to point out that yours is an unrealized gain? 

I'm always curious about this - when people (in my neighbourhood, too; we bought in Toronto 9 years ago and we'd be totally priced out now) talk about the price appreciation on their personal residence as a gain...it isn't a gain unless and until you sell the asset. Or, it is only a paper gain and may be fleeting. 

I put some approximation of the market value of my personal residence on my personal balance sheet and net worth statement, but in reality it is something of a contrived figure. YES, if I sold today I would realize an enormous gain. But I am not planning on selling. So...? Just curious to know why you or anyone would describe an increase in the value of your personal residence this way...

...back to the original discussion...


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## FrugalTrader (Oct 13, 2008)

MoneyGal, with the additional equity, you have the opportunity to use a HELOC to invest and grow (or decrease) your net worth even further. The additional access to funds should count for something.


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## Jon_Snow (May 20, 2009)

In my case, I own (outright) recreational property on which I will retire to in perhaps 8 years, so my city home will be sold at that point and the funds will become part of my retirement portfolio. Why wouldn't I want to keep track of this part of my assets in terms of its rising or falling value?


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## MoneyGal (Apr 24, 2009)

Der. Yes, you could realize a return on the equity that way. I'm not suggesting it counts for *nothing* but just that (like in my case), when you have no plans to realize the gain, why people talk about the gain in that way. Make sense?

(For example, my neighbourhood is very hot right now and I, too, would see a gain of over 50% over my purchase price if I sold now. So, my neighbours talk about this from time to time. Except if you aren't planning to sell - OR use the increased value to stake your claim in another asset - this strikes me as a little...wrong-headed. It makes you FEEL good, but there's no real practical or tangible value to the new valuation.)


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## MoneyGal (Apr 24, 2009)

x-post with Jon and I did not mean to take this discussion off the rails. I don't mean that you wouldn't keep track of an asset's value. I said as much for myself - I track the value of my house quite closely. I guess I just would not describe that adjusted value using the word "gain." I am wedded to the idea that the only real gains are realized gains.


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## ziggyindelta (Mar 18, 2010)

I know this post has gotten "off the rails" but all I want to know is what is the best use for the $2,000 per month we will have to invest in a few months. I know real estate is a "gamble" especially with prices here in the Vancouver area.....but if a tenant is paying off the mortgage for us, doesn't it still make sense...especially considering that after we pay off the HELOC being used for the down payment, we can then invest in RRSPs and TFSAs? We have been approved for a 3.75% five year mortgage on the "potential" investment property.


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## Four Pillars (Apr 5, 2009)

I would invest in diversified RRSPs all the way.

And get your house insurance lowered while you're at it..

http://www.canadiancapitalist.com/mortgage-free-ask-for-a-discount-on-your-home-insurance/


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## MoneyGal (Apr 24, 2009)

Paying off the HELOC after four years means you are then six years away from retirement. 

My questions would be, what is providing the retirement income stream? Does the investment property provide that? Will it provide enough income after expenses? When do you sell it? (Do you sell it?) What happens if prices move down by 20% at your preferred time to sell? 

Whether or not you "should" do this will depend on lots of factors, including what other sources of retirement income you will have. If you have $150K of unused contribution room, though, I suspect you don't have a defined benefit pension in the mix.


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## Cal (Jun 17, 2009)

Yep home equity doesn't count for anything unless you utilize it.

Personally, I would celebrate paying off my house by going on a trip, then if I were in your position, I would max out the RRSP contribution room.


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## ziggyindelta (Mar 18, 2010)

To answer the questions:
My questions would be, what is providing the retirement income stream? I work for a school district and do have a defined benefit plan. My husband has a RPP where he works and his employer does contribute to that for him based on his salary (of course my husband contributes as well). And there's CPP and, hopefully, by the time we are 65 OAS will still be around.

Does the investment property provide that? No we would most likely sell when we retire unless it was providing us with a good monthly income by that point but our intent at this point would be to sell.

Will it provide enough income after expenses? We are anticipating that we would pay down the HELOC ourselves, with rental income going to pay the mortgage and property taxes, etc. I don't think, for the first few years, the rent would cover both HELOC and mortgage.

When do you sell it? (Do you sell it?) What happens if prices move down by 20% at your preferred time to sell? This is where I am confused....even if prices go down 20% by the time we sell (and I just don't think they will be down from current values in 10 years)....aren't we still somewhat ahead of the game as the renters will have built up all that equity in the house/condo? I know, obviously, it would be much preferable for prices to increase (and I do think they will...even if they go down in the next couple of years) but having someone else build your equity seems to good to be true (unless I am missing in the way I am thinking).

Whether or not you "should" do this will depend on lots of factors, including what other sources of retirement income you will have. If you have $150K of unused contribution room, though, I suspect you don't have a defined benefit pension in the mix. As stated above, I have a defined benefit plan (that's part of the reason we concentrated on things other than RRSPs), my husband has a RPP, I have some RRSPs and, of course, we have at least 6 years (if we purchase the rental unit) to "catch up" on our RRPS.

I must admit though the landlord aspect of rental investment does make me a bit nervous.


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## Mockingbird (Apr 29, 2009)

Four Pillars said:


> I would invest in diversified RRSPs all the way.
> 
> And get your house insurance lowered while you're at it..
> 
> http://www.canadiancapitalist.com/mortgage-free-ask-for-a-discount-on-your-home-insurance/


I wasn't aware of the cheaper insurance with no mortgage. 
Thanks for the great info, Four Pillars!


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## MoneyGal (Apr 24, 2009)

Make it even cheaper by raising your deductible to $10,000! (or some other number beyond the standard $500 or $1000 deductible)


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## houska (Feb 6, 2010)

This may sound like an arcane bit of terminology, but I think it is important. You speak about RRSPs and TFSAs as if they were investments themselves, just like the potential real estate investment you are considering. RRSPs and TFSAs are instead vehicles (think empty boxes) in which you can place investments for tax benefits. Those investments can be all sorts of stuff.

I agree with the folks who are saying to be careful in just investing in more real estate. That's a highly concentrated bet to make fairly close to retirement in an area where a lot of people are uncomfortable with how prices will behave. You could only be "a slight bit wrong" and end up with a lot of your capital gone just before retirement. That's not to say your property might not offer you income - but most valuations in B.C. (note: I don't live there) are quite elevated and if all you are after is income then you can get that with less capital risk elsewhere.

Instead, taking your free cash flow for the next 10 years and building a diversified investment portfolio of foreign and Canadian stocks and bonds, possibly with a bit of real estate exposure through REITs (though I would not do that: you have real estate exposure through your house already), I think will provide a better balance of risk and return. Assessing your risk tolerance and time to retirement will let you find the right balance between these asset classes.

Regardless, by having $150k unused RRSP and TFSA room, you are missing out on free money (in the form of tax deferred or sheltered income and gains) from the government. That's a shame. And that in itself would really mean that you'd have to be really firm believers that the B.C. real estate market will shine while financial markets will crash in the next 10 years - a belief which I don't think many others will share.


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## Four Pillars (Apr 5, 2009)

ziggyindelta said:


> I know this post has gotten "off the rails" but all I want to know is what is the best use for the $2,000 per month we will have to invest in a few months. I know real estate is a "gamble" especially with prices here in the Vancouver area.....*but if a tenant is paying off the mortgage for us, doesn't it still make sense*...especially considering that after we pay off the HELOC being used for the down payment, we can then invest in RRSPs and TFSAs? We have been approved for a 3.75% five year mortgage on the "potential" investment property.


Not necessarily

http://www.four-pillars.ca/2010/03/16/tenants-paying-my-mortgage/

Bottom line is that doing the real estate investment first is riskier than just doing RRSP/TFSA from the beginning. You are using a lot of leverage which increases the risk. It's impossible to know how it will turn out but it things go well then the real estate move will pay off in spades. If not, then...you might be kicking yourselves as you extend your retirement date.


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## MoneyGal (Apr 24, 2009)

+1 to Houska and also: the issue for me is not whether real estate is "a good investment" or not (the phrases "good investment" and "bad investment" are often used in an incredibly vague and unhelpful way). 

The issue for me is that 10 years away from retirement, you start to be in a fragile zone - and the impact of your choices is really magnified. Think of it like leveraging your human capital (for an imperfect example). 

You have 10 years left in the labour force during which you will generate dividends from your human capital, and you will use those dividends to invest to create an income stream in retirement. By the end of that 10 years, your human capital will be largely depleted - certainly in comparison to where it is now. 

If you make a mistake with your investments, at 10 years from retirement you do not have enough time left in the labour force to recoup it. You would need to "borrow" against your depleted human capital by remaining in the workforce. (If you have no other investments, what are your other choices?) Or alternately, you could sell your hard asset - your principal residence - to fund retirement at your preferred date (or, in the worst case, you both work longer AND sell your asset). 

IMO as you draw closer and closer to retirement, the lens you want to look through is not "is this a good investment?" but "how am I going to create and generate an income stream for life in retirement?" - and the considerations are different than more generic "good/bad" investment considerations. 

I know I've thrown a whole bunch of concepts into this post. But the main point I want to emphasize is that your current largest asset is your human capital, and its value is declining over time. From that POV, you need to carefully safeguard the dividends from your human capital, because time is depleting the value of your asset for you. The takeaway, from my POV anyways, is that 10 years out is NOT the time to invest in risky assets.

Editing to add that this post was created *before* the clarifying post from the OP, above, showed up...


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## travelgeek (Nov 29, 2009)

Four Pillars said:


> And get your house insurance lowered while you're at it..
> 
> http://www.canadiancapitalist.com/mortgage-free-ask-for-a-discount-on-your-home-insurance/


Thanks..... I did not know this. Off to call my agent tomorrow.


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## OhGreatGuru (May 24, 2009)

I'm with Cal and Moneygal on this one. Unless you both have good pensions, you need to be building up something more reliable (diversified) for retirement income than a single residential property. And you are letting those RRSP tax deductions go to waste in your remaining working years. Put the money into RRSPs, in balanced mutual fund or ETF portfolios suitable to your investro profile.


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## Oldroe (Sep 18, 2009)

You need to supply a little more info.

If you are in the 46% tax bracket I would borrow 46% more than 24k. And put your tax return on your new house mortgage and pay it off at $2000/month. And then the next year do the same.

You both should be put $100/week in your tfsa.


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## Larry6417 (Jan 27, 2010)

*My 2 cents*

It sounds like the two of you have a firm foundation for retirement with a teacher's pension and a RPP. I would step back and look at the overall financial situation. What lifestyle do you want in retirement, and how much will it cost? Once you have an idea of what your desired retirement will cost (plus some margin for error), calculate the gap between what you will have (DBP, RPP, CPP, other savings) and the income needed for your dream retirement. The number may be smaller than you think; if so, then the investment risk you need to take is smaller than you think.

I'm going to play with some numbers. You say that you can set aside ~ $2,000 per month for 10 years. At a 5% rate of return (pre-tax) you should be able to save more than $300,000 - a very nice sum for all the extras you may want to enjoy. You don't need to invest in real estate to get this. MoneyGal and the others have given you very good advice. Concentrating your assets in Vancouver real estate is too risky. If you think real estate can't be stagnant for a decade, then I assure you that you are quite mistaken. An acquaintance bought a home in Edmonton at the peak of the boom in the late 1970s. After the bust, his home didn't return to the nominal high until about the year 2000. Since then, the large increases in home values have probably (I haven't worked out the exact numbers) given him a positive real return. But his "investment" (home) was stagnant for 2 decades. If you have the same ill fortune with an investment property, then the loss on your investment can represent the difference between a retirement of your dreams vs. one in which you have to count and agonize over every penny. Vancouver, as many in this thread have already pointed out, is overpriced. In fact, a recent article rated Vancouver as the most overpriced city in the world. If you buy, then you are adopting the "buy high, sell higher" theory of investing. Also, one deadbeat renter can render all your projections useless.

You also have to take into account tax. If you contribute to a RRSP, you will get a tax deduction. The proceeds from a RRIF are eligible for pension credits and income-splitting (rental income is not). If you contribute to a TFSA, then all the proceeds from it will be tax-free. Also, when you sell your investment property it will be subject to capital gains, unlike a principal residence.

The DBP and RPP act like annuities with longevity insurance, so you can afford to take higher risk with your other investments. However, an investment property is simply too risky. If your investment property performs poorly then all the travel or other plans you have for retirement are at risk. If one stock, bond, or REIT does poorly, then your retirement is still on track because of your other stocks, bonds, or REITs. I would take advantage of all the registered plan room (RRSP, TFSA) possible. You can be a bit more aggressive with equities, dividend-paying securities, REITs. Many REITs are paying 7-8% while bond ETFs are paying 4%. You have much better options than a second property.


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## Oldroe (Sep 18, 2009)

Real estate is just a lot of work.

With 150k rrsp room the gov. will give you 46cents of every dollar.

For your tfsa I would suggest ING and put the full 10k each keep the 4k for the next step.

Now check your last years tax return fined out how much you payed in tax each. Now borrow 46% more than 24k or about 35k in the first 30 days of 2011. I would look at house mortgage for cheap money or Heloc. Put this money in your rrsp.

I would suggest that you go to major bank to open your rrsp's and ask for the most conservative program they have. They will do a risk assessment and this is a legal document, you have shown no interest in investing so stay away from all DIY investing ETF's, Div. stocks,bonds.

Your tax return will be around 10k put this on the 35k and pay the rest off at 2k/month. And do the same thing for 5 years until you use up the rrsp room. Then just max rrsp after this. By doing this you will have max your rrsp in 5 years as apposed about 8 years at 24k/year and it's just gov. money.

Your tfsa account will 10k have each January 2011. I would each start putting $100/week automatic. At some point you should move from your no fee Ing tfsa to some other investment.


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## Berubeland (Sep 6, 2009)

I am always in favour of buying investment properties but they must fit a definition of what an investment is. First and foremost they must pay you!!!

So if you buy a property....

It sounds like you would finance 100% of it

SO ...to calculate if it is profitable or not this is how you do it. 

Rental income less
mortgage and financing costs
less 5% of rental income for vacancy
less 15% of rental income for repair and maintenance
less 10% of rental income for property management
less taxes
less insurance
less other applicable expenses

I urge any one to invest in properties like these. If you find one you will still be able to invest in your RRSP and TFSA and that's the way it should be. Buying anything other than a property which follows these guidelines is speculation.

Good luck finding one of these properties I know in Toronto it's almost impossible.


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