# Pay down mortgage or invest in markets?



## Valueinvestor (Dec 10, 2014)

Hi CMF.....I am looking to get feedback on what to do next with my money. I have about $40k to invest (or will soon in a month when I transfer my money from my other accounts). 

I can either invest it in my tax-free account (have never contributed anything so have the full amount available) or pay down the mortgage. I don't know what to do.

Mortgage on my principal residence is about $350,000. It's going to be renewed next month and I have secured a low rate (2.30%).

If I invest it in my tax-free acct I think I can make 7-10% annually *hoping*. I do not feel comfortable buying individual stocks so I have a few low cost funds in mind I'd want to buy. I've made some mistakes and lost some money in my rrsp by investing in companies i thought were undervalued in the market (not a whole lot) and don't want to go through the roller coaster again.

Rate of return by investing is probably higher but theres more to consider. My company is currently undergoing some major changes and there's a chance I could lose my job in the future. If I do I think I will get 2-3 months pay for severance. The lower monthly mortgage payments would help me get by if I did lose my job. If I invested the money I wouldn't want to rely on using it in case I had to since it may go down in value.

Also with the federal election coming soon Im worried the tfsa could either get capped or even eliminated *gasp*. I don't want to miss out on decades of tax-free returns if the ndp get in and eliminate it altogether. 

Classic question of getting a guaranteed return on my money by paying down the mortgage versus rolling the dice on the markets.

Thoughts?


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## mrPPincer (Nov 21, 2011)

mortgage, guaranteed 2.3% (and possibly/probably higher rate in future years) 
(just what I'd do, cuts risk down, what with job risk and all, just my thoughts).


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## Jorob199r (Sep 4, 2014)

Mortgage. Peace of mind, it's a sure thing.


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## dogcom (May 23, 2009)

Mortgage no question but maybe put some in risk free savings so you have more of an emergency fund for real peace of mind.

On investments there is no such thing as a 7 to 10 percent kind of easy return. You could buy something that gives you a 10 percent dividend like DFN but then it could drop that much or more in value as well.


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## james4beach (Nov 15, 2012)

Your assumption that you can make 7% to 10% annual return is a wrong assumption. So that's the first problem. The second problem is the concept of risk.

On the scale of investment risk, it boils down to something like this:

Risk-free investments: 2.0% - 2.5% (stuff like GICs)
Moderately risky: 3% - 5% (standard stock and bond mix)
High risk: 5% - 8% (pure stocks, junk bonds, etc)

So when you compare to your 2.3% mortgage consider it like this. If you're looking for the safe, sure-fire investment return... you can only get about 2.5% in risk-free investments. That's about the same as your mortgage.

If you start taking on a bit of risk, you can get an investment return around 4%. Now you have to ask yourself a question like, is this "extra 1.7% vs the mortgage" really worth the hassle... the stress in case of job loss... the risk your wife/husband will kill you if sink the household into financial ruin?

The answer for most people would be "no". You're not really going to see a significant benefit vs the 2.3% "return" on the mortgage.


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## Oldroe (Sep 18, 2009)

My 1st thought is your job. Most are always a crapshoot.

And 2nd is losing money in stocks.

It sounds to me like you invest in a company's and when it goes down you sell for a loss. The bad news is those funds go down to.

In our working life we need to do a little of everything.

I would suggest you need a financial plan. What is your mortgage plan, what is your rrsp plan, what is your tfsa plan, what is your OH S....T plan (that's job loss/sickness), what is your retirement plan.

And now investing, buying to best company's is always a smother ride. And aiming for 5% is more realistic.


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## blin10 (Jun 27, 2011)

yeah, might be better to put it into your mortgage... I would say it's only better with stocks when a huge sell off happens (ie, like 08/09)


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## My Own Advisor (Sep 24, 2012)

Can you do a bit of both...this way....you're reducing your risk (mortgage) and building more assets for the future (stocks).

If you can only do one, even though money is cheap, I'd do the mortgage until it's down to a point where if you lose your job or something else happens (disability) you don't have another stressor - moving! Once you're down to maybe $150k, could be better to invest vs. mortgage paydown given same rates, market conditions, etc. since there is more potential reward to be had there.

It's really a personal risk question I think.


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## christinad (Apr 30, 2013)

Just a comment that when i pay down extra on my mortgage the payments don't decrease, the length of amortization does. You may want to check your payments would decrease. I would save some money in a savings account if you think you will lose your job


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## fraser (May 15, 2010)

Our choice was to pay down our mortgage...and eliminate it in 7 years.

Don't forget...you pay your mortgage with after tax dollars. Don't compare this with pretax earnings on investments. Do apples to apples. And interest rates will be going up.

Pay down your mortgage. See if you can renew it early to take advantage of the current low rates. Reduce the amortization period. If you are monthly payments change it to every two weeks or however you are paid. It is amazing how quickly you can get a mortgage paid down if you work on it.


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## none (Jan 15, 2013)

People are missing the important question: How much of your mortgage do you currently have paid off?

If it's more than 50% then I would invest it - no question, invest it. A guaranteed 2.3% return is ****.


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## dogcom (May 23, 2009)

Don't forget that 2.3 percent is after tax return. We are also getting long in the tooth on this bull market as we always get a bear market every decade so the risk is far higher now.


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## none (Jan 15, 2013)

He was going to put it into a TFSA so it's also after tax return.

No one can predict when a bull market will end.


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## showmethemoney45 (Feb 27, 2015)

I'm in the same boat with my job. I would be the extra dough in low risk TFSA. If you lose your job you'll need a cushion to pay mortgage payments (maybe even more than your severence). If your job starts to look stable again put it on the mortgage. Just my $0.02.


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## none (Jan 15, 2013)

People tend to ignore the fact that risk goes two ways. There's risk of stock prices going down and there's the risk of opportunity cost of missed out gains. Any one who put extra money on their mortgagwe in the last 4 years rather than investing it, for example, in hindsite (which is 20/20) made a mistake.


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## dogcom (May 23, 2009)

If the Fed and central banks around the world hadn't started the unprecedented QE and money printing there wouldn't have been much of a bull market. We would have had the Japan scenario and your comment would have been reversed. We don't know what the future holds but we do know what it means to put money on the mortgage to pay it down.


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## none (Jan 15, 2013)

Of course, that's why you manage risk. Hence I said that if RE risk was reduced by the mortgage being paid off by ~50% then the rest could be invested.


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## Maybe Later (Feb 19, 2011)

Neither. 

If job loss is a real possibility then the few bucks a month off the mortgage will not be as useful as the flexibility of cash. Park it in a TFSA savings account. People's Trust is currently 2.25%. The difference between that and your 2.3% mortgage is $20 per year. Then if you do lose the job you have almost two years worth of mortgage payments in the bank ( I used a 20 year amortization - YMMV). 

And, if things look rosier you can always make a lump sum payment on the mortgage or change investments in the future.


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## JordoR (Aug 20, 2013)

If you already have a bit of an emergency fund tucked away, I would say go with the mortgage and pay that off as soon as possible. Or keep your mortgage as is for the renewal and double up the payments. 

If you don't have an emergency fund, I would suggest either placing some in a TFSA savings account or some low risk funds that you could easily liquidate if the time did come.


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## My Own Advisor (Sep 24, 2012)

none said:


> Of course, that's why you manage risk. Hence I said that if RE risk was reduced by the mortgage being paid off by ~50% then the rest could be invested.


I largely agree with this...


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## RBull (Jan 20, 2013)

none said:


> People tend to ignore the fact that risk goes two ways. There's risk of stock prices going down and there's the risk of opportunity cost of missed out gains. *Any one who put extra money on their mortgagwe in the last 4 years rather than investing it, for example, in hindsite (which is 20/20) made a mistake.*


Generally I know where you're going and I agree. Although, you're ignoring some of your own mantra- you can't predict where the markets are going or where interest rates are going. Hindsight in this case is useless. 

Your statement also *assumes* all investment returns over the 4 years would be superior to interest savings. Likely, but not guaranteed. You also assume people don't have other reasons more important to them to pay off debt vs. investing. For these reasons it doesn't make it automatically wrong.


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## none (Jan 15, 2013)

I agree - that's why the hindsight 20-20 qualifier. 

The two choices just put different levels of bounds around future net worth. The mortgage strategy has tight ones, the investing ones are larger. To me, it sounded like the OPs life stage allowed for some additional uncertainty.


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## cashinstinct (Apr 4, 2009)

in highsight, I should have put minimum 5% downpayment in 2012 instead of 20% to avoid CHMC premium

In insight, why an emergency fund ? no emergency for me in the last couple of years, so I could have invested almost all my cash and keep no safety net.

However, I can't regret that... 

---

My approach is a mix:
- I increase my payments on mortgage 15%+ per year (since 2014)
- I max out current year RRSP since +- 2013 (TFSA 2014)
(I have some work to do on prior years)

House net of mortgage around 30% of net worth.

If I was debt-repayment only, I would have no investments and house would be 70% of net worth... too much for my liking.


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## dogcom (May 23, 2009)

Cashinstinct you are talking from a position of knowledge and stability which many on the forum have. This poster is not from that position as mentioned with the previous investment losses and possible job loss to come. In the end the ability to access cash flow trumps everything when it gets down and dirty.


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## RBull (Jan 20, 2013)

none said:


> I agree - that's why the hindsight 20-20 qualifier.
> 
> The two choices just put different levels of bounds around future net worth. The mortgage strategy has tight ones, the investing ones are larger. To me, it sounded like the OPs life stage allowed for some additional uncertainty.


I was only referring only to your blanket statement about "any one" who put extra money on their mortgage, and not the OP or their situation.


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## RBull (Jan 20, 2013)

dogcom said:


> Cashinstinct you are talking from a position of knowledge and stability which many on the forum have. This poster is not from that position as mentioned with the previous investment losses and possible job loss to come. In the end the ability to access cash flow trumps everything when it gets down and dirty.


Important points.


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## cashinstinct (Apr 4, 2009)

He should have an emergency fund, and the job situation would be an argument to beef it up.

He could keep the 40K in non-registered in high savings interest account

I would not invest 40K or pay mortgage with that money one shot.

He could make temporary extra payments on mortgage or small monthly cobtributions to tfsa/rrsp and stop them if needed


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## My Own Advisor (Sep 24, 2012)

All very wise stuff Cashinstinct if the job uncertainty is there. 

This is why I usually advocate doing a lil' bit of both, small extra mortgage payments (that can be stopped) AND small contributions to TFSA or RRSP or both (that can be stopped). You are reducing your debt risk (mortgage) AND investing for your future self as well (investing) this way.

When the mortgage is more than half dead, or even closer to death, then investing likely trumps mortgage paydowns.


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## dogcom (May 23, 2009)

My Own Advisor this is what I used to do with my mortgage when I had one. First I took out the longer term 25 year mortgage and then pay it monthly not twice a month or any of those tricks. Then I would auto pay more each month as I could afford and this way if I needed the cash flow I could go in and reduce to the lowest payment easily without penalty or making changes.


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## Soon Forget (Mar 25, 2014)

My Own Advisor said:


> When the mortgage is more than half dead, or even closer to death, then investing likely trumps mortgage paydowns.


I'm curious about where this "50% paid off" concept comes from? Wouldn't it make more sense just to think about the absolute value of the mortgage debt? Or maybe what percentage of your income the mortgage interest represents?


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## My Own Advisor (Sep 24, 2012)

Sounds like your approach worked well dogcom, you have no mortgage 

@Soon Forget, what I'm thinking is, if you have lots of equity in your home, i.e., at least 50%, _then you could consider investing. _ 

This possibly makes little sense if you have a $1 M home in Toronto, owe $500k and only one person working to support the family.

This might make much more sense if you have a $400k valued home, owe $200k and you have two very steady full-time jobs to support the family.

A % of your net income vs. what is going to the mortgage is much more appropriate but then again, all these things are generalizations.

In the end, in comes down to this for me: it's a risk-based decision. There are risks with debt and risks with investing. Only the individual can decide what is best based on their unique and personal circumstances; hopefully it's a risk-based decision.


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## OurBigFatWallet (Jan 20, 2014)

Have you considered a 'hybrid' approach of both? What I mean is putting the cash towards the mortgage to pay it down and then using the difference in the monthly payments to invest - similar to what's mentioned above. 

At 2.3% a mortgage of $350k is about $1500/m but a mortgage of $310k is about $1300/m - you could keep the monthly payments at $1300 but setup an automatic transfer monthly for the difference (in this case $200/m). 

If you used the monthly difference to invest in your TFSA and earned 7-10% as you mentioned your total return would be closer to 6% and 2.3% of that would be guaranteed. This is because of the interest savings annually due to the $40k you'd put towards the mortgage as well as the returns in the TFSA. And of course this assumes you continually put $200/m into your TFSA and all income gets reinvested.

This option would also give you the peace of mind concerning your job - if you did lose your job you could pull the plug on the monthly investment amount and still have the lower monthly mortgage amount.

The big drawback is this wouldn't allow you to plow a lot of money into the TFSA right away. You mentioned you think it may disappear or be capped if a new government comes in. If that happens this option wouldn't be ideal. That being said I can't see the government completely eliminating the TFSA.

Out of curiosity what is the home worth and what area are you in?


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## RBull (Jan 20, 2013)

My Own Advisor said:


> All very wise stuff Cashinstinct if the job uncertainty is there.
> 
> This is why I usually advocate doing a lil' bit of both, small extra mortgage payments (that can be stopped) AND small contributions to TFSA or RRSP or both (that can be stopped). You are reducing your debt risk (mortgage) AND investing for your future self as well (investing) this way.
> 
> When the mortgage is more than half dead, or even closer to death, then investing likely trumps mortgage paydowns.


I did both when we had a mortgage. Last mortgage was 10 year amortization- added 10% to weekly payment(max) and 10% to principle each year (max). It was paid for in 5 years and 9 months- 241 months ago. (Paying down debt was a no brainer since our rate was 9.25%.) At the same time we saved maxing RRSP's and some in unregistered plus contributed to a pension. Because the initial mortgage amount was approx 1x joint annual earnings even our bumped up payments were well below typical ratios, and we had built up considerable savings before the mortgage, so we never worried over cash flow.


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## My Own Advisor (Sep 24, 2012)

"Paying down debt was a no brainer since our rate was 9.25%."

For sure. We/now are lucky with rates. Depending how you look at things, this has been a golden age to get into debt and then kill it quickly.

I'm looking forward to the day when I no longer have to service debt and every penny that was going into the mortgage (today) is able to flow into my portfolio - time to crank up the cash flow then!


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## Pluto (Sep 12, 2013)

If you invest in the market now, you will regret it. Pay down the mortgage.


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## none (Jan 15, 2013)

Pluto said:


> If you invest in the market now, you will regret it. Pay down the mortgage.


That's ridiculous.

One thing people are failing to grasp is that putting money on a mortgage is a long time horizon. The money he puts on now is taken off the ***-end of the mortgage. What's his amortization? 15 years+. If that's the case I doubt anyone would advocate that he put his money in GICs for 15 years. That's eight shades of retarded.


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## dogcom (May 23, 2009)

No one knows for sure if putting money into the market today is a bad move. Under normal markets you would expect a bear market but we don't know if the Fed will not blow the doors open with a new huge QE.

However if home prices and stock prices were to drop along with a job loss then the regrets could be huge.


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## Oldroe (Sep 18, 2009)

Money on your mortgage is immediate. And makes your bi weekly/monthly payment work harder for you.


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## daledegagne (Apr 6, 2015)

This is the best write up you will ever see on whether to pay down or invest.

http://financialmentor.com/financial-advice/pay-off-mortgage-early-or-invest/7478

He evenly weighs both sides of the argument without bias and includes behavioral/emotional impacts, cash flow considerations efficiency considerations, and other economic factors like mortgages as currency hedges, which I've never seen discussed anywhere else. Well worth the read.


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## humble_pie (Jun 7, 2009)

this todd is a friend of yours, dale?

or are you todd yourself? seems you both have easy/pricey financial services to sell ...


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## daledegagne (Apr 6, 2015)

humble_pie said:


> this todd is a friend of yours, dale?
> 
> or are you todd yourself? seems you both have easy/pricey financial services to sell ...


Negative Ghost rider. I don't know the guy and have no relationship with him beyond interacting on blog comments with him wich you can see all of them at the bottom of that article.

Can't speak for Todd or his prices. I don't know them. But I have a 100% money back guarantee that no client has ever taken. I guess that means they got enough value but you would have to ask them for sure.


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## Oldroe (Sep 18, 2009)

It's a US mortgage site and without a paid off first house he likely wouldn't get the 2nd house.

Life starts when the mortgage ends.

That being said you can't live for a mortgage payment and need to take a hybrid approach "Comfort and stress Free" and you can't live for your investment portfolio.

Most that advocate investments have good reasons for that belief.


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## besmartrich (Jan 11, 2015)

You can get two birds with one stone. Pay off mortgage and get HELOC.


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## Financial Couch (Jul 3, 2015)

*Financial Advise*

First at all. do not believe everything you see here as a possible answer or advice. I see that you are a very responsible person, and as a responsible person with your finances, you should look for a professional advise. You should get a financial plan not only for those $ 40.000, but for your entire financial health. My wife and I are completely available to sit down with you and your wife on your kitchen table and show you that your better solution is having a game plan. We have solved some situation like your and let me give you an advice or better yet a true: It is possible to grow your money with investment. I can show you my investments. I work as a financial broker with some of the most prestigious investments companies here in Canada and USA, like AGF, McKenzie, Leg Manson, Fidelity and others. They are experts. So if you are really interested in not only what to do with this money but with your whole financial health just call me. We can visit you without charging anything and without any compromise. Your Financial Analysis will be completely free. Well, no completely free, I think a cup of your good coffee and your friendship will be enough for us. If at the end you are not interested at all, at least we will have a nice talk.
Call us or text us at 289-696-5787, (my name is Gerard). 
P.D. in your Financial Analysis we plan to integrate one solution for your situation, including: debt resolution, income protection, emergency funds, retirement fund adequate to your needs, will and some other stuff. Remember. it is without any compromise, completely free and confidential. I am a licensed financial couch in the Province of Ontario.
Thanks


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## none (Jan 15, 2013)

First of all I only trust my finances at best with a financial coach. Financial couches always tend to squirrel away pennies between the cushions. :/


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## My Own Advisor (Sep 24, 2012)

Oldroe said:


> Life starts when the mortgage ends.


I've heard this many times and it never gets old. Debt-free must be an amazing feeling since now all that mortgage money can be invested and/or used to live your life.

Looking forward to it. 6 more years to go for us!


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