# Paying mortgage fast or investing?



## tavogl (Oct 1, 2014)

So, since I bought a pre sale condo a few months back(completion date October 2018) I am trying to figure out what would be more beneficial, make the extra payments and pay the mortgage early, or invest? I have to say that I am only starting to understand about investing and I would not feel comfortable with anything else than a couch potato strategy for now.

I came across a very interesting video on youtube, but it looks too good to be true, what isn't this guy taking into consideration? you can watch the video here https://www.youtube.com/watch?v=oR-SxrPPqRc or look at this picture, which is the end result of different scenarios.








I see that making bi weekly payments seem to be a common thing and beneficial, but I don't get paid bi weekly, but twice a month on a fixed date, 4 and 19 of each month, would you still do bi weekly payments even if you were only paid twice a month on fixed dates? opinions are appreciated.


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## Ag Driver (Dec 13, 2012)

Deleted


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## james4beach (Nov 15, 2012)

Something to consider is that investing while you have a mortgage means that you are leveraged (overall). You are using borrowed money to finance both your real estate and stock investments even though it may not feel that way.

Consider this argument that investing instead of paying down the mortgage is equivalent to buying stocks with leverage (or stocks on margin).

https://www.kitces.com/blog/Why-Is-...n-Margin-But-Prudent-To-Buy-Them-On-Mortgage/
https://www.kitces.com/blog/why-keeping-a-mortgage-and-a-portfolio-may-not-be-worth-the-risk/



> Functionally, the only real difference between the two happens to be the collateral involved; yet it’s not entirely clear offhand why buying stocks using stocks as collateral is “risky”, but buying stocks and using your home as collateral is less risky!?
> ...
> In the end, though, the fundamental point remains: from the perspective of the client’s entire financial balance sheet, buying stocks “on mortgage” is remarkably comparable to the risk of buying stocks on margin, which is almost (but not quite!) as risky as just investing in a portfolio that is twice as volatile in the first place.


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## TomB16 (Jun 8, 2014)

tavogl said:


> I see that making bi weekly payments seem to be a common thing and beneficial, but I don't get paid bi weekly, but twice a month on a fixed date, 4 and 19 of each month, would you still do bi weekly payments even if you were only paid twice a month on fixed dates? opinions are appreciated.


Bi-weekly payments will not help if you are paid semi-monthly. Align the payments with your paycheck for maximum efficiency.


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## hboy54 (Sep 16, 2016)

It is too long ago to remember exactly the sequence of events, but my net worth exceeded the value of my house about age 28, and I discharged the mortgage about 35. Somewhere in there I made the conscious decision to buy stocks too quite extensively. My thinking was that one house and no debt was a higher risk situation due to no diversification than house plus portfolio plus debt. Many, perhaps most will disagree, but that is what I did.

Hboy54


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## Oldroe (Sep 18, 2009)

You need to do everything. Pay off the condo, learn how and where to invest, have a life, have a vacation. 

Life begins when the mortgage ends.

Skin in the game makes studying and learning investments real.

When you make your mortgage payments is on your ability to have the money there.


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## Just a Guy (Mar 27, 2012)

It probably depends on you more than anything else. If your just going to throw money at the market and pray it goes up, or pass money off to a broker and hope he makes you something, then you're probably better off paying down your mortgage. 

If you spend time learning about investing and your potential investments, there's a good chance you may be better off investing, since it is possible to make more than your interest payments after taxes, but it's not guaranteed.

It really doesn't matter how well or poorly anyone else has done in the past, it'll only matter how well you do.


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## gardner (Feb 13, 2014)

james4beach said:


> investing instead of paying down the mortgage is equivalent to buying stocks with leverage


... except for the tax treatment. If you're going to do this, consider using a Smith Manoeuvre to duck some of the taxes on the interest.

Personally, I went all-in on my mortgage payments, only investing enough to keep my RRSP contribution up. But back then interest was way higher so it was 1,000% clear that there was no possible investment return that could beat the savings by earlier/faster mortgage paydown.


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## Pluto (Sep 12, 2013)

Your mortgage payments are divided into two parts, principle and interest. In the beginning the interest portion is higher than the principle portion. This is when additional payments on principle is most effective. In the later years of the mortgage, the part tghat is interest will be quite small. At that stage it doesn't pay to make accelerated payments on principle. 

Here is an example:
http://www.investopedia.com/articles/pf/05/022405.asp

Where the interest part in the first payment is 500, while the interest in the last payment is about $3.


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## james4beach (Nov 15, 2012)

Oldroe said:


> Skin in the game makes studying and learning investments real.


That's a really good point. You should still invest even while you have a mortgage, just to learn how to do it properly. It takes years to learn the lessons. The only thing I'd add is, invest, but don't put a huge amount of money into it -- until the mortgage is gone.


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## Dilbert (Nov 20, 2016)

james4beach said:


> That's a really good point. You should still invest even while you have a mortgage, just to learn how to do it properly. It takes years to learn the lessons. The only thing I'd add is, invest, but don't put a huge amount of money into it -- until the mortgage is gone.


+1


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## lonewolf :) (Sep 13, 2016)

tavogl said:


> I came across a very interesting video on youtube, but it looks too good to be true, what isn't this guy taking into consideration? you can watch the video here https://www.youtube.com/watch?v=oR-SxrPPqRc or look at this picture, which is the end result of different scenarios.
> View attachment 16569


 Totally complacent thinking in thinking interest rate on mortgage can not vibrate higher after the 5 years & to think dividend stocks will not vibrate lower& will pay 7%.


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## My Own Advisor (Sep 24, 2012)

james4beach said:


> That's a really good point. You should still invest even while you have a mortgage, just to learn how to do it properly. It takes years to learn the lessons. The only thing I'd add is, invest, but don't put a huge amount of money into it -- until the mortgage is gone.


I largely agree with this, especially for young investors.


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## lonewolf :) (Sep 13, 2016)

james4beach said:


> That's a really good point. You should still invest even while you have a mortgage, just to learn how to do it properly. It takes years to learn the lessons. The only thing I'd add is, invest, but don't put a huge amount of money into it -- until the mortgage is gone.


 Would go 2% max on investment also remember cash is an investment, After develop philosophy on market from study your plan might include waiting for time to be right before putting money on table


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## Mortgage u/w (Feb 6, 2014)

tavogl said:


> I see that making bi weekly payments seem to be a common thing and beneficial, but I don't get paid bi weekly, but twice a month on a fixed date, 4 and 19 of each month, would you still do bi weekly payments even if you were only paid twice a month on fixed dates? opinions are appreciated.


You can make bi-monthly payments which line up with your pay. You may still have an advantage over monthly since you are making 24 payments per year rather than 26 with a bi-weekly. The key is that your payments must be "accelerated", otherwise, there will not be an advantage. Example:

If monthly payment is $1000, then you pay $12,000 per year.
An accelerated biweekly payment divides the payment in 2, so you have $500 biweekly x 26 = $13,000 per year. Here, not only are you paying more per year but payments are more frequent which slightly reduce the overall interest paid.
If you apply that same calculation to a bi-monthly, $500 bi-monthly gives the same yearly result as a monthly payment, except for a slight interest reduction. Ideally, you should increase the bi-monthly payment to roughly $540 to have the same effect as a bi-weekly ($1000 x 12 divided by 26).

As for investing vs debt repayment, you should be doing both. Pay-down mortgage and invest as much as you can. Never do one without the other.


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## tavogl (Oct 1, 2014)

Hi all, thank you for the tips, I think I will do accelerated biweekly payments. I am doing some research on what kind of lump sum payments you can do once a year, see if it's possible to do bi weekly + once a year lump sum + some investing. 

I have to say I am kinda afraid of investing, it's something I've never done before... the only "investing" I've done is through the company DPSP and RRSP programs, which I only contribute what they match for now. When I log into my Great West Life account it says for the last 12 months it had a 9.34% return, is this real? and if it is, is it good?


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## Oldroe (Sep 18, 2009)

At this point don't worry about costs.

Take 1-2k get a TD cash account or the bank you deal with.

Buy 1 etf, and 2 stocks like a bank and a $10-15 stock.

Now hit the books,blogs talk to people.

If you are interested worried " is good", if you are scared to death lose sleep can't think of anything else investing may not be your game.


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## lonewolf :) (Sep 13, 2016)

tavogl said:


> Hi all, thank you for the tips, I think I will do accelerated biweekly payments. I am doing some research on what kind of lump sum payments you can do once a year, see if it's possible to do bi weekly + once a year lump sum + some investing.
> 
> I have to say I am kinda afraid of investing, it's something I've never done before... the only "investing" I've done is through the company DPSP and RRSP programs, which I only contribute what they match for now. When I log into my Great West Life account it says for the last 12 months it had a 9.34% return, is this real? and if it is, is it good?


 The best plan is probably the safest plan the commercial hedgers make most of the money almost all speculators big & small lose money to the commercials. As well takes a lot of money to keep the market well oiled & your playing against some of the most corrupt powerful men in the world. 

The safe play could be something like very small amount of cash when time is ripe buying Far OTM puts on SPX as insurance against deflationary crash & no longer have a job.


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## Mortgage u/w (Feb 6, 2014)

tavogl said:


> I have to say I am kinda afraid of investing, it's something I've never done before... the only "investing" I've done is through the company DPSP and RRSP programs, which I only contribute what they match for now. When I log into my Great West Life account it says for the last 12 months it had a 9.34% return, is this real? and if it is, is it good?


If your account says 9.34%, it is most definitely real and considered very good. I consider any return above 5% to be good.

I could understand your hesitation for investing. Anything we don't know much about is always worrisome. I suggest you start very slow with something like a high interest savings account in a TFSA. The idea is to get the ball rolling to build up some savings. There is no risk with the HISA but at the same time, don't expect returns above 2%. Low risk=low returns.

Once you have a good chunk saved ~$10k+, you may want to up the ante to get a higher return. You will want to consider ETFs and maybe some well-known solid and dividend-paying stocks. As your HISA builds up, take that time to inform yourself before taking the next step. You don't want to move too quickly nor do you want to invest in something you don't fully understand.


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## Butters (Apr 20, 2012)

It's best to keep things simple.

Paying down the mortgage is the simplest thing you can do!
As others have said the principle is higher in the early years.
The market is at an all time high right now (not saying it can't go even higher). Paying down your mortgage is the safest route.

In your early years, the best way to increase your net-worth is to:

1. Make more money (more hours, other side jobs, etc...)
2. Spend less money (make your own lunch/coffee, buy an older car instead of new, etc..)

Paying down mortgage might get some people excited and have them work more, and spend less so they can tackle that mortgage completely.


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## Mookie (Feb 29, 2012)

Great advice here so far. I would agree with the advice to focus primarily on beating down your mortgage first, as it is a guaranteed tax free return on your investment equal to the mortgage interest rate.

Regarding frequency of payments, the most efficient way to pay off any mortgage (assuming the mortgage terms allow it) is to make payments as soon as you have the money. Any time your money spends sitting idly in your chequing account is time that your mortgage is generating unnecessary interest. Since you are paid bi-monthly, you should schedule your payments to be bi-monthly, the day after you get paid.

I would also suggest that you set aside a bit of money annually to build up your investing experience. You can’t go too wrong starting with (or even sticking with) a couch potato portfolio. Have you considered whether this would be in a TFSA vs. RRSP, or both? That all depends on your income level now vs. retirement.


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## nobleea (Oct 11, 2013)

Mookie said:


> Great advice here so far. I would agree with the advice to focus primarily on beating down your mortgage first, as it is a guaranteed tax free return on your investment *equal to the mortgage interest rate.*


You know, I've always thought that it's a better return than that. Unless you are going to be paying the mortgage off in the current term, the return on your investment is more like the average of all your mortgage rates until the thing is paid off. Given that rates are likely to increase over time, the return is likely to be higher than you are currently paying. Its in future terms that you save. Remember it's money that you don't have to renew for and it comes off the end of your mortgage.


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## Mookie (Feb 29, 2012)

nobleea said:


> You know, I've always thought that it's a better return than that. Unless you are going to be paying the mortgage off in the current term, the return on your investment is more like the average of all your mortgage rates until the thing is paid off. Given that rates are likely to increase over time, the return is likely to be higher than you are currently paying. Its in future terms that you save. Remember it's money that you don't have to renew for and it comes off the end of your mortgage.


Yes, I suppose you could look at it that way. So far I've never heard of anyone who regretted paying off their mortgage early.


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## tavogl (Oct 1, 2014)

Mookie said:


> Great advice here so far. I would agree with the advice to focus primarily on beating down your mortgage first, as it is a guaranteed tax free return on your investment equal to the mortgage interest rate.
> 
> Regarding frequency of payments, the most efficient way to pay off any mortgage (assuming the mortgage terms allow it) is to make payments as soon as you have the money. Any time your money spends sitting idly in your chequing account is time that your mortgage is generating unnecessary interest. Since you are paid bi-monthly, you should schedule your payments to be bi-monthly, the day after you get paid.
> 
> I would also suggest that you set aside a bit of money annually to build up your investing experience. You can’t go too wrong starting with (or even sticking with) a couch potato portfolio. Have you considered whether this would be in a TFSA vs. RRSP, or both? That all depends on your income level now vs. retirement.


Hi Mookie, thanks for the reply, I am currently doing some research on couch potato investing. As I am kinda new to this investing thing I am not sure what's best for my situation, TFSA or RRSP. My income varies, last year it was 60k this year should be around 75k. Household combined salary of 150k/year (approx) like I said, it varies, I am in a new career path and loving it so far. What would you suggest doing? TFSA, RRSP?


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## tavogl (Oct 1, 2014)

SheaButters said:


> It's best to keep things simple.
> 
> Paying down the mortgage is the simplest thing you can do!
> As others have said the principle is higher in the early years.
> ...


We've been working hard on increasing our incomes, 4 years ago it was 80k/year, today around 150k/year, but I think this is kinda the top of what we can make in our current positions, we'd have to move out of province to get paid more, which we are actually considering, Ottawa seems to pay a bit more than here in Vancouver, and according to what I have seen its much cheaper than living here.

We really do try to not spend too much but buying this condo and considering having kids in the near future is what have us a bit worried, its going to take away alot of our saving power, that's why I am here today looking for advice


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## tavogl (Oct 1, 2014)

Oldroe said:


> At this point don't worry about costs.
> 
> Take 1-2k get a TD cash account or the bank you deal with.
> 
> ...


Looking into this, thanks for the advice.


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## tavogl (Oct 1, 2014)

james4beach said:


> That's a really good point. You should still invest even while you have a mortgage, just to learn how to do it properly. It takes years to learn the lessons. The only thing I'd add is, invest, but don't put a huge amount of money into it -- until the mortgage is gone.


Thanks James, I agree that having skin in the game makes it real and pushes you more to do it properly.


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## Karlhungus (Oct 4, 2013)

Mookie said:


> Yes, I suppose you could look at it that way. So far I've never heard of anyone who regretted paying off their mortgage early.


Probably because they never did the math to see how much further ahead they would have been by investing the extra cash instead of putting it against the mortgage.


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## yyz (Aug 11, 2013)

Karlhungus said:


> Probably because they never did the math to see how much further ahead they would have been by investing the extra cash instead of putting it against the mortgage.


Can you guarantee that? Nope

Post 22 above is correct it's not just paying off the mortgage it's the future where you pay cash for a car instead of a loan,etc.That is compounding the savings.Investing carries no guarantees.


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## Mookie (Feb 29, 2012)

tavogl said:


> Hi Mookie, thanks for the reply, I am currently doing some research on couch potato investing. As I am kinda new to this investing thing I am not sure what's best for my situation, TFSA or RRSP. My income varies, last year it was 60k this year should be around 75k. Household combined salary of 150k/year (approx) like I said, it varies, I am in a new career path and loving it so far. What would you suggest doing? TFSA, RRSP?


Hey Tavogl, the TFSA vs. RRSP debate can be a long discussion with no clear black and white answer because it depends on a lot of things, but in a nutshell, if you expect your total income from all sources in retirement to be lower than your current income, then you should prioritize your RRSP, otherwise start with the TFSA. I suggest you Google TFSA vs. RRSP to get a better understanding. Here’s a pretty good article to get you started: https://youngandthrifty.ca/tfsa-vs-rrsp/

If you’re going the RRSP route, you should also consider whether or not a spousal RRSP is advantageous for you, in order to balance your income vs. your spouse’s income in retirement.

And then if you end up having kids, there’s also the RESP to consider. You’ll get a nice 20% instant payback of free money from the government on the first $2500 that you contribute per kid, per year. Definitely worth taking advantage of. 

Of course, once your mortgage is paid off, you could divert the money that was going to your mortgage payment and use it to maximize both your RRSP and TFSA (and your RESP if you have one). Then the debate over which one is better becomes irrelevant. :chuncky:


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## Eclectic12 (Oct 20, 2010)

nobleea said:


> You know, I've always thought that it's a better return than that. Unless you are going to be paying the mortgage off in the current term, the return on your investment is more like the average of all your mortgage rates until the thing is paid off ...


For a longer term payoff ... the rate will change, just like where one gets promotion to pay off the mortgage even faster may swing what part ends up having more weight. Most have trouble figuring out the mortgage on it's own, never mind the complication of the early pay off taking several terms and being at several rates.




Mookie said:


> ... So far I've never heard of anyone who regretted paying off their mortgage early.


Question is though ... are they happy with the freedom/extra cash flow after the mortgage is done so that they stop there?
Or did they take them best guess, make a decision and then checked out what the actual experience was?
Most I know focus on freedom/extra cash flow after the mortgage is retired.

Keep in mind that IMO, more than just the "invest/payoff mortgage" needs to be considered. Where one can't sleep at night with investments - then IMO one should stick to paying off the mortgage.



Cheers


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