# Larger Down Payment or Invest?



## cash (Mar 5, 2011)

First time home buyer.

Do I want to make the maximum down payment that I can reasonably afford and work to pay off my mortgage as fast as possible? Or should I aim for a lower down payment (still at least 20% to avoid mortgage insurance fees) and a longer time frame for paying off the mortgage?  In this scenario, assume I invest the extra money.


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## OhGreatGuru (May 24, 2009)

There are numerous threads on this subject. The vast majority of advice is to do the former, but there is a small minority opinion that thinks you can do better by gambling on equities.

There is no investment with a guaranteed after-tax return that can beat paying down your mortgage.

Paying down mortgage reduces your financial exposure in case anything unexpected happens in your expense or income stream: and it paves the way to reducing your income needs in retirement.

PS: Study some mortgage tables, or run simulations through a mortgage claculator, to see how much interest you save over the life of a mortgage by a) maximizing downpayment; b) shortening amortization period; and, c) making early principal repayments.


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## cash (Mar 5, 2011)

I'm aware of how much interest you will pay over the life of a mortgage. Depending on the interest rate, it can be about as much as the principle.


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## financialnoob (Feb 26, 2011)

Not really sure as there's a lot of blanks here.

Amount of mortgage, interest rate and amortization will affect one side of the equation while the amount you have to work with and your expected rate of return also would factor into it. I'd also consider your monthly budget in terms of income vs. housing costs, and whether the extra downpayment lowering your monthly mortgage costs would be better or if you plan on contributing monthly to your investments.


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## LBCfan (Jan 13, 2011)

Depends a bit on how you plan to invest and if you are familiar with the risk/reward trade off. What kind of investor are you (what investments do you have today)? What is your track record and how confident are you that it will continue in the future?

If you plan to invest in GICs or mutual funds with >2% MERs, forget it and pay off the mortgage. If you plan to pay a 'financial adviser' some percentage of assets to invest your money, forget it and pay off the mortgage.

I'm guessing that someone, a 'financial adviser' maybe, has suggested investing rather than paying the mortgage. The reason I say this is that a seasoned investor with the option of a large down payment might think of the 'Smith maneuver'.

In my case, while I was interested in and 'studied' investing, I paid the mortgage first. No regrets.


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## cash (Mar 5, 2011)

financialnoob: 
-_interest rate, expected rate of return_ 
same as what everyone else has access to 
-_whether the extra downpayment lowering your monthly mortgage costs would be better_ 
I can comfortably afford the minimum down payment payments
-_if you plan on contributing monthly to your investments_
with the "slow route" mortgage payments, yes. With "express" mortgage payments, no.

LBCfan:
_-What kind of investor are you (what investments do you have today)? What is your track record and how confident are you that it will continue in the future?_
I currently own some ETF's and commodities. It's done slightly better than the market, mostly due to the commodities. I'm unsure of how this tactic will preform in the future. If I knew, this would be easy!

_-If you plan to invest in GICs or mutual funds with >2% MERs, forget it and pay off the mortgage. If you plan to pay a 'financial adviser' some percentage of assets to invest your money, forget it and pay off the mortgage._
No and no. Will stick to the etf's and a couch potato portfolio. Probably throw in some MIC's and a few commodity stocks.

_-I'm guessing that someone, a 'financial adviser' maybe, has suggested investing rather than paying the mortgage. The reason I say this is that a seasoned investor with the option of a large down payment might think of the 'Smith maneuver'._
It was my original intent to focus on paying my mortgage first. When I met with a mortgage broker, he suggested I pay the minimum that I could get away with and invest the balance, preferably in more real estate. I'm guessing that he would profit by selling me a larger mortgage? I don't really view him as a mortgage adviser, rather a mortgage salesman.


I'm beginning to think more of a hybrid approach would be appropriate. Simultaneously pay-off my mortgage and build an investment account. It would make me worry to have 100% of my money in my principle residence. When interest rates rise, I might place a higher emphasis on paying off the mortgage. I should also note that I'm incorporated for my work and can take advantage of a lower tax rate for investing.


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## Berubeland (Sep 6, 2009)

I like the both approach. 

Paying off your house does provide you with an awful lot of security because if you're ill or lose your job you don't have to worry about very much. 

However, my experience paying off my house in 5 years was that I starved my business of cash which is not necessarily a great plan.


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## Jungle (Feb 17, 2010)

I don't think this has been mentioned, but the more money you put down will decrease your mortgage payment, which will increase your cash flow. Cash flow is good. 

I am looking at the same thing right now, for when we upsize our mortgage next year and move to a bigger place. I used an amortization schedule to figure out that putting an extra $10-15K on the mortgage now will lower the monthly payment by almost $80 per month.

Also, now that we have the TFSA, I believe that putting equties in there stands a better chance of beating your mortgage rate over the long term.


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## kcowan (Jul 1, 2010)

Hybrid

Pay down your mortgage as fast as possible. Invest the maiximum in RRSPs every year. Put the tax refund in your TFSA. All your equity or income investments will be tax sheltered and you non-sheltered mortgage payment expense will be minimized.


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## Echo (Apr 1, 2011)

As Jungle mentioned, by putting more money down now it should lower your monthly mortgage payments freeing up some money for investing purposes. 

The other thing to consider: Is this the best time to be throwing a bunch of money in the market? Commodities are roaring along again after a dip last week, and the stock market is close to pre-recession levels.

Maybe a better strategy would be to rapidly pay down the mortgage for the next 3-5 years when it will really pay off in the early stages of your amortization at a super low interest rate.


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## cash (Mar 5, 2011)

The consensus seems to be more towards the larger down payment and a faster timeline for paying it off, but still being able to have TFSA, RRSP and a buffer.


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