# Pay Off Mortgage, Invest, or Both?



## Toast (Oct 28, 2009)

I hope this is the right place to post this question.

I am 31 years old and own my own business. I have two houses, my primary having a 220k mortgage owing and a rental property with 108k owing -- these are my only current debts. 

My RSP contributions are maxed yearly, TFSA fully contributed. My business has a considerable cushion incase things go sour as well.

I have ~ 220k in non registered accounts to invest. My question is whether I should pay off the house (and possibly HELOC the money back out to invest) or just invest it straight up. If invested my horizon for these funds is long (20 years) as my monthly income is easily greater than my cost of living -- and I don't see that changing much.

Currently both mortgages are on fixed 1 yr, so I'm out of them shortly.


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## Berubeland (Sep 6, 2009)

I don't think you should pay off the mortgage on the rental property considering that it is a deductible expense and that the tenant pays it.

Just my two cents.


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## osc (Oct 17, 2009)

Pay off and re-borrow to invest. Be sure to make more than the mtg interest.


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## scomac (Aug 22, 2009)

Pay off the mortgage on the primary residence as this will earn you a guaranteed *after tax* return of the mortgage rate (and more importantly the future mortgage rate should interest rates begin to rise significantly) without risk. This is a much better deal than a leveraged investment in equities, especially now.


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## CanadianCapitalist (Mar 31, 2009)

If you look at studies that compare how much investors earned versus how much the markets returned, you'll find that consistently, the average investor earns much less than market returns. If you are anything like an average investor, it makes sense to go for the sure thing: pay down the mortgage and earn a guaranteed after-tax return.


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## Sampson (Apr 3, 2009)

CanadianCapitalist said:


> If you are anything like an average investor, it makes sense to go for the sure thing: pay down the mortgage and earn a guaranteed after-tax return.


This assumes that the market return will be equal/similar to the interest paid on the mortgage or HELOC. Even if the average investor underperformed the market, but was only paying 1.75% interest on the loan - they'd very likely be ahead investing the money rather than paying down debt.

If you are comfortable with leveraged investing, then by all means start up a SM and further reduce the 'effective' interest rate through tax deductions. Calculate the amount of interest you'd potentially pay on a HELOC after tax deduction, then determine the return you'd need to beat.

The 'risk' of focusing on paying down debt, especially debt at low interest rates is the cost of opportunity.

I believe risk tolerance is the ultimate deciding factor. Due you need a guarantee, or are you comfortable with moderate risk?


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## CanadianCapitalist (Mar 31, 2009)

Sampson said:


> This assumes that the market return will be equal/similar to the interest paid on the mortgage or HELOC. Even if the average investor underperformed the market, but was only paying 1.75% interest on the loan - they'd very likely be ahead investing the money rather than paying down debt.


Not really. It also depends on how badly investors trail market returns. If the shortfall is 5%, markets have to return 6.75% in future years for an investor to simply break even (before taxes) on investing compared to paying down the mortgage. Further, a 1.75% rate is unusually low. I wouldn't count on it lasting the entire term of a 5-year mortgage. 

Of course, if _future returns_ turn out to be better than the mortgage interest rate, an investor will come out ahead. But how do you tell in _advance_ if market returns are going to be better than mortgage rates?


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## Rickson9 (Apr 9, 2009)

I would do both assuming that you have some solid knowledge about investing.


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## Shayne (Apr 3, 2009)

I am opting for paying off my mortgage. Besides the guaranteed return, there is a huge emotional/physiological advantage to having the biggest debt you will ever incur fully paid off.


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## AndrayDomise (Oct 21, 2009)

Putting math aside for a second - think about your state of mind after the principal mortgage has been paid off. What would you do with the dollars you've freed up?

For most money-conscious people, those uncommitted dollars would go towards long-term savings, and the cash flow would remain mostly unchanged. This is going to sound weird coming from an advisor, but I usually recommend getting rid of the mortgage ASAP - only contributing to RRSPs for the benefit of tax deductions.


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## specialk (Jul 14, 2009)

How much is your annual income?


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## Ben (Apr 3, 2009)

My current philosophy is to skim 10% off the top toward retirement savings, and direct the remainder toward aggressive mortgage reduction.


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## iherald (Apr 18, 2009)

I max out my RRSP, and use that tax deduction to pay down my mortgage. I can see the advantage of one or the other, but I figure this way I invest 10k (for example) out of my pocket, and end up with 14k 'invested'. 10k in the market and the 4k tax rebate on my mortgage. 

I'm sure there are lots of reasons why my solution isn't ideal, but it works for me and seems to make sense to the way I look at the world.


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## Toast (Oct 28, 2009)

specialk said:


> How much is your annual income?


About $90-100k into the biz at the moment, but I dont draw it all out -- some benefits to keeping money in the CCPC.

Thanks for the other responses.

Im getting the general impression that paying off the mortgage / having zero debt and considerable assets is preferred. I'm not an active trader in the market and am into ETF indexes in RSP accounts.

Does it really make sense to pay off a low interest rate mortgage though? I was considering paying it off and HELOC'ing the money back out for (dividend paying) investment, but not really paying it off and leaving it paid off.

Lastly, how does RE in canada do vs. (world) equities in an inflationary period?


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## specialk (Jul 14, 2009)

A couple things. As far as deciding which property to pay off first....ask yourself this. If something crazy were to happen in your life that caused you to lose one of them...which one would you rather lose? Your home, or an investment? I would rather have my home paid off. Plus, with the income you make and no payment on the primary home, you could quickly knock off the rental. As far as gimmicky tricks and loop holes to borrow against your house to invest etc....What are you accomplishing by paying the house down then taking back into debt again? I am confused. You can invest quickly and efficiently using the mortgage payment that you no longer have since you have no debt anymore.


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## specialk (Jul 14, 2009)

Berubeland said:


> I don't think you should pay off the mortgage on the rental property considering that it is a deductible expense and that the tenant pays it.
> 
> Just my two cents.


Your calculator is broken. You would rather pay expenses in order to avoid giving a fraction (your tax rate) of those expenses to the government? And I would not totally rely on tenants for financial planning...sometimes they don't pay....or there are none.


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## specialk (Jul 14, 2009)

Sampson said:


> This assumes that the market return will be equal/similar to the interest paid on the mortgage or HELOC. Even if the average investor underperformed the market, but was only paying 1.75% interest on the loan - they'd very likely be ahead investing the money rather than paying down debt.
> 
> If you are comfortable with leveraged investing, then by all means start up a SM and further reduce the 'effective' interest rate through tax deductions. Calculate the amount of interest you'd potentially pay on a HELOC after tax deduction, then determine the return you'd need to beat.
> 
> ...


Paying off debt = opportunity. When you have no debt payments you can invest larger sums of money and do just fine.


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## Sampson (Apr 3, 2009)

specialk said:


> Paying off debt = opportunity. When you have no debt payments you can invest larger sums of money and do just fine.


If you take a substantial amount of time to pay off your debt, the opportunity cost could result in an inability to catch up despite higher savings rates. It all depends on the assumptions on rates of return, future-value, savings rates etc. It should be somewhat straight forward to model based on a range of expected returns and interest rates on the loan.

As I mention before, it depends on the OP's risk tolerance level. It could mean it takes many more years to reach your financial goals.

If the opportunity of paying off debt was so beneficial, most investment companies would operate with exceeding low or no debt, which doesn't usually happen.


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## specialk (Jul 14, 2009)

Sampson said:


> If you take a substantial amount of time to pay off your debt, the opportunity cost could result in an inability to catch up despite higher savings rates. It all depends on the assumptions on rates of return, future-value, savings rates etc. It should be somewhat straight forward to model based on a range of expected returns and interest rates on the loan.
> 
> As I mention before, it depends on the OP's risk tolerance level. It could mean it takes many more years to reach your financial goals.
> 
> If the opportunity of paying off debt was so beneficial, most investment companies would operate with exceeding low or no debt, which doesn't usually happen.


Which is why you should never take a "substantial amount of time". 1-3 years is average depending on income and size of the mess. You will not likely get rich on the number spreads you are "spreadsheeting" in your explanation. There are many things that look great on a spread sheet that do not pan out in the real world. For example, I have a loan at 5 percent and I "expect to receive" 8 percent on an investment. This gives me a 3 percent spread right? Wrong. It is 3 percent minus taxes and risk. The risk being that I do not receive "expected" rates of return of 8 percent (no that never happens right?), and on the other side of the coin, I lose my job and miss a payment on the loan and they jack the rates..just as an example. One thing that is horribly wrong with a lot (not all) of financial "experts" today, is that everyone wants to only look at the up side and only crunch the numbers..as evidenced by this forum. Almost no real life is included in these calculations. I am not putting risk on my home where my children sleep and keep their toys so that I can "maybe if everything works out just right" make an extra few thousand dollars in the end. Another factor is stress and strain on a marriage for example. Ask your spouse how much they enjoy being in debt? I have always had an issue with statements like "depends how much risk you are comfortable with". What does this mean? It is not about how bold and brave you are...it's about the fact that no matter how "sophisticated", people lose their butts doing this kind of stuff every day.


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## ldk (Nov 10, 2009)

It needn't be all or nothing....pay off the mortgage and then borrow a lesser amount (say $100k) for investment purposes--the risk is mediated and the payments on the HELOC would be easily manageable out of your monthly cashflow.

Just my opinion (and the strategy we've used.)


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## Sampson (Apr 3, 2009)

specialk said:


> Which is why you should never take a "substantial amount of time". 1-3 years is average depending on income and size of the mess.


The size of the mess, so you are suggesting that anyone whom cannot pay off their principle residence mortgage within 1-3 years should be buy a house? That seems pretty extreme. If people could do this, why bother to take a loan out at all. Pay cash up front. I'm guessing most people don't have the ability to pay $300k up front, you seem to be in a different situation.



specialk said:


> I am not putting risk on my home where my children sleep and keep their toys so that I can "maybe if everything works out just right" make an extra few thousand dollars in the end. Another factor is stress and strain on a marriage for example.


I personally do not think that taking on a 20-25 year amortization to pay off a home is putting your home at risk. This is a cash flow issue. I agree with you that if your cash flow and savings are so low that you can not sustain after a job loss, that's too much risk. It all depends on the numbers. If you do not have adequate insurance for the risk, then you can't handle it.



specialk said:


> I have always had an issue with statements like "depends how much risk you are comfortable with".


Its about how much money you require to sustain your lifestyle in the event of crisis, whether job loss, medical crisis etc. You are misinterpreting my view of risk. It has nothing to do with pride, it has to do with a real calculated monetary measure of what your household can manage.


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## Sampson (Apr 3, 2009)

specialk said:


> There are many things that look great on a spread sheet that do not pan out in the real world. For example, I have a loan at 5 percent and I "expect to receive" 8 percent on an investment. This gives me a 3 percent spread right? Wrong. It is 3 percent minus taxes and risk. The risk being that I do not receive "expected" rates of return of 8 percent (no that never happens right?)


The flip side of that example. I have a mortgage, 5-year fixed rate (so no one is jacking the interest on me anytime soon) at 3.9%. Because of some cash damming, cash back on the initial load, my true effective tax rate is close to 3%. There are cashable GICs that currently yield greater than this on 5 year terms, and TFSAs can help eliminate the tax consideration. So let me ask you if it is particularly risky (betting my home and children's toys) to invest this money INSTEAD of making an extra payment on my mortgage. I'm still on schedule to pay off the house as per the amortization, the money is guaranteed, and cashable without penalty. What if my mortgage was at an even lower rate?

What would be the purpose of paying down the loan at an accelerated schedule? Now say on top of this situation, I'm already sitting on 3-6 months of emergency funds. Would you take the extra 'risk' of investing into vehicles that could return 40% in a year (because that never happens either right).

Based on general statements such as 'pay down your mortgage first, before and above all' can also result in missed opportunities such as not having enough money to fund a child's education.

I don't work in the industry, I'm just trying to offer alternative views of what people can do. People should always build adequate buffer's into their planning. Its not always about a few thousand dollars, it can easily be ten's of thousands of dollars over a few years. As I mention several times, it ultimately depends on the OP's individual scenario.


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## specialk (Jul 14, 2009)

Sampson said:


> The flip side of that example. I have a mortgage, 5-year fixed rate (so no one is jacking the interest on me anytime soon) at 3.9%. Because of some cash damming, cash back on the initial load, my true effective tax rate is close to 3%. There are cashable GICs that currently yield greater than this on 5 year terms, and TFSAs can help eliminate the tax consideration. So let me ask you if it is particularly risky (betting my home and children's toys) to invest this money INSTEAD of making an extra payment on my mortgage. I'm still on schedule to pay off the house as per the amortization, the money is guaranteed, and cashable without penalty. What if my mortgage was at an even lower rate?
> 
> What would be the purpose of paying down the loan at an accelerated schedule? Now say on top of this situation, I'm already sitting on 3-6 months of emergency funds. Would you take the extra 'risk' of investing into vehicles that could return 40% in a year (because that never happens either right).
> 
> ...


I never said to pay off "above everything". That would be insanity. You should be investing a healthy amount (as you are..good job) and funding children's education first. Everything above that...make extra payments on the house. The benefit is that the faster you can have no monthly debt payments, the faster you have substantially less risk in your life, in case you lose your job etc. Plus you can then begin to invest what used to be a mortgage payment. A lot can happen in 5 years. Ultimately, in your scenario, I think your right that it won't make much difference either way, and it sounds like you are doing great. All I was pointing out was that there are many other factors to consider than just math.


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## Sampson (Apr 3, 2009)

specialk said:


> All I was pointing out was that there are many other factors to consider than just math.


Amen. No disagreement here. But I still strongly believe that a moderate and controlled amount of leverage is not a bad thing especially in this case where it seems the OP could pay off all debts tomorrow.

I personally believe in a balanced approach, make some top-up payments AND invest. That way you mitigate downside risk in the equity markets, but have some exposure to the benefits - AND reduce your debt load.

The OP is actually in a great position financially. (when I first read the post I thought it was a joke, or a lead-in to some money making scheme )


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## Toast (Oct 28, 2009)

Sampson said:


> The OP is actually in a great position financially. (when I first read the post I thought it was a joke, or a lead-in to some money making scheme )


Yep I'm pretty lucky so far and work pretty hard. I'm very fiscally conservative (not cheap though). No schemes, wish I could come up with one... hah.

Anyway, good discussion folks. Maybe I'll report back when I decide which path to take -- sitting idly at the moment.


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