# Simple probably common question



## AudiS4 (Sep 11, 2013)

My wife and I now have an extra $1000 a month in our budget. Our only debt is our mortgage, at current repayment we have 13.5 years left, we'll be mortgage free when we are 50ish. For the time being we have some RSP room and all of our TFSA room. We already invest monthly in the RSP and fairly heavily along with saving money for kids education. 

Option one put the $1000 a month into the TFSA and leave it.

Option two put the money in the TFSA and make as large of a yearly principal payment on the mortgage as we can (max 10% per year of original principle value I think).

Option three put the money in the RSP and increase our tax return and put the tax return each year on the mortgage.

Option four unknown

Just on emotion alone I think I'd prefer option 3, my wife would choose option 2. Our mortgage rate is 3.95%

If things continue on as they are and as we hope, we will be mortgage free and able to afford a comfortable retirement leaving the workforce in our 50s (I'll probably work longer), but who knows life is pretty unpredictable.


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## Just a Guy (Mar 27, 2012)

If you can earn more than 3.95% on your investments! then invest it. If not, then pay down your debt.

If you can earn more, but are worried about your mortgage, put it in a TFSA since you can take that out at any time to pay down your mortgage.

If you can earn more and pay higher taxes, put it is the RRSP, then put the tax return in a TFSA or RRSP.

If you have kids, kiss your savings goodbye.


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## james4beach (Nov 15, 2012)

The principles I would use is that you should always try to reduce your debt, and you should do it as directly as possible.

Of the options you list, #2 meets these criteria. Plus, TFSA is a superior savings vehicle to RRSP.

In option #3 there are risks you may not be considering. For instance, tax rates at the time you retire may be much higher than they are today. Therefore there is a possibility you are _not_ actually gaining anything by deferring taxes for the future. Option 3 has uncertainty so it's not a sure-fire win.

#2 is certain and it's a sure-fire win. You will be paying down your mortgage as quickly as possible and there is no future tax uncertainty in the equation.


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## Oldroe (Sep 18, 2009)

What are you pension incomes?

Life starts when the mortgage ends>


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## AudiS4 (Sep 11, 2013)

Retirement income sources will be as follows.

A million dollar plus commercial building that will be paid for by retirement, so it can be rented or sold. I own the business that operates in that building which will have to be sold when I stop working. My self directed RSP, my wife does a 5% company match RSP with her employer, the paid for house. We also fund the RESP in such a way that it will probably be fully funded before it is needed.

We should be able to get where we need to be, it's more just the best way to do it. I don't like debt at all, which is why I want to work on the mortgage, it's the only thing we owe money on. 

Basically we live below our means, the places we can put our money are mortgage and retirement. I've had a residential income property in the past, I''m not looking to do that again, the business does not need any investment, I don't need any more commercial property. One of my financial goals was always to be mortgage free in my forties, I can do that if I make principal payments, it won't happen if I don't.


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## Money We Have (Mar 20, 2014)

Sounds like you're in good shape regardless which route you go. 

If your goal was to be mortgage free in your 40's then by all means pay down your mortgage first. Sure you might get better returns if you invest that money but psychologically if you're much happier being mortgage free, I think that's an accomplishment in it's own


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## uptoolate (Oct 9, 2011)

Sounds like you have the plan. It is psychologically nice to be mortgage free. Once you are mortgage free then you can revisit where you are going to put both the excess 1K plus the money that was going to service the mortgage.


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## Just a Guy (Mar 27, 2012)

There is nothing wrong with debt, if used properly.

You could, for example, buy a Canadian bank (who's dividend may be close to 5%) in a TFSA, then put the dividend towards the mortgage while also getting a chance at capital gains. Fairly conservative and safe investment, better return on investment.

However, as others have pointed out, you're not really in a position to worry...if your happy with your system, stick with it. You're on track to be fine without changing.


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## wendi1 (Oct 2, 2013)

Well, I would be tempted to chose option 3 (which is what I did). Being mortgage free is awesome.

All those three options are good, but domestic felicity is better - what about $500 each for option 2 and option 3?


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## Plugging Along (Jan 3, 2011)

As others have said, you are in good shape no matter what option. 

Just make sure that you are comparing after returns of being mortgage free.

This is partially a risk tolerance question. Paying off the mortgage is the lowest risk, as it is a gaurentee return. However, it comes at the opportunity cost of a potentially high rate of return but with more risk.

We choose to pay off our mortgage early because my investment returns on the past weren't very consistent and at times not losing money. I have found being mortgage free gives me a lot more choice in my life, and I am able to take higher risks now in my investments because I have security knowing the money does need to cover the basics.


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## RBull (Jan 20, 2013)

I'm on the same page as Oldroe, Plugging Along and uptoolate. 

AudiS4 I know where you're coming from on the debt and mortgage situation. I dispensed with mine at age 35 (my goal) in just over 5 years. The peace and control you have without debt (and FI) is a great feeling for those seeking it.


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## Just a Guy (Mar 27, 2012)

Well, back in the day, I paid off my first house before I was 30 and lived debt free for several years. It was nice, stress free, but my net worth didn't grow very fast. Then I got injured and couldn't work, my savings, while not bad, couldn't cover the gap of several years of lost income.

It was at that point I turned to investing. Done right, going into debt made a huge improvement to my net worth in a relatively short timeframe, my cash flow improved, and I'm way more secure today than I ever was before. Today, my liquid net worth more than covers my illiquid debts and the cash flow from my investments means I can choose to do whatever I want.

As the old saying goes...I've been rich, I've been poor...I prefer being rich.


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## bgc_fan (Apr 5, 2009)

AudiS4 said:


> My self directed RSP, my wife does a 5% company match RSP with her employer, the paid for house.


Getting rid of the mortgage is always nice. 

Just a little something I noticed in your follow-up post as an aside, I would guess that your wife maximizes the 5% company match RSP? If not, that would be something to consider.


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## AudiS4 (Sep 11, 2013)

She does maximize the pension matching.


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## protomok (Jul 9, 2012)

How about refinancing the mortgage to get a lower rate?

Personally my goal is to pay off my mortgage as *slow* as possible, maintaining the standard payments unless interest rates were to significantly rise. Our mortgage is variable/closed with <2.25% rate...even a People's Trust savings account TFSA @3% is a more attractive option than accelerating mortgage payments! I understand that paying off a mortgage as slow as possible is considered heresy by some, but IMO the math check out.

For example, you can get a better return in dividends alone from a high quality blue chip company like Fortis, TD, TransCanada, etc. I understand a correction could happen but if the mortgage is long term...say >10 years, than it's only fair to compare holding a company or ETF long term, also for > 10 years versus the mortgage rate. But to each their own.


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## RBull (Jan 20, 2013)

protomok said:


> How about refinancing the mortgage to get a lower rate?
> 
> Personally my goal is to pay off my mortgage as *slow* as possible, maintaining the standard payments unless interest rates were to significantly rise. Our mortgage is variable/closed with <2.25% rate...even a People's Trust savings account TFSA @3% is a more attractive option than accelerating mortgage payments! I understand that paying off a mortgage as slow as possible is considered heresy by some, but IMO the math check out.
> 
> For example, you can get a better return in dividends alone from a high quality blue chip company like Fortis, TD, TransCanada, etc. I understand a correction could happen but if the mortgage is long term...say >10 years, than it's only fair to compare holding a company or ETF long term, also for > 10 years versus the mortgage rate. But to each their own.


YES, rates are ~currently~ at levels that make paying off the mortgage less attractive than in more "normal times". However your method does not consider tax which may put a different spin on "better return", and also assumes extraordinarily low rates for 10 years+ . In any case the "return" is likely minimal and potentially a loss. 

You won't have a better opportunity to pay off debt more easily than now, which I know is a little different perspective than how you see it. For some folks like me the control and peace of mind of having no debt greatly outweighs any potential small financial gains you "might" be able to get with leveraging through your investments. If I wanted to do that I can simply use a LOC which isn't much different than typical mortgage rates. 

Different strokes for different folks.


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## protomok (Jul 9, 2012)

RBull said:


> YES, rates are ~currently~ at levels that make paying off the mortgage less attractive than in more "normal times". However your method does not consider tax which may put a different spin on "better return", and also assumes extraordinarily low rates for 10 years+ .


I agree, the..."turtle approach" is much riskier in a non-registered account. Personally I only use the turtle approach with our TFSAs. But if one spouse makes < ~40k / year the dividends would be taxed negatively and actually reduce taxes...making the turtle approach a quite elegant pseudo income splitting technique too! 

Anyway, the OP mentioned they have all of their TFSA contribution room, which means 62k of contribution room and new contribution room in future years so no need to use an unregistered account.



RBull said:


> In any case the "return" is likely minimal and potentially a loss.


I believe a 10 yr chart on almost any blue chip company or diversified blue chip ETF would disagree but as always, past returns do not always indicate expected future returns.



RBull said:


> You won't have a better opportunity to pay off debt more easily than now, which I know is a little different perspective than how you see it.


Yes, perhaps we have to agree to disagree. I guess I just don't see the urgency to pay off mortgage debt at the moment. In any case, nothing wrong with paying off the mortgage using the Hare approach, all I'm saying is that the Turtle approach should at least be considered during financial planning.

And I could be wrong...but I sometimes wonder if rates may actually go down before they go up, but I suppose that's a whole other discussion!


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## RBull (Jan 20, 2013)

protomok said:


> I agree, the..."turtle approach" is much riskier in a non-registered account. Personally I only use the turtle approach with our TFSAs. But if one spouse makes < ~40k / year the dividends would be taxed negatively and actually reduce taxes...making the turtle approach a quite elegant pseudo income splitting technique too!
> 
> Anyway, the OP mentioned they have all of their TFSA contribution room, which means 62k of contribution room and new contribution room in future years so no need to use an unregistered account.
> 
> ...


All fair points. The way things are going you may be right with rates going down. It's been 20+years since I've had debt and at that time IIRC rate was up around 9% at the time so my experience and perspective is quite different, and we retired young with all we need. Rates are so low now investing may well pay off. 

The real deal breaker for me however is from my post above - the control and peace of mind from not having debt. I guess I don't see the urgency of investing vs. debt payment, so yes we would probably have to agree to disagree.


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## My Own Advisor (Sep 24, 2012)

Personally, I'd kill the debt. 

For what's it's worth, we're making lump sum mortgage payments bi-weekly and regular RRSP contributions monthly. If I had more money, it would go on the mortgage to be debt-free sooner. Yes, you can make more money on some investments vs. guaranteed rate of return on mortgage but debt-free is debt-free.

As your kids age, you'll need some money for them. If something happens to your job in your 50s, you'll be debt-free.

I would think, although I don't know yet, owing nobody any money would be very liberating. It would open up a whole world of possibilities for us at least.

Maybe do this if you're still conflicted: make a deal with your wife, you'll do this (all extra money on mortgage) for 1 year and then re-assess. If you feel great about it after 12 months, keep going. If you feel you need to change course, the RRSP room and TFSA room will be there.

Good luck


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## RBull (Jan 20, 2013)

My Own Advisor said:


> Personally, I'd kill the debt.
> 
> For what's it's worth, we're making lump sum mortgage payments bi-weekly and regular RRSP contributions monthly. If I had more money, it would go on the mortgage to be debt-free sooner. Yes, you can make more money on some investments vs. guaranteed rate of return on mortgage but debt-free is debt-free.
> 
> ...


Yes, for me it was and is incredibly liberating. It seems to me so many of younger generation now accept debt easily and just expect to have it for a long time. May have something to do with only being used to low rates and more expectation of having it all now. 

You're on the right track with your plan to invest and top up mortgage.

I had the experience of losing my long term career about 11 years ago -early / mid 40's and could not replace. I won't get into all the details... but having a wife with a good income and having no debt was vitally important and allowed me to pursue something that turned into a significant amount of money. If I had a mortgage it would not have been possible.


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## Spidey (May 11, 2009)

I would also kill the debt but there is another option if you must invest. Take out a HELOC at the same rate as your mortgage. Invest the thousand a month in the mortgage and then borrow the same amount monthly from your HELOC to invest. All the interest from your HELOC will be tax deductible.


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## cannew (Jun 19, 2011)

Agree that you should get out of debt as quickly as possible. But I like the idea of having money saved or at least some money saved for the future.

Why not put $800 or $900 a month against the mortgage and the other $100 or two into savings. I'd start a drip with a company that allows you to add additional funds like BNS, FTS, NA, T or TRP. Once the drip is started there are no fees to invest additional funds. Check with Computershare because the just started the Direct Bank Debit.


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## My Own Advisor (Sep 24, 2012)

"It seems to me so many of younger generation now accept debt easily and just expect to have it for a long time. May have something to do with only being used to low rates and more expectation of having it all now."

Possibly @RBull. You might already know from my posts and comments here, I try to do a bit of everything. Killing debt is #1, automatic RRSP contributions is #2 and then save more from there if our salaries will allow.

No need to share details if you don't want to, but I suspect having no debt regardless of income is a great place to be. My wife and I definitely live for today, we spend money, but I believe in a balanced approach and _all spend today is no money for tomorrow. _


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## AudiS4 (Sep 11, 2013)

I don't know if it has been lost in the thread but we already invest fairly heavily, this isn't pay the mortgage at the expense of saving for retirement. It's more should we put the extra into retirement above what we already do or put it on the mortgage. I've pretty much decided to make a lump sum payment on the mortgage and increase our mortgage payments, I just have to find the time to talk to someone at the bank. The mortgage is up for renewal in May 2015, I didn't realize it was so close.


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## RBull (Jan 20, 2013)

^that's how I understood it. G/L with killing the debt. 

Once it's finished you'll feel like you had a very good pay increase that can go into more savings and/or a bump in lifestyle.


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## RBull (Jan 20, 2013)

My Own Advisor said:


> "It seems to me so many of younger generation now accept debt easily and just expect to have it for a long time. May have something to do with only being used to low rates and more expectation of having it all now."
> 
> Possibly @RBull. You might already know from my posts and comments here, I try to do a bit of everything. Killing debt is #1, automatic RRSP contributions is #2 and then save more from there if our salaries will allow.
> 
> No need to share details if you don't want to, but I suspect having no debt regardless of income is a great place to be. My wife and I definitely live for today, we spend money, but I believe in a balanced approach and _all spend today is no money for tomorrow. _


100% on the same page. It is definitely about a balance between lifestyle now and in the future and you sure seem to have all that well figured out. 

Yes, life starts when the debt is gone. A bit of an exaggeration..... but it definitely provides control and peace of mind, for me and my wife. I do not like anything controlling me and that's what debt felt like for me. I am enjoying FI.

It's funny but I was reviewing our finances 2 weeks ago after only being retired about 2 months. We were spending about 35% of what our plan has laid out. We promptly booked a small trip for last week and 2 more for this summer/fall in addition to a bigger one already set up for Sept. 

It's all good.


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## christinad (Apr 30, 2013)

As it stands now, I won't have my mortgage paid off until i'm 70, so i'm definitely trying to do prepayments. On the other hand, with compound interest investing in the RRSP early is important too. I agree it would feel nice to have the mortgage paid off! It would feel nice to have more money saved then the amount of my debt too. I think it will take about 5 years to get to this space. Once i'm there, I think i'll feel better.


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## My Own Advisor (Sep 24, 2012)

Little point is saving christinad when the money you save today might just be servicing debt at some point. Killing debt sooner than later seems a sure way to financial independence. If you can kill debt aggressively AND save for retirement at the same time, that's ideal. Just my take of course.

I don't know of anyone who has no debt, that isn't fairly well off financially. I know lots of people with lots of debt, who aren't well off financially.


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## AudiS4 (Sep 11, 2013)

Our mortgage dude is on vacation this week. We'll go talk to him next week and then talk about the options. Thanks for the help and I'll post after the meeting.


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## christinad (Apr 30, 2013)

I was just looking at a mortgage calculator and it says i'll pay roughly $70,00 in interest for my 140000 mortgage. (Roughly - I couldn't remember exact starting amount.) I fail to see how i'd get that much interest out of my investments.


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## Just a Guy (Mar 27, 2012)

With compound interest, and time, it's not that hard...

http://en.m.wikipedia.org/wiki/Rule_of_72

Plus, if you can generate a rate higher than your mortgage with the same money, then you are making more...

For example, you pay down your mortgage by $1000 (after tax dollars), you save 3% on that thousand dollars. If you invest that same $1000 and earn 6% and are in the 50% tax bracket your investment makes you 3%, so it's a wash.

If, however, you invest that $1000 in an RRSP (pretax dollars) or put it into a TFSA (after tax, but tax free earnings) things can change...

A TFSA earning 4% would net you a 1% better rate of return than paying down your mortgage with the same money. 

Over time, it adds up...if 3% costs you $70,000 investing at 4% should earn you over $100,000 in the same time period.

One last thing to remember, that $70,000 it says you'll pay is usually assuming your rate doesn't increase which is unlikely over the life of your mortgage, or only talking about the term you signed for (ie 5 years). You'll probably pay a whole lot more than 70k interest on a mortgage over it's life.


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## christinad (Apr 30, 2013)

I ran some mortgage calculators and you are right RRsps win. However what they don't take into account is the money saved by having your mortgage paid off. I'll save 7000 per year once it is paid off.


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## cashinstinct (Apr 4, 2009)

christinad said:


> I ran some mortgage calculators and you are right RRsps win. However what they don't take into account is the money saved by having your mortgage paid off. I'll save 7000 per year once it is paid off.


You are supposed to invest the $X per year saved when you are mortgage-free for the scenarios to be equal.

The people who do no invest the money saved when mortgage-free won't have as much investments in the end.


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## Just a Guy (Mar 27, 2012)

I thought we were talking about what to do with *extra* money. Instead of paying down, you earn more than you'd save by paying down. If you cashed out you could always apply the entire amount as a lump sum payment, say at renewal time and be debt free faster than doing multiple smaller prepayments.

Once you are mortgage free, you could invest the payments and make a lot more than 7000 per year.


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## AudiS4 (Sep 11, 2013)

Here is the situation in a nut shell with I guess rough numbers.

Mortgage rate is 3.95 due next May or so. Currently 13.5 years to be mortgage free (I am 37).

I invest roughly 2K into my self directed RRSP, wife puts 5% and it's matched at here company into her RRSP. We also put away money monthly into my child's RESP roughly 20K in, child is 6.

We have reached a place where all other payments are gone, except the mortgage and property tax, utilites etc. That leaves us with an extra $1100 a month in our cash flow. The real question is given out situation what we should do with that money. My first thought was apply it to the mortgage, we could simply increase our payments.


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## Just a Guy (Mar 27, 2012)

I'd say the question has been answered, asking it again won't change anything. If you can invest it and make more money (after tax) it would be wise to do so, if you can't then pay down the mortgage.

It seems to me that you want to pay down the mortgage, it's the easiest and there is nothing wrong with doing it. If you aren't comfortable with investing, and it's not for everyone, then don't do it. There is a big difference between investing and gambling, though not many people seem to understand that.

Whatever you decide, make your wife is also comfortable with your decision.


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## AudiS4 (Sep 11, 2013)

My investment returns over the last say 20 months have been about 10x higher than my mortgage rate. But that is today, not tomorrow and things can change fast. My mind is made up, and am going to work on the mortgage, no doubt. For me it is now just about the best way to do that.


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## RBull (Jan 20, 2013)

^I don't know of anyone who has not ended up doing well paying off debt, especially if you can still do some saving. 


G/L


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## realist (Apr 8, 2011)

As others have stated, it depends on your risk tolerance. Personally I put my extra money towards our mortgage (in addition to also investing in a Couch Potato strategy in my RRSP). If you can find a *risk free* investment that pays you 3.95% interest after taxes I'd appreciate hearing about it  LOW risk investments are not the same as NO risk.


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