# pay off mortgage or invest



## D-ru (Nov 27, 2011)

I am curious what people's thoughts are on this topic. I am 30 years old with 1 child (so far). Been living in my home for approx 8 years. 

I might have the opportunity to either pay off my mortgage (still 3 years left on term) so I would have to pay a penalty. Or take the money and invest in it into RRSPs/RESPs and TFSA. I have no other debt right now and my wife and I both work full time. I have had a RRSP for a few years now and have saved a nice little pot same with my wife and we both will have decent pensions when that day comes. 

Not sure what other info is needed to offer your 2 cents on this. 

Thank in advance.


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## Soon Forget (Mar 25, 2014)

Is this a windfall? You haven't given any numbers so tough to be specific, but I would in this order:

1. Max RESP (how old is your child and have you made any RESP contributions yet?)

2. Max both TFSAs (have you or your wife made any contributions yet?)

3. Apply leftover to mortgage up to what your prepayment privileges allow. I wouldn't pay any fees to break a low rate mortgage. At the end of your current term in 3 years you can decide whether to pay it off then.


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## TomB19 (Sep 24, 2015)

Max your RRSP and RESPs first. The short term tax benefits are likely to out weigh anything else, particularly at your age.

Fill your TFSAs next.

... and, since you claim to be flush, I suggest bumping your payment to the maximum allowed.

I would avoid the mortgage penalty at all costs, particularly with rates so low.


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## 319905 (Mar 7, 2016)

My understanding, which could be wrong ... the penalty is simply what you would pay if you let the mortgage run it's course ... if that's correct then it's a matter of pay now, or pay later.


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## D-ru (Nov 27, 2011)

Numbers would prob help, sorry.

- approx. 100g left on mortgage
- My RRSP are almost maxed out
- Wife has room left in her RRSP (not much)
- Coming up to 1 year's old, maxed out RESP for 2016 already
- Both have a good amount of room left in our TFSAs 

I would have paid mortgage off without even asking this question, but since mortgage rates are so low I wonder if there is a point in doing this. Mortgage rate is basically 3%.

Options are to max out my RRSPs, TFSAs and (RESP for 2017) what is left drop onto mortgage without paying a penalty. 
or
Pay mortgage off then use my mortgage amount each month to put away into RRSP, TFSA etc. 

Thank you, I appreciate the advice.


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## heyjude (May 16, 2009)

D-ru said:


> Numbers would prob help, sorry.
> 
> - approx. 100g left on mortgage
> - My RRSP are almost maxed out
> ...


Your mortgage interest rate is quite low. These days, a balanced portfolio might get an ROI of 5% over the long term. A 2% difference does not, in my opinion, warrant incurring a penalty. In your situation I would select option 1.


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## bgc_fan (Apr 5, 2009)

rikk2 said:


> My understanding, which could be wrong ... the penalty is simply what you would pay if you let the mortgage run it's course ... if that's correct then it's a matter of pay now, or pay later.


Depends on the mortgage contract. Sometimes it may just be the interest that would be owed for 3 or 6 months assuming you are breaking the mortgage. That's why it is best to maximize your prepayment amounts and increase the payments as high as your mortgage allows which will reduce your principal and hence the interest that would be allowed.


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## STech (Jun 7, 2016)

You need to provide a few more numbers.

What's the lump sum prepayment privilege on the mortgage anniversary? What's the penalty on breaking the mortgage? 

Typically it's not bad practice to pay off a debt that's paid with after tax dollars, vs investing in something with no guaranteed returns and that'll get taxed. But without having all the numbers, it's a shot in the dark at best.

I paid off my last mortgage early. I waited until the anniversary date, which allowed for a 50K prepayment. I paid a penalty of $120 on the remaining 10K. I would've paid more in interest charges on that 10K vs the small penalty. Could I have made more money with the 60K than my mortgage rate of 2.75%? Maybe. But it wasn't guaranteed, and it wasn't enough to worry about.


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## Oldroe (Sep 18, 2009)

My 2 things.

Money in RRSP ,tax return on mortgage worked for me. Basically you are turning every dollar into $1.50.

Life begins when the mortgage ends.

1 thing to remember when you retire new money every 10 years. About 30% more.

So you start with pensions, assuming early retirement, Gov pensions 10 years later then take income from RRSP at 71.

TFSA was not available for me but fit that in also.

You got 30 years but they go fast.


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## redsgomarching (Mar 6, 2016)

A few things to point out; one, what are the prepayment privileges on the mortgage? can you do lump sums without penalty? Find that out. Next, directly ask for the payout to see your penalty. Next, by paying your mortgage you are not paying 3% interest but you are also freeing up your cash flow for investing and the money invested in your house will still work for you. There is also a cool tax provision called the principal residence exemption which you should look into. 

If penalties are high - do as much as you can prepayment, do max rrsp contribution that will give you a decent tax break, and repeat until mortgage is done. I would find out this fast because if your mortgage amount was 300k and has 20-20 prepayment, the 20% is on the principal initially borrowed not the current amount. THis means you could prepay up to 60k with no penalties this year, and since 2017 is just around the corner, pay the rest off.


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## Bowzer (Feb 25, 2015)

I recently paid off my entire mortgage, for one key reason: *Because I wanted to.*

It was a very big life goal. I would never borrow against my house to invest, so why do the same thing by not paying it off as quickly as I could?

I even paid the penalty of breaking my mortgage, which worked out to less than if I paid interest for the remaining term, so in that way it came out ahead. 

Now 100% of my extra income is for "investments" and I can do whatever I want there, my house is no longer in the equation. 

I know it's different strokes for different folks... just sharing my situation and what I did.


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## mordko (Jan 23, 2016)

I am repaying my mortgage in full next week.

First, I am allowed to repay a fifth of the original amount without penalties. This cuts it almost by half to 90k. 

Secondly, the penalty on the remaining amount is three months' interest or .5 percent. That's less than 500 dollars, nothing to sweat about. 

Like others have said, it depends on terms and conditions and your circumstances. If you are in a high tax bracket, I would max RRSP and RESP and then repay mortgage. Obviously it depends on your risk tolerance but keep in mind that market volatility is likely to be high over the next little while.


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## hboy54 (Sep 16, 2016)

Hi:

I'd lean towards paying off mortgage up to the point that you begin to incur penalties. A certain 3% after tax might be a pretty good situation in the fullness of time. Markets are currently highish, so no great rush to put new money into stocks.

The other thing I would suggest is see if when you do pay off the mortgage, you can arrange a house LOC. As they already have had a look at your place, they should be willing to waive most if not all the fees to set up, likely $500 to $1000. Nobody says you have to use it, but if you can get it set up for free, what is the downside?


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## kostya (Jul 26, 2016)

The topic is somewhat complex to give you a straightforward answer, there are several factors playing role. If you are analytical type, you can google for article "The rrsp, the tfsa and the mortgage" by Jamie Golombek, I find it very helpful. 

If you don't want to read it all, there are several conclusions in the article marked with grey boxes that are summarizing the analysis of each example. In summary, you need to take into account your current and expected future income tax rates, your risk sensitivity, expected investment returns, interest rates, investment time horizons and personal goals and preferences.

At the end, for many people it probably will boil down to the risk sensitivity and personal goals/preferences. For example, even that I can understand all the required math and can make a logical conclusion that RRSP would make more sense from pure numbers perspective, in my own circumstances it made more sense to repay mortgage first and then focus on investments. I also can sleep better now, knowing that I don't have large debt commitments. But people and circumstances are different, so the decision should be based based on your own situation, goals and preferences.

I hope this helps.


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## My Own Advisor (Sep 24, 2012)

Math/a penalty is one thing, piece of mind and having no debt is another....

I would ease up mortgage and start putting your money to work; investing.

I would try and max out RRSPs and TFSAs and RESPs if you can. If you can't do all three, then pick two - max them out.

If you have money leftover, pay down your mortgage with lump sum payments.

I don't think it has to be a "Or" decision - do a bit of both or a bit of things - a nice balanced approach. 

For FWIW, we max out our TFSAs every year, my RRSP is maxed and my wife is catching up - almost maxed out. Then, extra money will go on mortgage once all registered accounts are maxed.


You have a good problem to have


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## CPA Candidate (Dec 15, 2013)

Whatever you do. do not forgo paying down the mortgage and then use the cash to invest in any kind of fixed income. The risk free return of extra mortgage payments is far higher than what fixed income can provide. Those who hold bonds/GICs on the asset side of their balance sheet and mortgage liability on the other side need finance 101.


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## Mookie (Feb 29, 2012)

Why not consider doing both? First pay off the mortgage, then get a home owner line of credit and borrow the money back to invest. 

If you use the borrowed money for non-registered investments, your debt is tax deductible. Then take the dividend income from this investment, plus any surplus savings, and use that to max out RESP/TFSA/RRSPs as needed.

Caveats:
-	Make sure you understand the tax rules around deducting carrying costs. Most importantly, don't use a penny of the line of credit for anything but non-registered investing, or your entire debt is not tax deductible.
-	You need to do the math for your situation / tax bracket to see if this is beneficial for you.

I did this after I paid off my mortgage, and it has worked out very well for me over the years.


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## D-ru (Nov 27, 2011)

After thinking about this and reading everyones responses, I believe I will pay my anniversary payments and double up monthly payments then invest a little. I think my goal is to pay down/off mortgage first though.

Thanks


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## Plugging Along (Jan 3, 2011)

Jumped in late. My thought is not really thinking of the math, but paying off the mortgage is a great idea especially with a child and perhaps more. 

The math said otherwise, but we paid off the mortgage as early as we could without penalty fees. It has provided peace of mind when a person was laid off, or we are feeling unsecured in our work. Having a paid off mortagae has allowed us to take on risks of careers changes and going into concluding, which paid itself over. 

It has provided us a lot more security to know our house has been paid off than having a larger amount investments. We have investment too but knowing our house is paid for, bring me the greatest security.


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## Oldroe (Sep 18, 2009)

So lets say your anniversary payment is $10,000.

And you are in the 50% tax bracket.

You put $20,000 in RRSP and your tax return is $10,000.

That's a 50% increase on your money. $30,000. You need to put your true numbers in.


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## Karen (Jul 24, 2010)

I have always been an extremely debt-averse person - I hate the thought of owing one cent to anyone - so when I had enough cash to pay off my mortgage, I did so with no hesitation whatsoever. I have been mortgage-free for the last 40 years, and it is such a good feeling. I'm not saying it was a wise financial decision - it probably wasn't - but it was the right personal decision for me. If I were the OP, I would get rid of that mortgage as soon as possible.

I must admit that my decision was probably made easier by the facts that my RRSP was already maxed out, my children were just finishing high school so it was too late to set up RESPs for them, and there was no such thing as TFSAs at that time.


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## heyjude (May 16, 2009)

Karen said:


> I have always been an extremely debt-averse person - I hate the thought of owing one cent to anyone - so when I had enough cash to pay off my mortgage, I did so with no hesitation whatsoever. *I have been mortgage-free for the last 40 years, and it is such a good feeling. *I'm not saying it was a wise financial decision - it probably wasn't - but it was the right personal decision for me. If I were the OP, I would get rid of that mortgage as soon as possible.
> 
> I must admit that my decision was probably made easier by the facts that my RRSP was already maxed out, my children were just finishing high school so it was too late to set up RESPs for them, and there was no such thing as TFSAs at that time.


In 1976, what interest rate were you paying on that mortgage? Did that influence your decision at all?

https://www.ratehub.ca/5-year-fixed-mortgage-rate-history


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## OnlyMyOpinion (Sep 1, 2013)

heyjude said:


> In 1976, what interest rate were you paying on that mortgage? Did that influence your decision at all?


Mtg rate was about 12% in 1976. But remember you could also buy a 5yr GIC with over a 10% posted rate. The average mortgage size was probably smaller too. 
I don't think this changes Karen's point about the advantage of paying off the mtg asap. Everyone's circumstamces/ability/priorities will differ of course.


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## heyjude (May 16, 2009)

OnlyMyOpinion said:


> Mtg rate was about 12% in 1976. But remember you could also buy a 5yr GIC with over a 10% posted rate. The average mortgage size was probably smaller too.
> I don't think this changes Karen's point about the advantage of paying off the mtg asap. Everyone's circumstamces/ability/priorities will differ of course.


We will let Karen answer for herself. 

My first mortgage had an APR of 10.25%. That was a key factor in my decision to pay it off ASAP.


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## My Own Advisor (Sep 24, 2012)

I would try and kill 10% debt if that was me as well!!! Those 70s and 80s were a rough patch for interest rates...geez.

With my debt at <2% for mortgage, more than happy with that while I try to max out TFSA + RRSP every year.


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## Mechanic (Oct 29, 2013)

In 1981-82 I had a mortgage rate of 21-3/4% Don't know how I survived back then. Nowadays I have no debt whatsoever. I hate paying interest when I don't need to Now I just want to see interest rates increase so I can get a better return with less risk than I have now. Always pay down debt first, highest interest being a priority.


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## My Own Advisor (Sep 24, 2012)

Wow...21+%....


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## Mechanic (Oct 29, 2013)

I think it dropped to 19-3/4 after that, lol. I remember that 21-3/4 quite vividly. It was a struggle and very little came off principal.


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## redsgomarching (Mar 6, 2016)

My Own Advisor said:


> I would try and kill 10% debt if that was me as well!!! Those 70s and 80s were a rough patch for interest rates...geez.
> 
> With my debt at <2% for mortgage, more than happy with that while I try to max out TFSA + RRSP every year.


Yeah but the houses were definitely not as expensive as today. If rates were to go up back to that level i doubt housing prices will fall to what the houses were purchased at back then


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## Karen (Jul 24, 2010)

Sorry - I can't figure out how to delete this duplicate post.


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## Karen (Jul 24, 2010)

heyjude said:


> In 1976, what interest rate were you paying on that mortgage? Did that influence your decision at all?
> 
> https://www.ratehub.ca/5-year-fixed-mortgage-rate-history


I'm afraid I don't even remember what the interest rate was, heyjude. I don't think it had any influence on my decision, though. It was more the idea that it was important to me to be debt-free.

I know it sounds strange that I don't remember that, but I had a stroke last summer that definitely affected my memory. I was lucky that it was relatively minor and didn't cause any paralysis, but besides the memory problem, it left me with an awful light-headedness that seems to be getting worse. I have to use a walker to get around and, worst of all, I'm not allowed to drive. So much for calling old age "the golden years." There's nothing golden about them!


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## Karen (Jul 24, 2010)

My Own Advisor said:


> I would try and kill 10% debt if that was me as well!!! Those 70s and 80s were a rough patch for interest rates...geez.
> 
> With my debt at <2% for mortgage, more than happy with that while I try to max out TFSA + RRSP every year.


The 70s and 80s were only a rough patch if you were borrowing money. I was earning up to 19% in my RRSP some of those years!


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## Karen (Jul 24, 2010)

redsgomarching said:


> Yeah but the houses were definitely not as expensive as today. If rates were to go up back to that level i doubt housing prices will fall to what the houses were purchased at back then


You're certainly right about that! I bought my first house in a suburb of Vancouver in 1965 for $15,500 with a down payment of $1200. That same house, now 50 years old, was listed for sale last summer at over $800,000. It sold in two days, presumably for something over asking price because that was happening for all sales at that time.


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## pwm (Jan 19, 2012)

I paid off my mortgage before I started to invest. For me it was an easy decision but that was over 30 years ago and it's a new world now. For me, the peace of mind I felt in being debt free was priceless. Also my wife did not work outside the home so everything depended on my income, and mortgage interest rates were around 12% if I recall. I never ever thought that I made the wrong decision and I was able to accumulate enough income producing investments in the remaining time, to retire at age 55, so I think that confirms that it was a good plan. 

You will have to decide how important it is to you to be debt free.


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## heyjude (May 16, 2009)

Karen said:


> I'm afraid I don't even remember what the interest rate was, heyjude. I don't think it had any influence on my decision, though. It was more the idea that it was important to me to be debt-free.
> 
> I know it sounds strange that I don't remember that, but I had a stroke last summer that definitely affected my memory. I was lucky that it was relatively minor and didn't cause any paralysis, but besides the memory problem, it left me with an awful light-headedness that seems to be getting worse. I have to use a walker to get around and, worst of all, I'm not allowed to drive. So much for calling old age "the golden years." There's nothing golden about them!


Thanks for your reply, Karen. I'm sorry to hear about your stroke. As my mom used to say, "old age is not for sissies". I think Bette Davis said it first.


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## Karen (Jul 24, 2010)

My mother used to say the same thing. Our mothers and Bette Davis were so right!


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## marina628 (Dec 14, 2010)

My husband really hates debt so we were making max payments even on rentals and paid them off on average in 7 years.Paying off our mortgage was one of the best things we did in terms of feeling good about what we accomplished in our life .


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