# mortgage or invest?



## rookie (Mar 19, 2010)

I know this question has been raised so many times but the situation is quite dynamic. so here it goes again.

i just paid off my car loan of 14k (2 minutes ago) and i think i still have about 10k cash. our rrsp rooms have been maxed out and so is our last years tfsa. wife is on mat leave (EI) till next march. we still have about 100k on our mortgage. till last week we were going aggressive on our mortgage since it was at 5% fixed. now i have renewed it at P-0.4 variable. since the interest rate is so low, the question arises. should we continue to be aggressive on our mortgage or start investing? is the market condition conducive enough now to get in?

any comments, suggestions appreciated!!! if it helps, we are 31-32 yr olds and have a 2 yr old and 2 month old. i prefer to stay away from resps for a while.


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## bean438 (Jul 18, 2009)

In my opinion as long as the mortgage gets paid off for retirement then use money to invest.

There is a fantastic sale in the market right now, although prices may go even lower. How low, and for how long? No one knows.


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## OhGreatGuru (May 24, 2009)

IMHO pay the d**n mortgage! You will have so much more cash flow and so many more financial options open to you once you get rid of that albatross. (Although why you would prefer to stay away from RESPs for a while is a puzzler - at least consider contributing enough to maximize the CESG)


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## rookie (Mar 19, 2010)

its still under consideration. we are not sure if we will permanantly settle down in canada or our kids will go to univ here...


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## HaroldCrump (Jun 10, 2009)

rookie said:


> our kids will go to univ here...


There is no requirement that they have to go to a Canadian school.
Most internationally known and recognized schools will be eligible.


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## iherald (Apr 18, 2009)

rookie said:


> I know this question has been raised so many times but the situation is quite dynamic. so here it goes again.
> 
> i just paid off my car loan of 14k (2 minutes ago) and i think i still have about 10k cash. our rrsp rooms have been maxed out and so is our last years tfsa. wife is on mat leave (EI) till next march. we still have about 100k on our mortgage. till last week we were going aggressive on our mortgage since it was at 5% fixed. now i have renewed it at P-0.4 variable. since the interest rate is so low, the question arises. should we continue to be aggressive on our mortgage or start investing? is the market condition conducive enough now to get in?
> 
> any comments, suggestions appreciated!!! if it helps, we are 31-32 yr olds and have a 2 yr old and 2 month old. i prefer to stay away from resps for a while.


If it were me I'd put the 10k into the market, but pay off your mortgage at the same amount per payment that you were paying at 5%. 

So if your old payment was $1000 and your new payment is $800, still pay $1000, and your life won't really change but you'll be paying off the mortgage quickly.


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## bh23 (Apr 16, 2010)

pay off the mortgage...I wouldn't sink 2 cents into the market at the current time. Paying off your mortgage is akin to making a guaranteed investment at your rate of interest. Plus, it gives you peace of mind. Nobody who is wealthy has a mortgage...


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## rookie (Mar 19, 2010)

thanks for all your advice. i am not sure how rbc renewed my mortgage, but my payment is now actually more than what it was at 5% and this was one thing i had no complaints with. cos i was going full double up earlier.

for now, i think, i will continue to go double up and also start PAC DRIPs on my RRSP with the spare money that i have. any suggestions for good equity ETFs are welcome since this will be my first time doing it. the only other ETFs i have are HOU and XIU


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## iherald (Apr 18, 2009)

rookie said:


> thanks for all your advice. i am not sure how rbc renewed my mortgage, but my payment is now actually more than what it was at 5% and this was one thing i had no complaints with. cos i was going full double up earlier.
> 
> for now, i think, i will continue to go double up and also start PAC DRIPs on my RRSP with the spare money that i have. any suggestions for good equity ETFs are welcome since this will be my first time doing it. the only other ETFs i have are HOU and XIU


You may want to look into how you're paying a lower rate but a higher amount. Did you change the amortization of your loan?


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## rookie (Mar 19, 2010)

iherald said:


> You may want to look into how you're paying a lower rate but a higher amount. Did you change the amortization of your loan?


might be. i will check the agreement again. since the payment increased, i did not bother to look into details. the thing was that the actual term remaining was less than 60 months while the minimum period rbc would go with for variable rate was 60 months. so the rep was playing around with this to see how she could adjust the renewal.


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## Underworld (Aug 26, 2009)

I'm planning on shoveling money into the mortgage as I'm financed 95% on an expensive house lol. And that I personally think the markets are going to tank again.


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## bh23 (Apr 16, 2010)

it's a no-brainer...pay it down as fast as you can...and then invest with money you can afford to lose. And I agree with your opinion on this market...too far, too fast...and with no real reason to do so.


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## canadianbanks (Jun 5, 2009)

I personally wouldn't put a single cent in the stock markets right now, and if I had a mortgage I would be paying it as fast as I can.


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## Dr_V (Oct 27, 2009)

rookie said:


> I know this question has been raised so many times but the situation is quite dynamic. so here it goes again.


http://www.taxtips.ca/calculators/RRSPvsMtgCalc.htm


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## jamesbe (May 8, 2010)

Ah thank you!!! That is the first calculator that I have seen that did this properly with continuous extra payments rather than one time lump sums.

According to the calculator with my numbers it always makes sense to put it in RRSPs even up to a 10% mortgage rate even at only 7% return!


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## michika (Apr 20, 2009)

canadianbanks said:


> I personally wouldn't put a single cent in the stock markets right now, and if I had a mortgage I would be paying it as fast as I can.


Just curious, but why? Any particular reason behind your recommendation?


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## rookie (Mar 19, 2010)

jamesbe said:


> Ah thank you!!! That is the first calculator that I have seen that did this properly with continuous extra payments rather than one time lump sums.
> 
> According to the calculator with my numbers it always makes sense to put it in RRSPs even up to a 10% mortgage rate even at only 7% return!


but both mine and wife's rrsp has been maxed. i was talking about investing unregestired money.


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## dilbert789 (Apr 20, 2010)

rookie said:


> but both mine and wife's rrsp has been maxed. i was talking about investing unregestired money.


In that case I would have to go for the mortgage. You would have to get something like an 8% return to match the interest rate you are paying for your mortgage. You'd have to pay tax on any income from investments, so if you get a 5% return on your investment which would "match your mortgage interest" you would end up losing money.


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## Sampson (Apr 3, 2009)

I'm always baffled by how one sided these forum discussion get re: paying down the mortgage. Sure you can't "guarantee" 8% returns every year, or predict when they might happen, but surely those who invested over the past year have returns that exceeded the interest rates of their mortgages.

My second pet peeve is when people say pay down your mortgage when the rates are low, more goes towards the principle. From a purely mathematical standpoint, makes sense to bank money when mortgage rates are low, then pay down aggressively when those rates are high.

I guess its like the old adage of 'buy low, sell high'. People seem to always do the opposite there as well.


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## jamesbe (May 8, 2010)

I'm with you!

My rates are 1.65% right now, I'm shovelling money into my RRSP, if the rates go up then I'll do the opposite. When I was at 5% I was paying off the mortgage as that was a good gain IMO. 

Emotions away, just do the math... but for some having no debt is a great feeling and liberating for sure. But leverage makes you rich if you do it properly.


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## Mockingbird (Apr 29, 2009)

Sampson said:


> From a purely mathematical standpoint, makes sense to bank money when mortgage rates are low, then pay down aggressively when those rates are high.
> 
> I guess its like the old adage of 'buy low, sell high'. People seem to always do the opposite there as well.


When rates are high, people have harder time paying down the mortgage aggressively as everything else seems to cost more and less money for the discretionary spending. There will be always excuses.

Also, I prefer the adage of "buy high, sell higher".


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## Four Pillars (Apr 5, 2009)

Sampson said:


> I'm always baffled by how one sided these forum discussion get re: paying down the mortgage. Sure you can't "guarantee" 8% returns every year, or predict when they might happen, but surely those who invested over the past year have returns that exceeded the interest rates of their mortgages.
> 
> My second pet peeve is when people say pay down your mortgage when the rates are low, more goes towards the principle. From a purely mathematical standpoint, makes sense to bank money when mortgage rates are low, then pay down aggressively when those rates are high.
> 
> I guess its like the old adage of 'buy low, sell high'. People seem to always do the opposite there as well.


Sampson, I can't disagree with your logic but for some situations, paying down the mortgage is a no brainer.

If you have a (too) large mortgage then you might want to reduce your personal risk by paying it down, regardless of the interest rate. I was in this situation a few years ago.

Not everyone has a super-low rate - My mortgage rate is 5.19% so I have no problem paying that down.

Lastly, I think the either-or question of "mortgage vs invest" is more relevant to someone who is just getting started. 

In my case I do both.

I have put more emphasis on mortgage pay down, but I've also kept up with rrsp contributions and have increased those last year quite a bit. At this point the mortgage is well under control, so it doesn't matter so much to me now if I put more money into rrsps or the mortgage.


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## Oldroe (Sep 18, 2009)

In my discussion with my house insurance company I was asked what truly unique things are in my house. I stated it was payed for.

And until till you do that you will never know.


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## Sampson (Apr 3, 2009)

Oldroe said:


> In my discussion with my house insurance company I was asked what truly unique things are in my house. I stated it was payed for.
> 
> And until till you do that you will never know.


You assume many of us have not paid our mortgages off. 

Paid off our first home in about 5 years, then 'moved up'. Second home should be paid off in about 9. All the leverage was strategic and I'm very glad we always took a balanced approach. The returns on our other investments have quite easily beat the interest we have paid on against our mortgage.

Just like a company's cash flow, as long as household income and expenditures are balanced, and there is flexibility to pay for higher interest rates if they arise, then debt is not a bad thing. Too much of it, a terrible thing.

Emotions and sensible decisions are often a bad mix.


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## Murph (Sep 9, 2009)

Pay down the mortgage, the market looks like it is about to double dip so paying the mortgage is a much safer bet.


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## Underworld (Aug 26, 2009)

I'd peronally pay off your mortgage first. Aside of the money difference, it is a psychologically awesome thing! That and I don't trust the markets right now.


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## dilbert789 (Apr 20, 2010)

Sampson said:


> I'm always baffled by how one sided these forum discussion get re: paying down the mortgage. Sure you can't "guarantee" 8% returns every year, or predict when they might happen, but surely those who invested over the past year have returns that exceeded the interest rates of their mortgages.
> 
> My second pet peeve is when people say pay down your mortgage when the rates are low, more goes towards the principle. From a purely mathematical standpoint, makes sense to bank money when mortgage rates are low, then pay down aggressively when those rates are high.
> 
> I guess its like the old adage of 'buy low, sell high'. People seem to always do the opposite there as well.


If I put money down on my mortgage above my normal payment, it always goes towards the principle. If I had a mortgage at 2% and could guarantee that I could get 5% on my money I would invest it. However after tax I wouldn't have a whole lot extra left over as I'd be paying something like 2% of my 5% interest in income tax, leaving me with a 1% actual gain. 

For 1% I'll take the guarantee that I'll have paid my mortgage off sooner. 

The entire situation changes when I have a mortgage at 5.4%(mine, 3 years in currently) and interest rates are low. For me I need to get the 8% return to equal the amount I would have saved by going with the mortgage. A few % means a lot.


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## andrewf (Mar 1, 2010)

If you were going to invest it, I would suggest paying down the mortgage anyway. You could then borrow on a home equity LOC to invest, with the interest on the loan being tax deductible. If you do go this route, make sure you read up and understand the rules around interest deductibility for investment loans.


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## dilbert789 (Apr 20, 2010)

lbs said:


> Using the facts above, for every $100 of taxable investment income, after paying taxes at 20%, you get to keep $80.
> For every $100 of mortgage interest you pay, assuming you itemize deductions on your tax return, after deducting this interest at 20%, your net cost is $80.
> Using this scenario, assume you had an extra $1,000 that you could either invest, or use to pay off a portion of your mortgage.
> If invested, you would earn 4%, or $40. After paying taxes on this interest income, you would keep $32.
> If you used the $1,000 to pay off a portion of your mortgage, it would save you 6%, or $60 in interest cost, but you would no longer have the extra $60 to deduct on your tax return, so after factoring in the lower tax deduction, it saves you In this scenario, you save $16 a year by paying off a portion of your mortgage rather than investing your extra funds. ($16 = $48 net savings on mortgage interest - $32 net interest earned on investment). This discussion has helped a lot.



Your calculation is also using a tax bracket that is really low. Also in Canada we can't deduct our mortgage interest without doing the Smith Maneuver.


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## Sampson (Apr 3, 2009)

The argument for paying down the mortgage always sounds the same, guarantee, guarantee, guarantee.

If an individual needs a guarantee on their returns, then they should not be investing in equities, only in the safest bonds and in CDs/GICs. If this is the case, then certainly pay down your mortgage. In fact, you should only ever hold an emergency fund, should rent as long as possible (unless it is cheaper to buy in your market, rare these days), then use as large a down payment as much as humanly possible.

However, if an individual has both the opportunity and the fortitude to bear some risk on their investment, then investing in equities can be higher prudent. Over the past 5 years or so, interest rates have been extremely low and it has been quite possible to get returns that exceed the interest you pay on your mortgage. The monies I have been putting into the market over the past 3 years have given returns that will easily pay for (plus a lot more) the interest I would have saved if that money went towards my mortgage.

While this was a unique situation, and one I don't think will continually repeat, it has happened in the past, and can happen in the future. So I will continue doing what I do.

Pay down my mortgage at an accelerated rate AND invest. The balance of which will be dictated not by a set rule, but on the likelihood of my investments giving a ROR higher than my mortgage rate. When my mortgage rate is low, I'll put more towards investments, when it is high, I'll focus on paying down my debt. 4.5-5% seems like a good number, but maybe I'm too optimistic about potential returns.


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