# Mortgage paydown or invest



## andrewrmunro (Mar 27, 2013)

With interest rates in Canada being near all time lows should I try to pay down my mortgage as fast as possible, or pay it off slower and invest the difference?

My mortgage is up in July. The current lowest rate I can find is:
2.15% variable, 5 year term, 20% prepayment. 
My mortgage in July will be $265,000.

I can afford accelerated bi-weekly payments of $2,000.
My RRSP and TFSA are fully contributed.

Option (A):
Should I pay down my mortgage as fast as possible by making payments of $2,000 on the mortgage? That would get my mortgage paid off in 6 years (I understand the variable rate will most likely change, but for simplicity lets assume it does not.)

Option (B):
Or should I stretch out the amortization period of the loan to say 12 years and make mortgage payments of $1,050. That leaves an extra $950 every two weeks to invest. Maybe in dividend paying stocks since it will be in a non-registered account.

That works out to $24,700 that could be invested throughout the year. I would hold the stocks until retirement, I am 33 years old so it is a while away. 

Would really appreciate your feedback, thanks!


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## Just a Guy (Mar 27, 2012)

How much equity do you have in your home? If there was a correction of 25-50% would you still be solvent?

Personally, I can earn more than 3% on other investments, but if housing crashes, chances are the market will also crash.

This is why one is expected to fill out those risk tolerance forms...some people can sleep at night should this occur, others not so much.

At your age, things should have time to recover, but the ride will probably have a few wild ups and downs...which can either be very profitable or very scary. You have to decide your own comfort level.


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## andrewrmunro (Mar 27, 2013)

The home is probably worth $475,000 conservatively. So there is $210,000 in home equity. 

I am planning on staying in the home for many more years, so home price corrections are not a concern. And if the stocks take a dive it would be stressful but I have 20+ years before I retire. 

What kind of income could I get from dividend paying stocks? Could the dividends pay higher than the 2-3% interest?


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## 1980z28 (Mar 4, 2010)

I would pay of house

I was mortgage free 20 years ago,now 54

Have invested all cash from that point,averaged about 2k per month,has worked out very well

Nice to have no bills after 30,makes it easy to raise a family

My 2 cents


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## andrewrmunro (Mar 27, 2013)

That is great advice. Thanks. 

Just playing devil's advocate for a second. What if I invested the extra money by purchasing a Dividend ETF such as: 

VDY – Vanguard Canadian High Dividend Yield Index ETF

MER = 0.34%.
Yield about 2.7%.
Monthly payout.
The top holdings are the big-5 Canadian banks, Enbridge and TransCanada.

If the dividend yield is 2.7% and I am paying 2.15% interest, would I be better off investing?


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## Just a Guy (Mar 27, 2012)

To counter 1980z28, not to say he's wrong, I too was debt free for a while...enjoyed the lifestyle emensely. 

That was before I learned about investing and getting money to work for me. Looking back, I certainly wouldn't say I regret being debt free, but I certainly think I lost an opportunity to be financially free a lot sooner. It took being injured and not being able to work to "inspire" me to learn investing...I was amazed at how fast my net worth increased after that...though it took a few years to start.

Had I invested, instead of being debt free, those years of no income, which pushed me nearly to bankruptcy may not have happened...but one can never be sure, the investments could have lost money and I may have been worse off.


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## Mortgage u/w (Feb 6, 2014)

Depends on your current financial situation and savings cause both strategies are good. See how much interest you would save by paying mortgage in 6 years vs 12 and compare to how much you'd be able to save. 

If you have not started a savings portfolio, I suggest concetrating some money to that.....otherwise, the mortgage is what I would attack.


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## 1980z28 (Mar 4, 2010)

You can experiment your mortgage in guaranteed it is going one way,,down

The rest is not

You can split the difference


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## Mortgage u/w (Feb 6, 2014)

andrewrmunro said:


> If the dividend yield is 2.7% and I am paying 2.15% interest, would I be better off investing?


2.7% is before tax and 2.15% is after tax.....so you would need to earn more than 2.7% to offset the interest pmt.


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## Soon Forget (Mar 25, 2014)

andrewrmunro said:


> If the dividend yield is 2.7% and I am paying 2.15% interest, would I be better off investing?


Don't forget about taxes on those dividends, in a taxable account will be ~30% for you it sounds like. We've chosen to pay down mortgage after RRSP/TFSA are filled and hold off on taxable investing until the mortgage is gone. Hopefully bond yields will be higher at that point too so we can feel better about buying the fixed income portion of the portfolio.


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## Just a Guy (Mar 27, 2012)

andrewrmunro said:


> That is great advice. Thanks.
> 
> Just playing devil's advocate for a second. What if I invested the extra money by purchasing a Dividend ETF such as:
> 
> ...



Simple answer is, you now are earning more money, so probably. Of course, you have to pay taxes on that money, so the benefits may not be all that good.

Now, if you were an investor, and used cash daming to convert the cash you want to invest into debt from your mortgage, you could then write off the interest that you paid on that portion of the mortgage and increase your return.

Debt is not always a bad thing, it's a tool just like a hammer...it can be used to build, or used to kill.


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## 1980z28 (Mar 4, 2010)

Mortgage u/w said:


> 2.7% is before tax and 2.15% is after tax.....so you would need to earn more than 2.7% to offset the interest pmt.


+1 on the math


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## My Own Advisor (Sep 24, 2012)

I don't think it's too hard to earn more than 3% these days. Dividend stocks pay 4% yield or more. You might want to avoid COS for yield although capital appreciation might be there??? 

Kidding aside, FWIW, this is our plan:

1. Max out TFSA every year, priority #1.
2. When money is leftover for investing, contribute as much as we can to RRSPs. I am close to maxing mine out in 2015, hopefully for my wife in 2017.
3. After #2 and monthly RRSP contributions are running along, then priority #3 is to put as much lump-sum payments on the mortgage as possible (guaranteed rate of return).

We have some assets non-registered but I have to pay capital gains to sell them. Don't want to do that.

We hope to have the mortgage dead in 6 years.


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## NorthKC (Apr 1, 2013)

Comfort level is key for sure. You can always do the ultimate compromise, the 50/50. Mortgage gets paid off in 9 years and you still have that nice extra savings being built up.


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## andrewrmunro (Mar 27, 2013)

Thanks for the great feedback. 

Since I am investing with my TFSA and RRSP which are maxed out, I will focus any extra funds towards paying down the mortgage. It will feel great to be done with it in 6 years or so.


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## Sustainable PF (Nov 5, 2010)

We pay down debt. Almost $115k in mortgage debt has been erased in the last 20 months.

Wife and I both have DBPs. Next we contribute to the TFSA and last would look at the RRSP. RESPs fully maxed to take advantage of the 20% the govt provides.


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## Soon Forget (Mar 25, 2014)

My Own Advisor said:


> I don't think it's too hard to earn more than 3% these days. Dividend stocks pay 4% yield or more.


Hi MOA, I don't know if i can get on board with this logic if you are a young accumulator who reinvests all dividends. Since the dividend comes out of the stock price, you're no better off than if the company didn't pay a dividend at all. It's still a bet that the overall growth of the company - and market sentiment - will be higher than your mortgage rate over time, which is the tough thing to predict. The fact that they are choosing to spin off a certain percentage in cash is irrelevant, no? Am I missing something?


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## My Own Advisor (Sep 24, 2012)

You're not really missing anything. It's total return that matters, dividends + capital appreciation. I like dividends because I get to do what I want with that cash, reinvest, save as cash, buy new stocks, buy new ETFs, etc.


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## larry81 (Nov 22, 2010)

andrewrmunro said:


> With interest rates in Canada being near all time lows should I try to pay down my mortgage as fast as possible, or pay it off slower and invest the difference?


I personally like to do both.

I cranked up my weekly payment by 20% and i invest what's left, first in registered accounts and next in my non-registered accounts.

With a mortrage <3%, there no point of being overaggressive with payments...


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## houska (Feb 6, 2010)

Thinking long-term, generally speaking the best is i) pay down mortgage as fast as possible, and b) then -- to the extent your risk tolerance permits -- reborrow whatever money you want and invest that.

Suppose Investor Ingrid keeps a $100k balance on her mortgage and (over x years) instead invests $100k in the market.
Double dipping Dave pays down the mortgage to zero, then reborrows $100k and invests that.
Dave's twin Cautious Charlie starts like Dave does, but gets cold feet and does not reborrow.

Dave and Ingrid end up with exactly the same exposure to housing downturn as well as market risk. But Dave's interest on the reborrowed $100k will be tax-deductible (as an investment loan) while Ingrid's will not.
And Dave is not in any way worse off than Charlie, since he can decide to be Charlie when the time comes.

Of course, it's not quite that simple, since there is timing risk. If you really care about that, Dave can come very close to emulating Ingrid by doing a Smith Manoeuvre. There's a lot of discussion of that in these boards which tends to boil down to whether SM is a good idea based on whether "leverage" is a bad word or not. That's a good question to decide whether to be Charlie or Dave. But it's the wrong discussion if the question is whether you want to be Ingrid or Dave -- you're leveraged either way, it's just how you label it.

[Edited to add - all the above assumes you're maxing out RRSP and TFSA already]


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