# Best Times to Make an Extra Mortgage Payment?



## Brad911 (Apr 19, 2009)

Here's my thoughts: http://www.triageinvestingblog.com/best-times-make-extra-mortgage-payment/

MDJ obviously knows the most about the Smith Manoeuvre, but other strategies people use or general rules?


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## dogcom (May 23, 2009)

With mortgages so huge nowadays it is very tough for people to figure out all their expenses and then make an extra mortgage payment.

Let us for example say that we have an emergency fund already and we have 3 or 4 years left in a decent rate mortgage term. So instead of saving money we go all out paying down the mortgage without penalty and try to not make any big purchases over that period. At the end of that period we remortgage and pay for that roof and car we need at that time.

What do you think of this idea for people with larger mortgages trying to make a go of it. I am mortgage free today but do wonder how people manage under the debt loads and their needs today.


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## Brad911 (Apr 19, 2009)

Remember DC though that "huge mortgages" aren't a frugal persons problem; its those people who either don't educate themselves or WANT a lifestyle they can't support. Making an extra payment on even a reasonable mortgage goes a long way to helping to reduce the long-term interest generated by the mortgage.

If I had a mortgage set at 3.1% and in 5 years interest rates are over 6% (which they will be if you buy today) then this is going to be a really important topic for people to think about. You'll want to start additional payments otherwise you're not getting as much value when your existing term expires.

People who have what I call an "unsustainable mortgage", a variable they can afford at these interest rates but not likely above 5%, are the ones who this won't apply to. They'll be lucky to afford their house if they lock in as rates rise before 5%. 

Other people could have an affordable mortgage and even $100/month goes a long way to saving them $$. The people who get 30 year mortgages are likely going to in the end buy 2 homes; 1 in principle and 1 in interest!


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## dogcom (May 23, 2009)

I understand what you mean by reasonable mortgage so the people of today will really have to have a decent down payment while being frugal to make the extra payments.

I think it is critical to have a good emergency fund and then set up extra payments on the mortgage any way you comfortably can and your idea of the paying when you get three paydays a month is a good idea.

In the cities of Vancouver or Toronto if you want a house at a reasonable mortgage you should wait until either your pay cheque catches up or the market declines to get in. Interest rates are very low so we can't depend on them going down to help out that is for sure. I also feel the stock market is way to risky right now to be putting money there while one waits for the right time to buy a home.

There are a lot of people on this forum who want to get into houses in these cities and prices do not seem to ever really drop all that much. People I know in Vancouver and probably Toronto have been saying the same thing about home prices for decades. So looking at frugal types like them how do they ever get into a position to have a reasonable mortgage.

Sorry to go off topic a little but it is something I wonder about for the younger people or the people trying to get in today. When I bought I held my nose and went for it and couldn't put much extra on my mortgage at the time but that seems to be the way it is. I did however buy at a time of high mortgage rates so I had the advantage of future rates dropping rather then expect them to be higher in the future.


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## Brad911 (Apr 19, 2009)

If you need to buy a home you have to buy something. I just think the my generation (30 and younger) need to make saving I priority. Far too many of my own friends have bought or buy homes with 5% down and a 30 year term.

They still have 2 nice cars, lots of student debt, the newest toys (iPad, iPhone, etc, etc). At some point you have to service that debt at a significantly higher interest rate. Its naive and ignorant to think that it can continue that way it has.

My wife & I are not the norm. We live very nicely, but count my income for expenses and hers for savings & debt payments. That's likely how it should be, but far too many of our friends/peers use both incomes for expenses.


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## DanFo (Apr 9, 2011)

I started by buying a place 60K less than I was approved for. Increased my bi-weekly payments every year with wage increases and occassionally dropped an extra payment or two on the principle throughout the year. Results are the mortgage will be killed in a little more then a year from now...after about 9 years instead of the original 25 year term (saving me about 60K in interest). I have savings set aside for emergencies and regular repairs as well so I'm far from stretching myself thin. I see too many people buying the most they can afford and then refinancing every five years back to another 25-30 year mortgage and i just scratch my head...they turn their 300K house into a 550K-700K burden but they just seem to care about the monthly payment not the final tab.

I've read about the smith manoeuvre just not my thing.. the after tax advantage it may give me just doesn't seem to be worth the risks (for me) especially in these markets and with my level of investment knowledge.


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## jamesbe (May 8, 2010)

Best time to make extra payments?
NOW?

haha

Or when rates rise?

My mortgage is higher than I want it to be, it's my only debt, $344k right now. House is worth about $500k (what I bought it for last year).

Anyways, my interest rate right now is 2.15% so I don't see a point in paying it down. I've now maxed my RRSPs and I have maxed my TFSA, and I have a rather large emergency fund.

So since I have no more sheltered places to put the money the next thing I'm going to do is put chunks on the mortgage. If the rates rise I'm going to cash out the TFSAs and lump sum. But right now I'm making 8% on the money in my TFSA so it makes no sense.

So for me I'm going to wait until the rates rise and then take my guaranteed 5% or whatever the rate is. The only issue here is once you put the money on the mortgage the money is "Gone". Or at least gone as cash, so if I didn't have the savings tier I wouldn't put it on the mortgage.

Oh and also to note. Instead of reinvesting my Dividends at the moment I am taking them in cash and lump summing them onto my Mortgage. It's not a lot ... about $3000 a year but it's another 2.15% profit.


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## Mall Guy (Sep 14, 2011)

_"The only issue here is once you put the money on the mortgage the money is "Gone". Or at least gone as cash, so if I didn't have the savings tier I wouldn't put it on the mortgage."_

However many (most ???) mortgages tie into a LoC, so if you pay down the principal, but need to emergency funds, you can draw down the extra payment that way, and still save interest. Of course, one needs to have discipline, but that's true of all alternatives. I usually increase my mortgage payment by 10% each year, and figure out the lump sum as it is affordable . . . but too many children in university for that at the moment!!!


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## jamesbe (May 8, 2010)

I don't have a LOC, never needed one so never got one. It's still gone though, your LOC will be at a higher rate. I'd rather keep the cash in the bank for use with anything.


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## Mall Guy (Sep 14, 2011)

. . . actually, my mortgage is at 3.54% and the HELOC is at 3.50%. If I never draw down, interest savings, if I draw down at some later point, smaller interest saving, put still better then cash siting in the bank . . .


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## jamesbe (May 8, 2010)

Pretty sure that is very rare! Lucky you!


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## Mall Guy (Sep 14, 2011)

. . . maybe, have the same feature on my house and condo . . . offered up in both cases. Made sure (at the time) I asked for an aggressive rate, so that it would be "sent downtown" for approval ! Always worth while.


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## cardhu (May 26, 2009)

jamesbe said:


> Pretty sure that is very rare! Lucky you!


Its not that rare ... RBC has been actively marketing that rate for the past 6 months or so, and other banks have been matching it.


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## Brad911 (Apr 19, 2009)

DanFo said:


> ...I've read about the smith manoeuvre just not my thing.. the after tax advantage it may give me just doesn't seem to be worth the risks (for me) especially in these markets and with my level of investment knowledge.


Its definitely more risky and not for any novice investor IMO. It can work to your advantage, but just like anything else, if you use it properly.

For someone like myself who already had a dividend portfolio it made a lot of sense because I didn't need to trigger any unnecessary capital gains and I already had a predictable cashflow from dividends.


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## Spidey (May 11, 2009)

I'm also not fond of the Smith Manoeuver and it really only works well in steadily increasing markets, not the volatile ones we've seen lately. By paying off one's mortgage, one is assured of the highest guaranteed ROR tax free. What more can you ask for?

On the other hand, I think that a limited amount of leveraging in depressed markets can be a useful tool if the mortgage and all other debts are fully paid.


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## Brad911 (Apr 19, 2009)

Define "really works" thought...

See the biggest issue most dividend investors make is that you're not more successful in rising markets, but rather when they ARE depressed.

For a young investor like myself (30), I'm not concerned about the income I'm earning today; I'm more focused on the income I'm earning 20 years from now.

If I were using the SM yes you pay less interest in low interest rate environments and therefore yields are lower, but you're also accumulating (buying) at reasonable prices. Your capital essentially is being utilized far better than buying near or at the top of a market. Yes your overall portfolio is WORTH more, but the dividends should be your focus.

If I have an ability to build a portfolio of stocks with $100,000 that yields 3% ($3,000/yr) why would I want to wait to use the SM until that same portfolio will cost me $130,000 for the same amount of dividends. The yield will change in terms of overall valuation, but what you're paid is essentially the same.

I've been in accumulation mode the past 2-3 years. I'm not "backing up the truck", but my focus is on accumulation so that when a market does advance I'm able to sit back & evaluate whether or not its cost effective to continue adding to positions. If the market goes down (which I expect) then I have equity at my disposal to make a large number of purchases.

This is exactly what I was talking about when I wrote an article in 2009 about *Leveraging Dividends*. As long as the investor remains mindful of what risks they're exposed to and treats risk as a real threat to their success the SM isn't a good or bad strategy; just simply effective if used properly.


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## Financial Cents (Jul 22, 2010)

The best time is any time.

The question is, should you put down more or less when rates are dirt low like they are now?

We're doing a balance of investing and debt repayment. If rates move higher, more debt repayment instead of investing will be our protocol.


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## larry81 (Nov 22, 2010)

With rate now near or below 3%, its not a good idea to rush mortgage payment, best to invest !


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## Spidey (May 11, 2009)

Brad911 said:


> Define "really works" thought...
> 
> See the biggest issue most dividend investors make is that you're not more successful in rising markets, but rather when they ARE depressed.
> 
> ...


I think the problem with the SM and this volatility is that it involves dollar-cost-averaging rather than taking advantage of the regular "sales" that seem to be arriving. For example, I don't leverage at market highs and only consider leveraging when the market has dropped 20% or more. And I realize that in itself is not a guarantee of bargains, but then an investor can apply further analysis to see if there are bargains to be had. 

I realize that you are a much more experienced investor than most so the same criteria may not be as relevant. However, for the average young home owner, I think they should just plow every spare cent into their mortgage and leave leverage until they are debt-free. If they were to leverage, I think a better approach than the SM would be to have a HELOC and employ it only when stocks are depressed. Just my opinion, of course.


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## MrMatt (Dec 21, 2011)

larry81 said:


> With rate now near or below 3%, its not a good idea to rush mortgage payment, best to invest !



Paying debt is a no risk, 100% guaranteed principle, and competative after tax return.
There isn't any investment that has a better return without substantially more risk.


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## Sampson (Apr 3, 2009)

Anyone that is carrying debt while investing is already doing a type of leveraged investing, whether specifically the SM type strategy or not.

My issue with the 'pay down debt first, it's a guaranteed return' argument is that we don't know where the market will go.

I think the typical investor should be carrying some mortgage debt AND investing at the same time. I know personally this helped my situation. We were adding money aggressively into the market during 08-10, meanwhile topping up mortgagae payments. Sure our mortgage balance would have been much lower today had we chosen paying down that debt as a priority, but we earned more in by investing during those years than the interest we will ultimately pay during the course of our mortgage term.

Things obviously could have gone the other way and paying down the mortgage could have ended up better, but I didn't know which would happen and I don't know now. My suggesion, middle of the road. It will never give you the best scenario, but your chances of guessing wrong by using an all or none approach is reduced


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## Spidey (May 11, 2009)

I think if most young homeowners make max payments on their mortgage, max their RRSPs and TFSAs (which are not tax-deductible if leveraged) and possibly even start an RESP (if they have children), they will have plenty on their plate. Adding leverage to that mix would not be appropriate for most and I suspect it would ultimately take resources away from these other priorities. Again, just my opinion.


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## dogcom (May 23, 2009)

I hear what you are saying spidey but you would be injecting your emotions by timing the purchase. I think during a poor market a robot like DCA plan would be the best strategy providing you are investing in enough dividend stocks or an ETF so one stock doesn't cave you in. 

On another note when I had money I did put it all on the mortgage and when renewal time came I would get the reno's I needed. So instead of saving in an account until I could afford it I would take the best risk free rate available and that is paying down the mortgage.


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## Sampson (Apr 3, 2009)

Spidey, have to seen or heard about the concept of lifestyle investing? reviewed on MDJ's blog.

It is an interesting concept and while I agree with you that leveraged investing brings risks that many people cannot comfortably assume (both psychologically and financially), I think it can be a very important tool if the risks are properly understood AND controlled (possibly with assets to back the loans like in the example of the SM).

You are probably right, most people would end up very well off simply paying down debt, it is clear that even in older generations (boomers), mortgage repayment WAS supposed to be a 25 year thing, but many have extended those and carry debt into retirement.


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## Spidey (May 11, 2009)

Don't get me wrong. I personally use leverage and have been extremely happy with the result. But having my mortgage paid off gives me that extra comfort level. I also only initiate a position in down markets. It may be market timing, but it seems to work. I started in 2008 and I bought bank perpetual preferreds, a few blue chips and REITs. I was a little too early, so I went through more than a little anxiety as the crisis unfolded but held on and it worked well. Then I sat on my hands until November 2011 and just let the dividends pay down the HELOC. Since November I've bought Dundee REIT, CAP REIT, BMO, Rogers sugar, COS, NAE and recently TA. 

Like I say, I just think a younger family has enough on their plate with mortgage, RRSP contributions and TFSAs. I also wonder about the anxiety level of someone sitting on a $300,000 mortgage and who also started a leveraging program a year before the financial crisis hit.


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## dogcom (May 23, 2009)

You are right spidey if I had a $300,000 mortgage and wanted to leverage to invest I would be in a can't lose position. That means that I couldn't lose any money when I invested so this would be far above my risk tolerance level. I think brad911 is prepared for a big decline in the market if it happens and is able to go on so his risk tolerance would be higher then my own in this case.


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## Guigz (Oct 28, 2010)

jamesbe said:


> I don't have a LOC, never needed one so never got one. It's still gone though, your LOC will be at a higher rate. I'd rather keep the cash in the bank for use with anything.


Keeping cash in the bank does cost you some money, in the form of lost opportunity and returns. Using the LOC only when you need it is more efficient.

Even if the rates are low, I think now is a great time to make prepayments on a mortgage. What we do is that we max out our RRSP and TSFA and all that remains is pumped into our mortgage.


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## Pigzfly (Dec 2, 2010)

Brad911 said:


> Other people could have an affordable mortgage and even $100/month goes a long way to saving them $$. The people who get 30 year mortgages are likely going to in the end buy 2 homes; 1 in principle and 1 in interest!


Tell me about it... my neighbours got a 35! The difference in cash flow per month to a 30 was like $20... and FIVE YEARS!
We started at 20, 2 years ago, and are down to about 4 more.


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## Eclectic12 (Oct 20, 2010)

jamesbe said:


> Pretty sure that is very rare! Lucky you!


Or unlucky me ... mortgage 5%, heloc 3% ... though it's certainly had me make sure I maxed the extra mortgage payments!


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## Eclectic12 (Oct 20, 2010)

Brad911 said:


> Define "really works" thought...
> 
> See the biggest issue most dividend investors make is that you're not more successful in rising markets, but rather when they ARE depressed.
> 
> ...


Hmmm ... well I've been using more a leveraged "buy some bargains" method than an SM. 

However, most of my "low yield" were/are stuff like Agrium, Potash or Maple Leaf Foods. Most I've been able to pick up were paying 7% or better, at the time I purchased them. A few has increased their dividends since then.

I did like the results of my highly leveraged split share - 30% for almost two years and then a sale for a 230% gain. It made it easy to max the mortgage prepayment!

Lately I've been bored and allocated a set amount to "month trading" a few companies, in quantities I could afford. Within a two to six week period, I've managed to sell for a 5 to 9% capital gain.


Cheers


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## Brad911 (Apr 19, 2009)

As long as you understand the risks you're exposed to I see nothing wrong with using a SM for a more aggressive strategy. 

I just think something with a more sustainable focus is better than being too aggressive when using this strategy.


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