# investing vs mortgage principal paydown



## jumbalaya (Jan 17, 2013)

let's say i have a mortgage of 300k, but 0 investments.

assumptions: investments get 7% a year. no tax. mortgage rate 3%

which one should I put money towards first?

say i saved 20k. 3% of 280k (300-20) is more than 20k x 7%

it seems pretty complicated... esp if rates rise too.

i always thought it'd be better to invest because 7% > 3%, but i didn't consider the actual money gained/lost itself.

are there calculators for this?

thanks.


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## cashinstinct (Apr 4, 2009)

It's a never-ending debate because there are many factors at play.

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In theory, you would make more money over the long run on investment using your 7% assumption. 

7% is better than 3%.

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You don't save 3% on 280k... you save 3% on the amount you are able to pay extra on your mortgage, so let's say 3% of 20k is what you save annually in interest... It's also 3% before tax, since your interest on mortgage is paid with after-tax money.

You don't make X% per year on investment (7% let's say), average return is an average so you could make big gains some years, lose in other years... how do you feel about that? Psychology is a big thing with money matters...

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What I do: I do both...I invest regularly (weekly or monthly) and I regularly pay extra on your mortgage (15% extra on my weekly payment).

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You cannot use a calculator since
1) future return rates on investments are unknown
2) future mortgage rates are unknown (not 3% forever)... you save 3% on 20k each year that your rate is 3%.

You save some interest on mortgage by paying more, and you "protect" yourself from future rate increases on future renewals, since your remaining amount will be less....

Since investments (diversified) tend to do better long-term than mortgage interest rates, you should invest too. I don't suggest waiting till you have no mortgage to start investing.

If your work "matches" the investments you make in a retirement program, you should invest the amount required for the maximum employer contribution.


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## jumbalaya (Jan 17, 2013)

great response, thanks.

i was planning to pay the minimum mortgage amount, and invest the rest. what do you think of that strategy?

i'll also be doing the smith manoeuvre, which helps the investment argument more (assuming 7% average returns <-- i'm ready for the dips and gains)

if i hold firm to the assumption that investments return 7% average (tax included), it means i should only focus more on mortgage payment after the mortgage rate hits 7%, right? i'm a little confused on the math/opportunity cost here.

-------

this is the part where i'm most confused about:
"You save some interest on mortgage by paying more, and you "protect" yourself from future rate increases on future renewals, since your remaining amount will be less"

this makes a lot of sense, so i don't see how investing instead of paying off the mortgage principal would be good given these 2 assumptions:
1) rates rise
2) investments consistently make 7% only, no more


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## Just a Guy (Mar 27, 2012)

You need to remember that the 7% is in pretax dollars as well, if you're in the highest tax bracket, you are only earning 3.5% after tax...

Now think about the issue of a market correction. When your mortgage renewal comes up, they may ask for you to come up with more money as your property is now worth less...

There are many other variables of course, and it all depends on your personal situation and risk tolerance.


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## Butters (Apr 20, 2012)

I do a bit of both aswell. 

Focusing more on doubling up my mortgage lately. 

If the market prices ever looked extremely attractive I may switch back. Suncor does look attractive though 16% off its high. And way off its high of 2008. And considering our dollar could hit 85cents next year 

But mortgage is always safe.


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## AltaRed (Jun 8, 2009)

There is no guarantee of any return on investments (other than things like GICs and gov't bonds) but over the long term, e.g. 5-10 year running averages, investments should do better based on historical data. Note however that the S&P500 took about 5 years to get back from its highs in 2008, never mind get back on track for a CAGR of 6-7% over a 10 year period. 

Also, unless you have your investments in a tax sheltered vehicle like a TFSA or a tax deferred vehicle like an RRSP, all income off investments is taxable annually and cap gains taxable when the investment is sold.

I would only invest rather than pay down the mortgage IF I could put the investments in a TFSA or an RRSP (with its tax deduction), and then only if I feel I could handle a substantial rise in mortgage interest rates. Use a mortgage calculator to see what your payments would be at a 5 or 6% interest rate and decide whether monthly payments would be easily manageable. If not, buy down your mortgage until it is at least less than 50% or so of your home value (rule of thumb).


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## wendi1 (Oct 2, 2013)

I agree that if you invest, it should be within a TFSA or RRSP.

One very common decision is to put all the money in an RRSP, then use the refund to make a lump sum payment on the mortgage. Whether this makes sense for you depends on your marginal tax rate, your contribution room, whether you have a pension, the amount available for investing, and, well, your financial plan...

My decision was to do both, but I can see it doesn't make sense for everyone.


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## lightcycle (Mar 24, 2012)

Just a Guy said:


> You need to remember that the 7% is in pretax dollars as well, if you're in the highest tax bracket, you are only earning 3.5% after tax...


Only if you liquidate the equities at the end of each year. CAGR calculations will still remain at 7% (or whatever the real number is) until the equities are sold.



> Now think about the issue of a market correction. When your mortgage renewal comes up, they may ask for you to come up with more money as your property is now worth less...


Really? A mortgage is just a loan for a specific amount to pay off the seller of the property you just bought. How does the value of the property affect the loan amount? If the property appreciates, does the bank give you money back?


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## jumbalaya (Jan 17, 2013)

Just a Guy said:


> You need to remember that the 7% is in pretax dollars as well, if you're in the highest tax bracket, you are only earning 3.5% after tax...


the 7% is just an example, the main issue is the 3% of a large mortgage could potentially be bigger than 7% of a relatively small investment. would it make sense to kill off the mortgage principal?

also, capital gains are half of the tax rate, so you'd earn more than 3.5%.


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## none (Jan 15, 2013)

I don't really think it matters in the grand scheme of things. Mortgage rates may go up/down markets may go up relatively faster or slower. I think the MAIN issue is that you either do one or the other instead of blowing it all on booze and hookers.

To me this is similar to the argument to chasing small differences in MER.


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## AltaRed (Jun 8, 2009)

lightcycle said:


> Really? A mortgage is just a loan for a specific amount to pay off the seller of the property you just bought. How does the value of the property affect the loan amount? If the property appreciates, does the bank give you money back?


If a mortgage is underwater, a lender can require the outstanding loan balance to be bought down to at least appraised value at renewal time. It happens....and happened in Alberta after the 2008 houseing slump. It is more likely to happen if the homeowner is skating on thin ice, late payments, etc.


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## My Own Advisor (Sep 24, 2012)

I like what none said about the MER, spot on.

FWIW, here was what I wrote on MDJ, we do both:
http://www.milliondollarjourney.com/ending-the-mortgage-paydown-vs-investing-debate.htm

Doing both, lowers our risk (mortgage) and builds money for our future self (investing).


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## Just a Guy (Mar 27, 2012)

lightcycle said:


> Really? A mortgage is just a loan for a specific amount to pay off the seller of the property you just bought. How does the value of the property affect the loan amount? If the property appreciates, does the bank give you money back?


A mortgage is a loan backed by an asset that is worth more than the loan...if the value of the asset drops, the bank won't be happy holding the bag if you walk away because it's underwater, so they'll ask you to bring the assets loan to value more in line.

Likewise, if the value of your property increases, you can borrow more money against it.


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## Just a Guy (Mar 27, 2012)

jumbalaya said:


> the 7% is just an example, the main issue is the 3% of a large mortgage could potentially be bigger than 7% of a relatively small investment. would it make sense to kill off the mortgage principal?
> 
> also, capital gains are half of the tax rate, so you'd earn more than 3.5%.


Technically, it depends on how your investment increases in value...if it's from interest, you are taxed at the full rate, if it's dividends its lower, just like capital gains...I didn't think the fact that you're not truly earning 7% needed to be fully explained for all contingencies.


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## liquidfinance (Jan 28, 2011)

Then of course you could always pay down the mortgage and borrow it back on the line of credit to invest and get the benefit of the tax deduction. 

All depends on the risk you are happy with. 

Mortgage rates could rise and stocks could sink which would really give you a blow.


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## leslie (May 25, 2009)

* The difference between the size of the debt and the savings under being questioned does not make any difference. That is why everyone talks in terms of % rates of return.

* The capital gains tax rate is not 50%. It is half the normal rate. So if you are in the 22.5% first tax bracket your rate on capital gains is 11.25%. Technically that is not correct --- you are taxed on half the gains .... not at half the rates. But for this purpose the first understanding is accurate and easier to appreciate.

* The choice will never be decided by % rates of return because there is wide differences in risks. The debt is 100% certain - you WILL have to pay it. Equity returns are unknown and can quite possibly be 0% over very extended periods (or vice versa). The choice is only comparable if you hold Treasury debt assets. In that case your %return from the asset will certainly be lower than the cost of your mortgage so you are always better paying the mortgage. This means that when you hold a mortgage the normal rules of Asset Allocation don't apply.

* The decision to invest instead of paying off debt is a decision to leverage-invest. Leveraging investments is almost always a really bad idea IMO. I don't and I have decades of successful investing experience. True, you won't get 'a margin call' but the leverage impacts just the same. 

* Don't let stories like the MillionDollarJourney tempt you. This guy saved about $50,000 a year for 10 years and used it to buy real estate in a period when RE doubled in value (and he leveraged that investment with a mortgage as well. There is nothing magical in what he did. Can you save that much each year? Will RE double in value in the next 10 years?


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## Pluto (Sep 12, 2013)

Making extra payments on mortgage principle is very effective during the first five years. The reason is that the interest is front loaded: in the beginning of a mortgage each payment is mostly interest, while your last payments is mostly principle. In other words, the % of each payment that is interest gets smaller with each payment (assuming the interest rate stays the same.) So what I would do is make extra principle payments for 5 years, otherwise not much of the principle gets paid during those years. Then start the other 7% investment. 

In general extra mortgage payments are effective in the beginning, and less effective after five years. After about 10 years, extra payments are not worth while as most of the interest has already been paid.


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## AltaRed (Jun 8, 2009)

Pluto said:


> In general extra mortgage payments are effective in the beginning, and less effective after five years. After about 10 years, extra payments are not worth while as most of the interest has already been paid.


Directionally correct but only because the mortgage payment remains constant and the ratio of interest to principal in each payment decreases as the balance of the mortgage is paid down. The outcome is thus an exponential effect like a snowball going downhill increasing in size and speed as it goes. We have all seen the charts* that show that effect.

I agree completely that for the first 5 years as a minimum, and perhaps upwards of 7+ years, extra money should be used to pay down the mortgage as quickly as possible. That technique was hugely beneficial to me and my family such that the mortgage was paid off in just under 15 years despite having upsized about 3 times during that same period.

* as per http://www.homebuyergo.com/Principal_Interest_Payment.aspx


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## etfstrader (Sep 26, 2014)

*Test*

Testing


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## lonewolf (Jun 12, 2012)

jumbalaya said:


> let's say i have a mortgage of 300k, but 0 investments.
> 
> assumptions: investments get 7% a year. no tax. mortgage rate 3%
> 
> ...


 Jambalaya unless you know how to make money weather the market goes up or down your more likely to get closer to a negative 7% annual return over the next 5 years then a positive 7% return on your investments.


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## steve41 (Apr 18, 2009)

> ... are there calculators for this?


 RRIFmetic handles this stuff nicely.


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## el oro (Jun 16, 2009)

^I'd seriously consider a calculator like that. A well managed corporation doesn't put half of their money in one solution and half in the other all willy-nilly like. Crunch the numbers and make an informed decision. Run sensitivities for the variety of potential future outcomes and make pretty tornado graphs. Rising rates have a negative impact on most investments while also increasing mortgage service costs. You can't just think through the optimal solution.


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## james4beach (Nov 15, 2012)

leslie said:


> * The choice will never be decided by % rates of return because there is wide differences in risks. The debt is 100% certain - you WILL have to pay it. Equity returns are unknown and can quite possibly be 0% over very extended periods (or vice versa). The choice is only comparable if you hold Treasury debt assets. In that case your %return from the asset will certainly be lower than the cost of your mortgage so you are always better paying the mortgage. This means that when you hold a mortgage the normal rules of Asset Allocation don't apply.
> 
> * The decision to invest instead of paying off debt is a decision to leverage-invest. Leveraging investments is almost always a really bad idea IMO. I don't and I have decades of successful investing experience. True, you won't get 'a margin call' but the leverage impacts just the same.
> 
> * Don't let stories like the MillionDollarJourney tempt you. This guy saved about $50,000 a year for 10 years and used it to buy real estate in a period when RE doubled in value (and he leveraged that investment with a mortgage as well. There is nothing magical in what he did. Can you save that much each year? Will RE double in value in the next 10 years?


Great post, leslie!

Yes this really is fundamentally about leverage (which is at all time highs among Canadians). As you said in your post, people who decide to invest when they could be paying off debt, are choosing to employ leverage. This amplifies everything: positive returns are greater, but negative returns are more negative too. Someone _who gets lucky_ and leverages during a strong market is neither smart nor skilled. There are plenty of people who are highly leveraged in a down market, and they get destroyed -- like American homeowners, for example.


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## My Own Advisor (Sep 24, 2012)

I liked Leslie's point here:

"* The choice will never be decided by % rates of return because there is wide differences in risks. The debt is 100% certain - you WILL have to pay it."

Makes me think killing debt and having it done and having no debt, is always a great move.


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## InvestingForMe (Sep 6, 2012)

When trying to answer this question lose sight of the details. 

1) Your principal residence is the most tax-efficient investment you'll ever make. So your answer should be based upon an after-tax comparison.
2) If your investing in your RRSP, make sure you reinvest your income tax refunds. If you don't you have just eliminated the main benefit of an RRSP.
3) Just like a mortgage has a cost (Interest Expense), investments also have a cost (MERs, brokerage, management services fees, etc.). So don't forget to include these in your comparison.
4) Your mortgage's interest rate is more predictable than are investment returns, so your analysis becomes less and less reliable the longer you forecast certainty into your comparison.
4) Re: Mortgage Payments: When is the best time to make extra mortgage payments - when interest rates are low and more of your payment goes to reducing your outstanding principal, or when interest rates rise and more of your extra payment goes toward paying the mortgage interest expenses?

Our calculator might help you to answer this question.(It's Free!) http://bit.ly/1lV6SK4


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## favelle75 (Feb 6, 2013)

jumbalaya said:


> let's say i have a mortgage of 300k, but 0 investments.
> 
> assumptions: investments get 7% a year. no tax. mortgage rate 3%
> 
> ...


You don't save 3% on $280K unless you pay the ENTIRE $280k off. You save on what you put towards it, not any more or less.

So in this case, if you can guarantee returns higher than 3%, then yes, its more profitable to invest in those returns rather than paying down the mortgage.


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## My Own Advisor (Sep 24, 2012)

I really think this is a risk issue, and folks that only see investing as more profitable than the guaranteed rate of return that comes with a mortgage payments are missing something....

Folks with a $280 k mortgage debt, are at risk if they lose their job or their human capital is impacted. 

Somebody with no mortgage debt, who owns their home, has much less risk if their human capital is impacted.


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## tygrus (Mar 13, 2012)

The pure numbers analysis is not the whole story. The peace of mind factor is huge and underestimated. 

So you have a mortgage and then you add a HELOC onto it and invest it in the market and hope to make a return. Now instead of just a mortgage you have 3 things to worry about. You still have your original mortgage, now a HELOC so more debt that has to be paid and now at the same time you are watching the fluctuations in the market like this past month. 

Sure, if you have the patience and nerves of a rock, this won't bother you, but thats not 99% of people. So if you are not one of those, the better strategy is to throw extra month at your mortgage until its paid, then start investing with cash. There will always be opportunities.


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## christinad (Apr 30, 2013)

It seems to me the temptation when returns are low is to throw more money at your mortgage which isn't what you should do necessarily as you are missing an opportunity to buy low. I am tempted, I admit. : -) I will try and do both though. I agree that I am looking forward to paying off my mortgage. I think it will definitely give me peace of mind. Right now, my mortgage won't be paid off until i'm 70 so I have an incentive to try and pay it off sooner.


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## tygrus (Mar 13, 2012)

Going into the second half of your life with a significant debt load is always a bad strategy. Many people neglect to count for the possibility they could get sick and unable to work. If you have your primary expenses paid for, house, car, etc, then you don't need a lot of money to live if that happens.

A better strategy is to try and be debt free in your 50s and then devote whatever you can after that to investments.


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## My Own Advisor (Sep 24, 2012)

tygrus said:


> Going into the second half of your life with a significant debt load is always a bad strategy. Many people neglect to count for the possibility they could get sick and unable to work. If you have your primary expenses paid for, house, car, etc, then you don't need a lot of money to live if that happens.


Totally agree, aggressively paying down your mortgage is an excellent risk management move. This is what I meant as well in my recent comment.


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## christinad (Apr 30, 2013)

Personally I also think having money saved in a safe investment in a tfsa is important. It doesn't seem to me that having all my money tied up in my condo is necessarily a smart move in the event of an emergency.

I had a thought thanks to this thread. I am paid biweekly and 2 months of the year you are paid 3x (like this month  I can put that extra payment towards my mortgage.


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## jumbalaya (Jan 17, 2013)

thankfully, i have the patience and nerves of a rock. so taking my assumptions (yes, i know there's capital gains and dividend tax)... 7% net gain on stocks per year at the end of 30 years, 3% mortgage interest rate, I should always invest in stocks?

i'm looking for the most optimal, weath-building option here.

I don't understand the "throw all money at mortgage in first 5 years". can someone explain that to me with numbers?

thanks everyone for their helpful replies


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## wendi1 (Oct 2, 2013)

Christinad: You can probably ask for your mortgage to be paid every two weeks when you next renew.

As long as you keep the payment at half the monthly payment, it's like having 13 months in a year, and pays down that puppy extra quick.


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## cheech10 (Dec 31, 2010)

You can only know what the best decision was in retrospect. If your assumptions hold true, then yes investing in stocks gives you a better return than paying down the mortgage. And historically yes, in most 30 year periods stock returns would have outperformed mortgage paydown strategies. But there are no guarantees of future performance, and equity returns are volatile. Only you know your risk tolerance, income stability and outlook, net worth, dependents, etc. 

If you really wanted to, you could model this with a monte carlo simulation or similar method; you'd probably find that 80% of simulations would end up with better returns for equities (depending on the input parameters). But what if reality follows one of the other 20% of simulations? Even patient, dispassionate investing over a long enough period is no guarantee of a good outcome.


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## nobleea (Oct 11, 2013)

christinad said:


> It seems to me the temptation when returns are low is to throw more money at your mortgage which isn't what you should do necessarily as you are missing an opportunity to buy low. I am tempted, I admit. : -) I will try and do both though. I agree that I am looking forward to paying off my mortgage. I think it will definitely give me peace of mind. Right now, my mortgage won't be paid off until i'm 70 so I have an incentive to try and pay it off sooner.


I think when rates are low is the best time to throw money at the mortgage. Say you have $200 extra a month to pay down or invest. $200 when rates are low goes right against the principal. But if you wait until rates are higher and you are on a new term, that extra $200 is eaten up in extra interest costs. 
Herd mentality says that in low rates you should leverage and invest. If that's what everyone is doing (leverage is very high for Canadians, and the stock market is at all time highs), is that the most prudent?


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## AltaRed (Jun 8, 2009)

jumbalaya said:


> I don't understand the "throw all money at mortgage in first 5 years". can someone explain that to me with numbers?


Just what others, including nobleea have said. Most of your mortgage payment in the early years is interest with maybe 20% of the payment going to principal. If you can throw extra money at the mortgage, it goes 100% toward paying down principal balance.... which then makes future payments more weighted to principal buydown.

Try googling for a mortgage calculator which will allow you to input your terms of mortgage, e.g. face amount, amortization period and interest rate.... and then be able to vary your payment amount (any additional amount over your current payment goes directly to principal buydown). It will dramatically show how some additional principal buydown in the early years cuts several years off your mortgage and beaucoup interest off during the life of your mortgage. The tables and graphs will astound you.


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## jumbalaya (Jan 17, 2013)

yes you can only tell in retrospect, but i'm gonna probably hold these assumptions (7% is actually 5% personally, and will stop investing when mortgage rate hits 5... everything after tax). if i look back and see I didn't pick the best route, i can't fault myself because i gave it my best shot. who could've known the 30 years of me investing would be different from the entire history of the stock market? i'd be content with my results.

re: mortgage calculator, i know it kills off the mortgage really fast, but that's not my main goal as previously mentioned. i just want the most optimal and weath-building approach. 

so i guess it wasn't a clear cut answer, but what in life really has one?  i'm gonna do the smith manoeuvre, on top of paying minimum+a bit more in the first 5 years against the mortgage, and invest the rest (minus living expenses).

thanks everyone!


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## cheech10 (Dec 31, 2010)

nobleea, extra payments are 100% applied toward principal; it doesn't matter whether your rate is high or low at the time. What matters is whether the payment is early or late in the amortization schedule; obviously payments early in the amortization will have a larger effect on interest paid since the compound interest on the corresponding principal won't have to be paid.

jumbalaya, if you really don't care at all about risk, then historically your best course would have been to invest rather than pay down the mortgage. But are you sure you are really so risk-tolerant? It's hard to know without knowing your whole financial picture.


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## jumbalaya (Jan 17, 2013)

well i didnt care at all about the markets dropping these last weeks... wish i had more money to buy. i have a stable fed govt job too.


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## My Own Advisor (Sep 24, 2012)

"I think when rates are low is the best time to throw money at the mortgage."

Totally agree...the extra money goes on the principal. At time of renewal, less principal, less interest.

While borrowing to invest is good when rates are low, it's also the best time to pay down debt for the same reason. Unless somebody out there can control interest rates for me, I will continue to pay down my mortgage using lump sum payments.


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## nobleea (Oct 11, 2013)

cheech10 said:


> nobleea, extra payments are 100% applied toward principal; it doesn't matter whether your rate is high or low at the time. What matters is whether the payment is early or late in the amortization schedule; obviously payments early in the amortization will have a larger effect on interest paid since the compound interest on the corresponding principal won't have to be paid.


that is correct. However, if you only have $2000 available, would you rather put $200 extra payment on an $1800 mortgage payment when rates are low? Or put nothing extra down on a $2000 mortgage payment when you renew at a higher rate? You might have invested the extra $200 earlier in stocks so then you can move it over to the mortgage. Assuming it hasn't dropped in value. Is that a fair assumption with stocks having been on a tear for some time and due for a decent correction?

In my experience, many who say you shouldn't pay down the mortgage when rates are low and instead invest end up doing one of the following:
Don't invest the monies they would have put down and spend it
Invest in individual stocks, usually poorly, not beating the index and possibly not beating their mortgage rate.


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## cheech10 (Dec 31, 2010)

What I'm saying is the current interest rate doesn't tell you as much about the return of extra mortgage payments as it seems. For example, say you are paying 3% and have 5 years left on your term, with a 30 year amortization (similar to the OP). It might seem that a 3% risk free after tax return is relatively low, but you actually need to factor in the future interest rates for the remaining amortization, which could potentially be significantly higher. If rates are 5% in future terms, the initial payment has a more favourable return. Not to mention the possibility of a variable rate mortgage, where the interest rate risk is even higher. So the actual return after 30 years could be very different.


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## dogcom (May 23, 2009)

Investing using borrowed money at a time when markets are high is a bad idea especially when you have such a great risk free investment like paying down a mortgage. Of course we hear the you don't know the top stuff but at the same time if you are forced to sell and cover at a bad time then you just timed the market at the worst time. Even if markets fall I wouldn't borrow for the the old saying of the market can stay irrational longer then you can stay solvent. Once you have paid down the mortgage enough and markets are down and borrowing to average in is well within your margin of safety then I would consider it.


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## CPA Candidate (Dec 15, 2013)

You can use the capital asset pricing model to help with making these types of decisions.

risk free rate + (return of the market portfolio - risk free rate)*beta = required return

Risk free rate = your mortgage rate (3%)
The return of the market minus the risk free rate has historically been about 5.5%
Beta = the beat of the stock or index (lets say TSX, beta =1)
0.03 + 0.055 = 0.085 or 8.5%.

Thus you would need a 8.5% return on equity to compensate for the risk of equity compared to paying down your mortgage. Historically the markets do about 9%. The Canadian banks have done about 10%.

One advantage of paying down the mortgage faster is that it might keep you from making bad investment decisions. One disadvantage is going illiquid. You can sell an investment to raise cash, but pulling money out of your house is not easy. Investing keeps your options open.

I don't put any money on my mortgage in excess of the minimum required payments at these low interest rates.


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## dogcom (May 23, 2009)

Money in a safe emergency fund is a very good idea so your not forced to fire sale your house or investments.

On historic market returns of 9 percent that is a big if when lined up against a nice risk free return. If the Fed wasn't creating this market rise we would be in very big trouble and the rise we have seen since 2009 wouldn't have happened or the rise would have been far less.


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## nobleea (Oct 11, 2013)

cheech10 said:


> What I'm saying is the current interest rate doesn't tell you as much about the return of extra mortgage payments as it seems. For example, say you are paying 3% and have 5 years left on your term, with a 30 year amortization (similar to the OP). It might seem that a 3% risk free after tax return is relatively low, but you actually need to factor in the future interest rates for the remaining amortization, which could potentially be significantly higher. If rates are 5% in future terms, the initial payment has a more favourable return. Not to mention the possibility of a variable rate mortgage, where the interest rate risk is even higher. So the actual return after 30 years could be very different.


Yes, i completely agree. I've talked about this on other sites. Any prepayments don't save you the interest on this term (unless you pay it off in the term), they save you the interest off the back end of your ammortization. Since we're at historic lows not for rates, it's fair to assume you're getting a better return.


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## namelessone (Sep 28, 2012)

Getting a 7% return on a 3% cost is not a very attractive thing to do. Getting 7% return is a no brainer. When something is easy to do, you face lots of competition! 
Try to get 5 to 10 times interest cost, the more the better, because borrowing to invest has risk and you want good return to compensate.

I am not big fan of mortgage but I am not in a rush to pay it down. And, I'd like to use the HELOC *occasionally*. I prefer low cost margin loan with bigger flexibility.


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## Eclectic12 (Oct 20, 2010)

nobleea said:


> ... Any prepayments don't save you the interest on this term (unless you pay it off in the term), they save you the interest off the back end of your ammortization...


I can agree the big effect is cumulative at the end. The part I'm not following is the claim that there's "no savings from interest in the current term".

The prepayment should lower the amount owed ... a smaller amount owed x constant (i.e. interest rate) *must* result in a smaller interest charge for each succeeding payment in the current term.

In the future, a renewal at a higher interest rate *could* add back enough to wipe out any gains ... but that does not change that interest charges were reduced by the prepayment, during the current term.


Cheers


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## Oldroe (Sep 18, 2009)

What pre payment does is makes your money work harder for you.

So you make 10 exacter payments you save the amount of interest from payment 100 to payment 110 immediately. Them every month you are paying off more principle than interest.


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