# Pay off mortgage or invest



## Bizmarck (Apr 23, 2016)

Hi Everyone,

This is my first post, please go easy . Would like some unbiased advice please. My wife and I have about $73k outstanding on our mortgage. Our current rate is 2.34% and the mortgage comes up for renewal on Oct 1 2016. We had been aggressively paying down the mortgage when it occurred to me there may be a more optimal course. What do you think about reducing payments to the absolute minimum required, and investing the difference instead into something that yields a higher rate of return?

For example, let's say my minimum mortgage payment was about $1000 a month. In this case, I would reduce it to say $300 a month, and invest the difference of $700 into 4 or 5 dividend paying ETFs which pay out an average rate of 5%. Always reinvesting the dividends into the same set of ETFs. This way the investments would grow faster than the mortgage costs in interest. When the interest rates go up such that it is no longer advantageous, I would cash out of the ETFs and put that cash into the mortgage.

The major risk is that the ETFs depreciate significantly. Can anyone else see other problems with this approach?

Thank you!


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## Bowzer (Feb 25, 2015)

I always reframe this question:

If I had a paid off house today, would I borrow against it to invest that money?


That will give you your answer. Sure, you could break down the numbers, but sometimes this is a heart vs mind question.

Me personally, I want a paid off mortgage asap as a personal life goal. The younger I can achieve it the better.


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## Plugging Along (Jan 3, 2011)

Bowzer said:


> I always reframe this question:
> 
> If I had a paid off house today, would I borrow against it to invest that money?
> 
> ...


+1. From a numbers perspective investing may make sense, but that brings on an additional risk. So then you have factor in your own risk tolerance and your own abilities

In 2008, I remortgaged to invest. I picked a good dividend stock. A few months later the markets started to tanked, I watched my investment fall to about 50%, I even did the smart thing of trying to average down u til I had no more extra money to invest. Then my spouse lost his job while I was on mat leave. The markets were all down, both my spouse and I were not working with a new baby at home. It was then I learned a lesson about cash flow. We still had over a years worth of living expense in cash, and a very high net worth. However, our net worth was tied up on our real estate which is not liquid and equities which were at all time low and it would seem silly to sell. 

We ended up fine as we are pretty resilient and creative in cutting costs. However once my spouse and I both started working again, and those stocks hit a value I could pay off our mortgage, we did so. It took about three years, and we were lucky that we could hold on. If we had not sold that stock and paid off our mortagage, we would have even made more money as that stock double from what we sold at (and I sold some at break even and some at a profit). However, my spouse was laid off again last year, and without a mortgage, we were not stressed at all. That in otself for us was worth losing the potential gains we would have had. 

I know there are people here who have done really well being leveraged, so it comes down to what is you risk tolerance.


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## tygrus (Mar 13, 2012)

Bowzer said:


> Me personally, I want a paid off mortgage asap as a personal life goal. The younger I can achieve it the better.


You need to brush up on the time value of money. 

Make your minimum payments to discharge your mortgage in 20 or 25 years, and invest the rest right now. You will never get those years back.

Oh and dont by individual stocks, buy ETFs.


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## Just a Guy (Mar 27, 2012)

Technically, you should do both. Pay off your mortgage aggressively, the interest isn't tax deductible. Then, get a heloc (home equity line of credit) and invest that money, making the interest on the heloc tax deductible. It's better than investing after tax dollars which you are using to pay off your mortgage.

Of course, never invest money you can't afford to lose. I treat all my invested money as "spent" money, just like if I'd used it to buy a cup of coffee, it's not coming back. Don't get sucked into success, if you do well initially, it doesn't mean you're a genius, things can change on a dime. 

Also, until you sell, your "worth" is nothing but theoretical. Too many people brag about how much they are "worth" when, in reality, it's only on paper. There's a big difference between wealth on paper and cash in hand.


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## atrp2biz (Sep 22, 2010)

This would depend on the HELOC rate vs the mortgage rate. The OP's mortgage rate is pretty good and it may be tough to find an 'after-tax' HELOC rate that is better. This is our dilemma as well as our mortgage rate is P-1.01%.


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## Pluto (Sep 12, 2013)

Just a Guy said:


> Technically, you should do both. Pay off your mortgage aggressively, the interest isn't tax deductible. Then, get a heloc (home equity line of credit) and invest that money, making the interest on the heloc tax deductible. It's better than investing after tax dollars which you are using to pay off your mortgage.
> .


correct answer, except that after paying off the mortgage, get another mortgage as it would have a lower rate than an heloc. Tell the mortgage broker it is to buy investments and house is collateral. Your investment must produce income for the mortgage interest to be tax deductible.


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## Just a Guy (Mar 27, 2012)

Many helocs allow you to "lock in" portions just like a regular mortgage, at mortgage rates. So, let's say you buy $10k of each of the big 5 banks (each paying close to a 5% dividend), you could lock in $50k at mortgage rates (say 5 year variable) or you could lock in any combination you like (10k at each 1,2,3,4&5 year fixed, 25k variable, 25k fixed, whatever).


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## Bizmarck (Apr 23, 2016)

Thank you for all the replies. Just to be clear, the idea would not be to borrow from a HELOC. Rather, I would be redirecting money used right now to pay the mortgage into my TFSA. And then buy 5 or 6 dividend paying ETFs, reinvesting the dividends. I know that if I borrow from the HELOC and invest, the interest is tax deductible, but that is not the idea here (this is not a Smith maneuver).

Thank you for pointing out the risks of the ETFs or stocks tanking, I think that is the major risk here. The dividends would still keep coming though, so I could dollar cost average. Will think about it more.


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## Rusty O'Toole (Feb 1, 2012)

This is a personal decision that depends on your income, how secure it is, what makes you happy etc.

I will just add that if you pay off your mortgage, then remortgage or get an LOC to invest, the interest becomes tax deductible. An ordinary mortgage is not deductible.

Later..... Ha ha I see we were thinking the same thing at the same time.


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## none (Jan 15, 2013)

I think this decision starts looking at hyperoptimization of finances which is usually a waste of time. You might make out better with one but who really knows? Saving/investing are both within the realm of good choices. Basically just choose the one that is simpler for your life which is probably paying off the mortgage.


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## Pluto (Sep 12, 2013)

Another aspect is he should look at the % of each mortgage payment that is interest vs principle. Interest is front loaded. The first 5 years of payments are mostly interest. If he has made payments for more than 5 years a huge chunk of the interest may already be paid so paying it off fast may not be saving much.


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

I too agree that it becomes a personal decision. You shouldn't maximize your borrowing to invest just like you shouldn't deprive your savings just to pay off a loan. 

I strongly suggest you do both; pay down mortgage aggressively while still saving and investing.


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## Soon Forget (Mar 25, 2014)

Bizmarck said:


> ... dividend paying ETFs which pay out an average rate of 5%. Always reinvesting the dividends into the same set of ETFs. This way the investments would grow faster than the mortgage costs in interest. When the interest rates go up such that it is no longer advantageous, I would cash out of the ETFs


Hi Bizmarck,

Are you aware that when a company/ETF pays out a dividend, the price of that company/ETF drops by the amount of the dividend payment? I could be reading you wrong, but your statement above sounds like you are under the impression that when a 5% dividend is paid, your investment acquires 5% of new value. This isn't the case.

There have been other threads that discuss this, but basically the dividend is just an amount that companies choose to spin off to their shareholders in cash. Immediately before a dividend is paid (or rather, before the ex-dividend date) the company still owns the cash so the share price reflects the value of the cash. After the ex-dividend date the cash belongs to the shareholders so the share price drops by that amount. If you are reinvesting the dividends into the same stock, you end up with more shares that are all worth slightly less but the total value of the investment hasn't changed.

So basically, you can't say that an investment with a 5% dividend will grow faster than mortgage costs with a lower interest rate. The dividend % actually means very little if you're reinvesting. It's more important if you are creating an income stream to be spent.


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## My Own Advisor (Sep 24, 2012)

Paying down debt extends beyond a math decision. Emotionally, being debt free for us will be VERY liberating. 

With only $73k left, I would kill debt but invest at the same time. Mortgage rates are low and you'll likely get a higher rate of return from investing vs. your current mortgage rate. As soon as the debt is killed, 1) celebrate and then 2) put all mortgage money previously going on mortgage into TFSA, to max it out and your RRSP as well.

By paying down debt and investing, you win.


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