Canadian Money Forum banner

1 - 6 of 6 Posts

·
Registered
Joined
·
12 Posts
Discussion Starter #1
I am a couch potato indexer, but I have yet to buy a bond position. I've started wondering if it actually makes sense to hold bonds while I still have a mortgage. Wouldn't paying down my [variable] mortgage be equivalent to buying the same amount of bonds?

The advantages of the mortgage route that I see are:

- Paying a mortgage is tax free, whereas a bond fund would take space in a registered account.

- Overall engagement with financial institutions is slightly reduced. I'm not borrowing money and lending money at the same time... less overheads/MER?

OTOH, a paid mortgage is less liquid (would get money out as a higher priced LOC).


I realize that my mortgage and a bond fund aren't exactly the same beast, but are they "close enough" from a course-grained couch potato perspective?

Any insights appreciated,

Thanks,
Dan.
 

·
Registered
Joined
·
7,253 Posts
If you are a couch-potato indexer, you probably already have bond exposure through ETFs or eSeries.
What is your mortgage rate?
Bond yields are not very high right now.
Long bond yields are very poor, actually.
If your mortgage is 3% or above, I see no benefit in holding bonds as an alternative to paying off mortgage.
However, you may choose to hold bonds as part of your non RE investments.
Bonds are fixed income assets and often lend stability to an equity-heavy portfolio.
 

·
Registered
Joined
·
450 Posts
Larry McDonald touched on this issue recently in his blog. According to Professor Milevsky, your mortgage is like a negative bond, so you should own bonds to diversify.

I believe the opposite, that you should either invest in something with a higher expected return than your mortgage rate (i.e.: equities), or pay down the mortgage. Plus paying off your mortgage is a risk-free (and tax-free) return, whereas bonds carry some risk (except perhaps government short bonds, in which case you'll very likely earn less after-tax than you have to pay for your mortgage).

That said, there is value to having some liquid funds for emergencies/transactional needs (e.g.: a high-interest savings account)...

Larry McDonald's post: http://blog.canadianbusiness.com/do-homeowners-need-more-bonds/

Mine: http://www.holypotato.net/?p=774
 

·
Registered
Joined
·
2,925 Posts
Like potato said you should have a good safety fund invested in a GIC, high interest savings and you could probably add some short term bonds to that.

After that I would put all my money outside of RRSP to pay down the mortgage.

Inside the RRSP you should definitely own bonds along with equities in a diversified portfolio. If we go through another round of stock market meltdown then you will be glad that you have some bond exposure.
 
1 - 6 of 6 Posts
Top