Canadian Money Forum banner

1 - 20 of 25 Posts

·
Registered
Joined
·
3 Posts
Discussion Starter #1
I hope this is the right place to post this question.

I am 31 years old and own my own business. I have two houses, my primary having a 220k mortgage owing and a rental property with 108k owing -- these are my only current debts.

My RSP contributions are maxed yearly, TFSA fully contributed. My business has a considerable cushion incase things go sour as well.

I have ~ 220k in non registered accounts to invest. My question is whether I should pay off the house (and possibly HELOC the money back out to invest) or just invest it straight up. If invested my horizon for these funds is long (20 years) as my monthly income is easily greater than my cost of living -- and I don't see that changing much.

Currently both mortgages are on fixed 1 yr, so I'm out of them shortly.
 

·
Registered
Joined
·
2,054 Posts
I don't think you should pay off the mortgage on the rental property considering that it is a deductible expense and that the tenant pays it.

Just my two cents.
 

·
Registered
Joined
·
373 Posts
Pay off the mortgage on the primary residence as this will earn you a guaranteed after tax return of the mortgage rate (and more importantly the future mortgage rate should interest rates begin to rise significantly) without risk. This is a much better deal than a leveraged investment in equities, especially now.
 

·
Premium Member
Joined
·
2,686 Posts
If you look at studies that compare how much investors earned versus how much the markets returned, you'll find that consistently, the average investor earns much less than market returns. If you are anything like an average investor, it makes sense to go for the sure thing: pay down the mortgage and earn a guaranteed after-tax return.
 

·
Registered
Joined
·
2,626 Posts
If you are anything like an average investor, it makes sense to go for the sure thing: pay down the mortgage and earn a guaranteed after-tax return.
This assumes that the market return will be equal/similar to the interest paid on the mortgage or HELOC. Even if the average investor underperformed the market, but was only paying 1.75% interest on the loan - they'd very likely be ahead investing the money rather than paying down debt.

If you are comfortable with leveraged investing, then by all means start up a SM and further reduce the 'effective' interest rate through tax deductions. Calculate the amount of interest you'd potentially pay on a HELOC after tax deduction, then determine the return you'd need to beat.

The 'risk' of focusing on paying down debt, especially debt at low interest rates is the cost of opportunity.

I believe risk tolerance is the ultimate deciding factor. Due you need a guarantee, or are you comfortable with moderate risk?
 

·
Premium Member
Joined
·
2,686 Posts
This assumes that the market return will be equal/similar to the interest paid on the mortgage or HELOC. Even if the average investor underperformed the market, but was only paying 1.75% interest on the loan - they'd very likely be ahead investing the money rather than paying down debt.
Not really. It also depends on how badly investors trail market returns. If the shortfall is 5%, markets have to return 6.75% in future years for an investor to simply break even (before taxes) on investing compared to paying down the mortgage. Further, a 1.75% rate is unusually low. I wouldn't count on it lasting the entire term of a 5-year mortgage.

Of course, if future returns turn out to be better than the mortgage interest rate, an investor will come out ahead. But how do you tell in advance if market returns are going to be better than mortgage rates?
 

·
Registered
Joined
·
8 Posts
Putting math aside for a second - think about your state of mind after the principal mortgage has been paid off. What would you do with the dollars you've freed up?

For most money-conscious people, those uncommitted dollars would go towards long-term savings, and the cash flow would remain mostly unchanged. This is going to sound weird coming from an advisor, but I usually recommend getting rid of the mortgage ASAP - only contributing to RRSPs for the benefit of tax deductions.
 

·
Registered
Joined
·
305 Posts
My current philosophy is to skim 10% off the top toward retirement savings, and direct the remainder toward aggressive mortgage reduction.
 

·
Registered
Joined
·
319 Posts
I max out my RRSP, and use that tax deduction to pay down my mortgage. I can see the advantage of one or the other, but I figure this way I invest 10k (for example) out of my pocket, and end up with 14k 'invested'. 10k in the market and the 4k tax rebate on my mortgage.

I'm sure there are lots of reasons why my solution isn't ideal, but it works for me and seems to make sense to the way I look at the world.
 

·
Registered
Joined
·
3 Posts
Discussion Starter #14
How much is your annual income?
About $90-100k into the biz at the moment, but I dont draw it all out -- some benefits to keeping money in the CCPC.

Thanks for the other responses.

Im getting the general impression that paying off the mortgage / having zero debt and considerable assets is preferred. I'm not an active trader in the market and am into ETF indexes in RSP accounts.

Does it really make sense to pay off a low interest rate mortgage though? I was considering paying it off and HELOC'ing the money back out for (dividend paying) investment, but not really paying it off and leaving it paid off.

Lastly, how does RE in canada do vs. (world) equities in an inflationary period?
 

·
Registered
Joined
·
74 Posts
A couple things. As far as deciding which property to pay off first....ask yourself this. If something crazy were to happen in your life that caused you to lose one of them...which one would you rather lose? Your home, or an investment? I would rather have my home paid off. Plus, with the income you make and no payment on the primary home, you could quickly knock off the rental. As far as gimmicky tricks and loop holes to borrow against your house to invest etc....What are you accomplishing by paying the house down then taking back into debt again? I am confused. You can invest quickly and efficiently using the mortgage payment that you no longer have since you have no debt anymore.
 

·
Registered
Joined
·
74 Posts
I don't think you should pay off the mortgage on the rental property considering that it is a deductible expense and that the tenant pays it.

Just my two cents.
Your calculator is broken. You would rather pay expenses in order to avoid giving a fraction (your tax rate) of those expenses to the government? And I would not totally rely on tenants for financial planning...sometimes they don't pay....or there are none.
 

·
Registered
Joined
·
74 Posts
This assumes that the market return will be equal/similar to the interest paid on the mortgage or HELOC. Even if the average investor underperformed the market, but was only paying 1.75% interest on the loan - they'd very likely be ahead investing the money rather than paying down debt.

If you are comfortable with leveraged investing, then by all means start up a SM and further reduce the 'effective' interest rate through tax deductions. Calculate the amount of interest you'd potentially pay on a HELOC after tax deduction, then determine the return you'd need to beat.

The 'risk' of focusing on paying down debt, especially debt at low interest rates is the cost of opportunity.

I believe risk tolerance is the ultimate deciding factor. Due you need a guarantee, or are you comfortable with moderate risk?
Paying off debt = opportunity. When you have no debt payments you can invest larger sums of money and do just fine.
 

·
Registered
Joined
·
2,626 Posts
Paying off debt = opportunity. When you have no debt payments you can invest larger sums of money and do just fine.
If you take a substantial amount of time to pay off your debt, the opportunity cost could result in an inability to catch up despite higher savings rates. It all depends on the assumptions on rates of return, future-value, savings rates etc. It should be somewhat straight forward to model based on a range of expected returns and interest rates on the loan.

As I mention before, it depends on the OP's risk tolerance level. It could mean it takes many more years to reach your financial goals.

If the opportunity of paying off debt was so beneficial, most investment companies would operate with exceeding low or no debt, which doesn't usually happen.
 

·
Registered
Joined
·
74 Posts
If you take a substantial amount of time to pay off your debt, the opportunity cost could result in an inability to catch up despite higher savings rates. It all depends on the assumptions on rates of return, future-value, savings rates etc. It should be somewhat straight forward to model based on a range of expected returns and interest rates on the loan.

As I mention before, it depends on the OP's risk tolerance level. It could mean it takes many more years to reach your financial goals.

If the opportunity of paying off debt was so beneficial, most investment companies would operate with exceeding low or no debt, which doesn't usually happen.
Which is why you should never take a "substantial amount of time". 1-3 years is average depending on income and size of the mess. You will not likely get rich on the number spreads you are "spreadsheeting" in your explanation. There are many things that look great on a spread sheet that do not pan out in the real world. For example, I have a loan at 5 percent and I "expect to receive" 8 percent on an investment. This gives me a 3 percent spread right? Wrong. It is 3 percent minus taxes and risk. The risk being that I do not receive "expected" rates of return of 8 percent (no that never happens right?), and on the other side of the coin, I lose my job and miss a payment on the loan and they jack the rates..just as an example. One thing that is horribly wrong with a lot (not all) of financial "experts" today, is that everyone wants to only look at the up side and only crunch the numbers..as evidenced by this forum. Almost no real life is included in these calculations. I am not putting risk on my home where my children sleep and keep their toys so that I can "maybe if everything works out just right" make an extra few thousand dollars in the end. Another factor is stress and strain on a marriage for example. Ask your spouse how much they enjoy being in debt? I have always had an issue with statements like "depends how much risk you are comfortable with". What does this mean? It is not about how bold and brave you are...it's about the fact that no matter how "sophisticated", people lose their butts doing this kind of stuff every day.
 

·
Registered
Joined
·
16 Posts
It needn't be all or nothing....pay off the mortgage and then borrow a lesser amount (say $100k) for investment purposes--the risk is mediated and the payments on the HELOC would be easily manageable out of your monthly cashflow.

Just my opinion (and the strategy we've used.)
 
1 - 20 of 25 Posts
Top