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Discussion Starter · #1 ·
I'd like to hear everyone's thoughts on how their primary residence figures (or not) into their portfolio. I'm not talking about investment RE here, just the house you live in. I think we had a thread which touched this topic at some point but I can't find it.

I've never considered mine much at all. It's just a place to live and I figure I will keep needing a place to live. It helps that RE prices are somewhat less insane here.

But the problem I now have is that with the recent inflation of stocks, I find myself looking at my portfolio and needing to throw a good sum of money at bond ETFs, with a current yield to maturity slightly below 2%. On the other hand, I have a 2% mortgage which I can make extra payments on. Which seems to me roughly similar to buying a bond, with zero risk.

Even better, because I'm paying the mortgage with after tax money, I would need bonds close to 4% to get a similar after tax return.

Am I looking at this the wrong way? I think it would make more sense to put the money on the mortgage and consider the overpayment as a fixed income part of my portfolio. I would effectively get the "yield" at the end of my mortage, because it would stop sooner.

The odds of needing the money back before then are very low but it is supposed to be available (it's going to a BMO mortgage cash account). I do have some RRSP room but I'm not sure I should consider it in my choice as I can make use of it for other investments instead.

But this gets me thinking: should I just consider the entire equity of the house (or maybe 80%) as a fixed income part of my portfolio? It should at least roughly keep up with inflation, after all. Mortgage interest on the whole amount, not what I'm actually paying, would be like rent for budgeting purposes. Meaning once the house is paid off, I'm effectively paying rent into my investment portfolio. Except that unlike having $(house value) in bonds generating the rent money used for an actual apartment, the whole thing is tax free.

Thoughts?
 

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I hate debt and paid my house off....

its still all your money....

As soon as its paid off, take that next mortage payment & hold it in your hand and think this is not taxable.... if you had bonds and they paid you that money, you owe full taxes on it....

im a fan of getting rid of debt, its a boat anchor holding you down !!!
 

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But the problem I now have is that with the recent inflation of stocks, I find myself looking at my portfolio and needing to throw a good sum of money at bond ETFs, with a current yield to maturity slightly below 2%. On the other hand, I have a 2% mortgage which I can make extra payments on. Which seems to me roughly similar to buying a bond, with zero risk.
You can use this calculator to see the difference and make scenarios : Mortgage Calculator with Lump Sum Payments - Canada

Let's input a $500,000 mortgage at 2%, paid monthly, with a 5-year term and 25-year amortization.

After 25 years, you will have paid $135,176 in interests.

If you make a $10,000 lump sum payment on year 5, you will have paid $130,361 in interests. That's $4,815 less.

In order to gain $4,815 in profits with a $10,000 investment in 20 years, you would have to invest it at 1.98%.

Ok, that's basically that 2%, but where the comparison gets tricky is if you make a $50,000 lump sum payment on year 5, because not only will you have paid only $112,764 in interests ($22,412 less), but the mortgage will be paid off 2 years sooner, as you are already aware. So how should we compare this scenario is more about cashflow opportunities (one could calculate the present value for comparison).

And yes it's even more complex when taking into account taxes.

So from a mathematic standpoint, I guess that paying the mortgage makes sense when comparing to the low-yielding bonds, but keep in mind that the money used to pay off the mortgage is illiquid as opposed to investing that money in liquid assets. But you are already aware of this.

Another thing to consider. If you pay more capital on the mortgage now and interests start rising in the near future, I guess you will be glad you've put that lump sum in the mortgage instead of bonds.

And, when looking at somewhere safe where to put money, I guess that's it's safer to decrease a 2% debt than keeping that debt as-is and investing new money at 2%. I would prefer having reduced a $400,000 debt to $350,000 when interests are rising than having $50,000 invested when interests are rising. Even if interests continue decreasing, they are so low anyways.

I guess that investing that money instead of decreasing your debt would make sense if it's invested in riskier assets that would have the potential to earn, say, 5%+ over 20 years. (Or if you need that money to be liquid)

That's just my thoughts and opinion. I didn't think this through and I may be wrong.
 

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After getting caught with the high interest rates in the early eighties, I decided to avoid debt if at all possible. I realize for the younger set, that is not always possible but I’ve encouraged my children to pay down their mortgage as soon as possible. After eliminating my mortgage debt some 30 years ago, I was able to relax knowing that I had much greater flexibility in making financial and career decisions.
In my professional career, I strived to issue equity rather than take on debt. I agree that some debt is useful in a corporate setting but one must always remember that at some point it has to be repaid.
 

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I absolutely consider my home/condo part of our net worth but like you, it's a place to live.

It's also an expense!

With maintenance fees and property taxes in Ottawa where I live, it's not a cheap city to live in. I could have semi-retired years ago had I left this city but I like it here. Life isn't all about money.....

I can't speak for your approach but I wouldn't be throwing anything into bonds right now. You might beat inflation over the next decade with them. If you need keep money secure, consider some rolling GICs, for short-term needs. Otherwise, go with a cash wedge and then put your money into stocks/equity ETFs or even a balanced fund like VBAL, HBAL, etc.

Coming out of this pandemic, as slow as it may be, may be the biggest recovery since WWII. I suspect bonds are not the place to be for wealth building but I could be wrong.

Your house is an asset class unto itself. It's not a bond for sure. It's also not a stock IMO.
 

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You say dont buy bonds... buy a balanced fund. That is confusing since 40% of the balanced fund is a medium duration bond....
 

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Well... I think... At the moment, one doesn't buy bonds as an investment for performance, but one may buy bonds as part of a strategy with this uncorrelated asset class providing stability and reducing the volatility.
 

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I'd like to hear everyone's thoughts on how their primary residence figures (or not) into their portfolio. I'm not talking about investment RE here, just the house you live in. I think we had a thread which touched this topic at some point but I can't find it.

I've never considered mine much at all. It's just a place to live and I figure I will keep needing a place to live. It helps that RE prices are somewhat less insane here.

But the problem I now have is that with the recent inflation of stocks, I find myself looking at my portfolio and needing to throw a good sum of money at bond ETFs, with a current yield to maturity slightly below 2%. On the other hand, I have a 2% mortgage which I can make extra payments on. Which seems to me roughly similar to buying a bond, with zero risk.

Even better, because I'm paying the mortgage with after tax money, I would need bonds close to 4% to get a similar after tax return.

Am I looking at this the wrong way? I think it would make more sense to put the money on the mortgage and consider the overpayment as a fixed income part of my portfolio. I would effectively get the "yield" at the end of my mortage, because it would stop sooner.

The odds of needing the money back before then are very low but it is supposed to be available (it's going to a BMO mortgage cash account). I do have some RRSP room but I'm not sure I should consider it in my choice as I can make use of it for other investments instead.

But this gets me thinking: should I just consider the entire equity of the house (or maybe 80%) as a fixed income part of my portfolio? It should at least roughly keep up with inflation, after all. Mortgage interest on the whole amount, not what I'm actually paying, would be like rent for budgeting purposes. Meaning once the house is paid off, I'm effectively paying rent into my investment portfolio. Except that unlike having $(house value) in bonds generating the rent money used for an actual apartment, the whole thing is tax free.

Thoughts?
Your thinking is close to my own with a couple of tweaks.
1. Principle residence is a cost, lifestyle choice. Need to live somewhere. It has a budget and expected utility in terms of how we want to live comfortably.
2. Mortgage. Yes, that's exactly how I see it. Servicing it comes from after tax income / cash flow. It is liability on one's balance sheet that is the mirror image of a GIC with monthly amortizing payments. Not much point owning a GIC at a lower rate, save for the flexibility to invest the cash elsewhere on maturity.
3. "Include principal residence equity value in portfolio value?" It's an asset for the heirs to our estate, but until then running it is a cost of living. Tempting to recognize the equity value in net worth, especially as it runs up. But to what end? Not going to change how we allocate investments and we are not planning to move so it's not something we can realize on.
 

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Discussion Starter · #9 ·
1. Principle residence is a cost, lifestyle choice. Need to live somewhere. It has a budget and expected utility in terms of how we want to live comfortably.
Yes, it's definitely an expense too. I guess what I'm trying to do is decouple the capital value from the ongoing costs of maintenance, insurance, mortgage interest, and the equity that's just sitting there.
3. "Include principal residence equity value in portfolio value?" It's an asset for the heirs to our estate, but until then running it is a cost of living. Tempting to recognize the equity value in net worth, especially as it runs up. But to what end? Not going to change how we allocate investments and we are not planning to move so it's not something we can realize on.
My goal is precisely to allocate investments differently. Especially while I have an ongoing mortgage, the money can go to either the mortgage or the bond part of my portfolio. The liquidity aspect is less of an issue too. That will of course change one the mortgage is paid off, I retire, and can no longer pull money out of the house as easily.

Thanks to everyone else for your comments too. And yes, the bond part is obviously not for stellar returns right now. It's to lower volatility and let me sleep well.
 

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Yes, it's definitely an expense too. I guess what I'm trying to do is decouple the capital value from the ongoing costs of maintenance, insurance, mortgage interest, and the equity that's just sitting there.

My goal is precisely to allocate investments differently. Especially while I have an ongoing mortgage, the money can go to either the mortgage or the bond part of my portfolio. The liquidity aspect is less of an issue too. That will of course change one the mortgage is paid off, I retire, and can no longer pull money out of the house as easily.

Thanks to everyone else for your comments too. And yes, the bond part is obviously not for stellar returns right now. It's to lower volatility and let me sleep well.
Re read your initial question and this post. I believe what you are driving at is to think of the house asset as having a notional rent revenue stream? Factoring this asset into an overall asset allocation along with equities and fixed income? Never thought of it that way but if that's the case then ultimately what is required is a forecast of expected returns for the house asset. Maybe look at your annual expenses (not including mortgage or discretionary renovations) to operate the house and compare with an assessment of what it could be rented for? If that notional rent exceeds op cost then there is notional net operating income. The cap rate is approximated here by market value divided by net operating income so that can give us a rough idea of what the asset's return is, before taking into account the mortgage to get to your net return which is expected return.

Just my noodling. Hope it helps.
 

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Discussion Starter · #11 ·
I believe what you are driving at is to think of the house asset as having a notional rent revenue stream? Factoring this asset into an overall asset allocation along with equities and fixed income?
Yes, I think that's a great way to put it. Fast forward to when the house is paid off, having a large chunk of equity sitting there is equivalent to having fixed income providing part of my rent money. If I don't consider this, my portfolio will be significantly overweight in fixed income.

Or looking at it a slightly different way: if I were to sell the house and invest the capital to provide rent money, I wouldn't have 100% of it in fixed income without considering the effect on the entire portfolio.
Maybe look at your annual expenses (not including mortgage or discretionary renovations) to operate the house and compare with an assessment of what it could be rented for? If that notional rent exceeds op cost then there is notional net operating income.
Thanks for the suggestion. It should be interesting to figure out all the right numbers.
 
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