The definitive answer to paying down your mortgage or investing

The definitive answer to paying down your mortgage or investing

Should you be paying down your mortgage or investing?

In a perfect world, we would all have enough cashflow to pay down our mortgage aggressively AND invest for our future financial selves in abundance.

The reality is, most of us need to make some very tough choices on where our money goes.

If you’re like me, you probably dream a little about paying off the mortgage on your home/condo.  In our case, that would free up about ~$1,600 per month in cashflow or $19,200 per year in after-tax money.

This is not a trivial sum of money.

Home June 8, 2019

(Our former home.)

Imagine what we could do with that cash?  Invest more is certainly one option.  Work less might be another.  Regardless of the dreamy option, I believe the less you need to pay others, the more money you can keep or utilize yourself.  This makes one of our big financial goals (becoming debt-free in a few years) essential for our long-term financial health.

Investing time is on your side

While long-term debt obligations increase risk to your financial health, investing early and often has the potential to create tremendous wealth. 

Using some simple calculators on my Helpful Sites page, all FREE stuff by the way, you can see that there is tremendous power in establishing a disciplined investing plan sooner than later.

Example 1:  A 25-year-old who aspires to retire at age 65, starts with an initial deposit of $1,000, and automates $500 per month towards her Tax Free Savings Account (TFSA) without fail for decades on end.

25-year-old $500 per month

Example 2:  A 40-year-old who also aspires to retire at age 65, starts with an initial deposit of $1,000, and automates $1,000 per month towards his Tax Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) to play catch-up, cannot come close to the 25-year-old wealth even if they doubled their savings.

https://www.myownadvisor.ca/wp-content/uploads/2019/10/40-year-old-1000-per-month.jpg

So, on one hand, you focus on the mortgage, you pay it off and invest later. 

On the other hand, you could focus on investing while killing mortgage debt more gradually.

What should you do?

Before I give you my definitive answer on this subject, let’s look at some pros and cons for this decision.

Pay off the mortgage, first

Pros:

  • Save money. By paying down your mortgage early, you will save thousands of dollars in interest costs.  Certainly the higher the borrowing costs, the greater your potential savings will be the faster you pay down this debt. 

Using my very own numbers for the last house we owned, before we moved to this downsized condo, we took on a whopping $363,000 mortgage.  (Yes, my personal finance heart nearly stopped when I signed that paperwork.)  Assuming we stayed there in the former home, and continued to pay down our debt using an average borrowing cost of 2.97% (over the years we lived in that home); with a few more assumptions in mind I calculated our total borrowing costs would be close to $500k to own that home.  That includes paying off over $130,000 in interest.

MOA Mortgage Interest

Calculator courtesy of Mortgage Intelligence (no affiliation).

  • A guaranteed rate of return. Based on my own case study above, you can likely see that paying off my mortgage sooner than later would yield some significant savings – a guaranteed rate of return.  Meaning, over a 22-year plus mortgage payment schedule, the savings in mortgage interest would be greater than what I would earn in some lower-risk investments.

Over the decades of being a homeowner for a couple of homes, when it comes to mortgage debt, I would encourage others to use these primary methods to reduce your total borrowing costs:

  1. Use a mortgage broker to find a very competitive mortgage rate and terms for your situation.
  2. Enroll in bi-weekly, accelerated payments to increase the mortgage payment frequency.
  3. Reduce your mortgage amortization period over time (i.e., I tend to start with 20-years; I reduce to 15-years after my first mortgage term (5-years in this example) is up).
  4. Make a few lump-sum payments early in the mortgage payment schedule to put down more against the outstanding principal owed.

When it comes to paying off your mortgage, the goal is rather simple: 

the lower the amount borrowed + the more frequent the payments = the less interest you’ll pay.

  • Debt freedom. Another reason to pay off your mortgage debt before investing, is it will provide financial flexibility.  Monies formerly funneled to paying someone else first (i.e., the bank) will now go to you.  

As we have seen above, tens of thousands of dollars may be charged in interest costs on your mortgage.  Once your mortgage debt is gone, that cashflow can be allocated to your retirement savings, your child’s post-secondary education, or simply invested in you.

When not to pay off the mortgage, first

I believe there are several reasons not to pay off your mortgage aggressively, and instead, consider an investing first/balanced approach to managing debt and investing.

  • When borrowing costs are cheap. Unless you’ve been living under a rock for the last decade, you’ll know that mortgage costs (borrowing costs in general) are historically-speaking cheapWhile I believe it’s prudent to pay down debt in any interest rate environment, one could argue that there is no urgency to kill debt when borrowing costs are so low.  Use that money to invest, instead.
  • Long-term investments should outperform low-interest rate mortgage payments. Related to my point above, by maintaining your minimum mortgage payments, and putting your extra funds into long-term equity investments, chances are you will come out ahead with investing.  Although past performance is never a perfect indicator of any future results, a diversified mix of investments over a 20-25 year investment time horizon (approximately the same period as your mortgage amortization) should deliver close to 8% return. This would be by far and away more money earned than any amount you’d save in interest charges by paying off the mortgage early – all things being equal.

Vanguard Growth ModelsThe bottom line – if you expect the rate of return on your investments to be consistently higher than your mortgage interest rate over the life of your mortgage, you will have more money by paying the minimum amount on your mortgage, and investing the difference inside your TFSA or RRSP.

  • Diversification.  While owning real estate and your home, or multiple properties for that matter might be fine and good, I would encourage investors to consider diversification as part of wealth-building.  Diversification, in a nutshell, can bring higher potential returns for less investment risk.  Said other way, consider diversification like a healthy diet.  While eating a variety of healthy, diverse foods over time won’t guarantee your body will be healthy, doing so will increase the probability you will be healthier all things being equal.

Having an investment portfolio that extends beyond real estate, will allow you to participate in growth opportunities that are not tied to that sector.  While potentially very nice, your home is an isolated asset in a tiny part of a global investment world.  If for whatever reason something happens to your localized asset, I believe it would be smart to invest in other assets around the world.

  • Liquidity. Have you ever tried to sell a home in a few days, AND move out?  I wouldn’t bet on doing that successfully.  By having your assets invested beyond your primary residence, you will have more liquidity should you need the money for something.

In our case, we aspire to keep our cash emergency fund at this level.  Other than for a few months now and then over the years, we’ve done that.

With all your money siphoned to your mortgage, not in any cash savings let alone in long-term investments, a sudden job loss, health issue or major capital expense could leave you in a financial crisis. The ability to sell investments assets or better still, draw on cash savings for any emergency without borrowing more money for it, is a very liquid and healthy proposition.

  • Tax advantages. Unlike the U.S. where upon fulfilling a few simple requirements, you can deduct mortgage interest costs, in Canada this cannot be readily done.  (There is of course the Smith Manoeuvre which you can read about here.)  In some cases, depending upon your tax situation, I believe paying off your mortgage should be a low priority.
  1. You are self-employed or run a small business. A portion of your mortgage interest will be tax-deductible to reduce your taxes payable.
  2. If you own an investment property or multiple investment properties. Those investment properties also have tax deductions that may be applied against them.
  3. Making an RRSP contribution is a method to reduce your taxes owning. While you should know that always reinvesting the RRSP-generated refund is the linchpin any RRSP vs. TFSA investment debate, contributions to your RRSP offer two great benefits a) you can reduce taxes payable today and b) you can participate in long-term tax-deferred growth as long as investments stay inside this account.

Is it really one or the other, paying down your mortgage OR investing?

Ultimately you are the only person that can decide if paying down your mortgage is the best risk-adjusted return you can make, over other forms of investing.

Personally, when it comes to our financial playbook, I’ve pursued the following:

  • When our mortgage balance was initially high (years ago at $363k), we paid down mortgage debt more aggressively.
  • When our mortgage balance became more modest a few years ago (<$250,000), we increased contributions to our RRSPs – until the point mine was maxed out of contribution room consistently every year. (My wife still has some RRSP contribution room left.  We hope to max her account out in 2020.)
  • Now that our mortgage remains at an acceptable-level, for us, we will continue to strive and max out our TFSAs every year – first, and continue to invest in our RRSPs to the point they are also maxed out of contribution room until semi-retirement.

I don’t subscribe to any definitive answer on this subject for everyone. 

Instead, my definitive answer for you is:  “it depends”.

It depends for you because your decision should be goal-based and personal.

Do you desire to be debt free sooner than later?  Regardless of opportunity costs?

Do you dream of financial independence, travelling the world?  Debt and mortgage free will help you accomplish that.

Do you aspire to have “money in the bank”; you’re comfortable with your debt load even like some retirees are (who have a mortgage) in retirement?

Only you know your answers.

That said, if part of your financial plan is to diligently invest money inside your registered accounts for many years, if not decades on end, then I believe it usually makes sense to slowly pay off your mortgage while you invest at the same time. In doing so, you’ll reduce your debt burden while feeling much more confident about your long-term financial future self.

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Happy investing and thanks for reading.

Mark

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, we're inching closer to our ultimate goal - owning a 7-figure investment portfolio for semi-retirement. We're almost there! Subscribe and join the journey. Learn how I'm getting there and how you can get there too!

41 Responses to "The definitive answer to paying down your mortgage or investing"

  1. Hello Mark,
    Happy thanksgiving for you and for everyone here !
    Thank you for your detailed article i really enjoyed reading and it answered a lot of the questions that i had.
    like i told you in the e-mail that the rent from my old place covers 80% of the mortgage and when i took the mortgage for the new place i took a 30 year amortization just to keep payments low in case things go wrong like losing my job or health issues but then i increased the by-weekly payments enough to cut it down to 15 years so in my own thinking like a backup plan 🙂
    after reading your article i believe i will continue doing both paying extra and investing the same amount i’m doing right now because for myself i’m considering the TFSA investment as an emergency fund for my mortgage in case something happened i can always put down a big lump sum of money on my mortgage .
    yeah it’s been so confusing for me because before in my young years i never thought of investing so all my money went toward investing in real estate and paying off mortgages in few years but now it’s different and i completely get your point of diversification beyond real estate and here i would like to ask if you can consider your real estate as part of your bonds ? i know i read that somewhere 🙂
    Mark thanks for your time specially on a long weekend and a thanksgiving weekend i know i have a lot of things to be thankful for my family my health the beautiful country that i live in and the good people like you Mark and a lot of your readers that dedicate their time to help novice investors like myself 🙂

    Reply
    1. Most welcome Gus. I appreciate everyone’s readership.

      Ultimately you have your own decisions to make but as I outlined in my article, we enjoy taking a balanced approach – that means killing some debt and striving to max out our accounts (TFSAs and RRSPs) now. We believe diversification beyond Canada’s hot real estate market is a good thing. I think such thinking and reflection would be good for other investors too! My bias.

      I don’t consider real estate very bond-like at all given it does not behave like fixed income, although I can see how folks might want to lean that way.

      Sounds like you have much to be thankful for. As do I. All the best and see you in the comments section again soon and often!

      Reply
      1. Thank you Mark,
        i know i’m guilty when it comes to the lack of diversification but i guess when i started to learn about the benefit and power of investing i was up to my ears in real estate 🙂 but you know what no regrets because it worked out great for us , our mortgage is 460k but we’ve got 1.3 mil in equity in old properties so we’re kind of comfortable with it not to forget that current property value is up by over 200k .
        sometimes i really don’t know what’s right and what’s wrong i just enjoy the ride, work enjoy life and family invest and most of all take vacations to reset and re energize 🙂

        Reply
        1. Gus, I’m guilty of many financial mistakes. But I learn from all of them. I hope to be better for it over time.

          I’m slowly increasing my U.S. diversification with every passing year.

          Back to you, with that much equity that’s great. Just something to be mindful of re: real estate vs. other assets. Who knows what the future holds!?

          All the best and continued success to enjoy your ride.
          Mark

          Reply
  2. Hi Mark,
    I’ve been reading your blog for quite some time and really enjoy it. Great article. My spouse and I (we are in our early 50s), have gone back and forth many times on whether to focus paying off the mortgage first and then investing. We settled on making biweekly mortgage payments while focusing on maxing out RRSP and TFSA accounts. Last spring we completed maxing out both, and it felt great.
    We then set our attention on throwing all extra money on our mortgage. Over the years, we have regularly evaluated our investment returns (TFSA and non-registered) and determined whether it was worth it or not to sell them and pay off the mortgage. It was more beneficial to invest than pay off the mortgage given low mortgage rates.

    Last October, we looked at the pitiful market returns, and decided we wanted to be debt free and we did just that – cashed out our TFSAs and a few Non-registered investments and became mortgage free. For us, it was the right decision. There is nothing like waking up every morning knowing you don’t owe anyone anything! The next thing we did was immediately begin saving up to replenish our TFSAs which we began contributing to again in January 2019. We will have them maxed out again by Q2 2020.

    Reply
    1. Love the readership Marc!

      I’ve always believed it’s been more beneficial to invest vs. pay off debt but I also threw more money into the mortgage years ago since our debt-load was uncomfortably high for me ($363k). That was a bundle…

      Cashed out TFSAs?! Bold move but you know what, you did what you thought was best for your well-being. Now, you wake up, and you’re debt free. I have no doubt we’ll enjoy that freedom at some point too 🙂

      Good on you to get after maxing out the TFSAs in the coming year or so. What a gift of an account! Keep me posted on your progress. I hope to have a TFSA update later this year and will have a few in 2020 as well.

      Mark

      Reply
  3. Being late starters for investing or saving for retirement, we concentrated on paying off our mortgage before all else. Debt was a dirty word and I certainly don’t regret paying off our debt as fast as possible. What we didn’t do was immediately start saving an equivalent amount or more towards our retirement.
    So, I think it’s great to discuss the issue and try to recognize which might offer you the best advantage. Even better is recognizing that both should be a priority. Anyone who does will be in great shape later in life.

    Reply
    1. Absolutely cannew – if folks can get after both (aggressive mortgage paydowns AND maxing out investment accounts) at the same time, that’s ideal but I suspect most Canadians must choose extra mortgage payments/killing debt sooner than later vs. investing a bit.

      Great to have this conversation of course. Makes for learning from others.

      Reply
  4. Great overview Mark.

    Those are some big debt numbers. There certainly are numerous considerations for this choice and I would agree “it depends” is the right answer.

    My first home in 1985 had a ~$50k mortgage over 20 yrs @ ~11.5%. My second home in 1989 had a 90k mortgage @ ~9.5% over 10 yrs which we aggresively attacked shortening that to less than 6 yrs celebrating the final debt in our lives. The decision to be bold with paying off debt was much easier then, and our savings/investing was maxxing our RRSPs.

    Thanks Gus and same to you. I think you’re way past novice investor.

    Reply
    1. Rbull,
      i was in the same situation in 1989 with almost 10% interest rate , being a 19yo and making double payments and 15% at the year end shortened the mortgage to about 5 years or so and it felt so good 🙂 that’s why at 24 i was able to get married with a paid off home and no debt 🙂
      nothing comes easy that’s what i keep telling my kids but i hope they’ll do it better then me invest in their education first then in the market , i barely finished high school but i had to work physically hard in order to relax a bit now .
      Rbull thanks for the promotion from a novice investor to a probationer investor , i still have a lot to learn from you guys and i love it 🙂

      Reply
      1. Great story Gus. You’ve done extremely well for yourself. In 1989 I had just turned 30, gotten engaged, taken on more debt with the building of our new home. But there was now 2 incomes, and I had also sold a rental property to help finance the new much bigger place. The rental cash flowed nicely but I really don’t like debt. We moved in a couple of weeks after the wedding. Paid home off at age 35. A lot less impressive than your age 24! But I was also investing since about age 22.

        Ha, its not my place to give the promotions but my opinion is you’re well on your way to being a saavy investor, as well as already being a saavy real estate investor.

        Reply
        1. wow so impressive Rbull investing @ 22 🙂 i invested my first 5k in GIC when i was 18 or 19 and then forgot about it for years , i just stopped contributing and completely got focused on mortgages .
          at the end of the day i believe that stock market mortgage gold GIC anything can go as long as you save a bit and not waste all your hard working $$$ dollars on silly things. i know i have a lot of coworkers who are in their 50’s and live pay cheque to pay cheque.

          Reply
          1. Yep, the basics. Spend less than you make, save, invest in different ways as desired and a lot more people would be actually be writing their own successful financial journey and destiny.

    2. Yes, we did take on some considerable debt and I thought for this post it would be good to share real numbers with folks.

      Our debt is nowhere near that number now (thank goodness – we’ve worked hard to kill it off) but I don’t think it’s uncommon for 30- and 40-somethings who live in our major cities in Canada to have mortgage debt into the $300k, $400k or even north of that, $500k+ range. If a house costs $700k+ in the city, I would find it very hard to believe my cohort would always have more than $200-$300k to put down as a downpayment, generally speaking, as they try and raise a family and their dollars compete with other needs.

      I could be wrong though. Maybe people are richer than I think! 🙂

      Reply
      1. I think it’s great you shared that. Makes it so much more real. That’s why I put my numbers too. Awesome your debt is much less and portfolio substantial too.

        Ya, I get that. But I note the focus is nearly always on the more expensive places for real estate. Not all cities 700k. Crazy expensive! I had equivalent of about 250k for down payment as single person age 30. Maybe unusual? If I had to take on more debt than what I did would have stayed in my smaller house until had more saved etc.
        Looking back am happy with balance between investing and debt we had. Could have much less in houses over the years, more $$$ but all good. Decisions on debt repay or invest now different, with rates, home prices bigger considerations. Fortunately we were able to do both from early on.

        Reply
        1. We could pay off our mortgage with our non-reg. assets tomorrow if we wanted, but I’m choosing not to do that. I hope that the non-reg. portfolio will continue to grow over time.

          I think it would be very unusual for any early 30-something to have $250k saved up for a down payment today. I could be wrong, but that’s not “normal” for today. Most 20-somethings I know or read about have some student debt. So, to have $250k saved, in cash, ready for a home purchase is very unlikely for most.

          When the income to home affordability ratio was much higher, homes were more therefore affordable. Not today as you well know.

          Houses in my (new) area of Ottawa are selling north of $700k and ones that are fixed up are close to or over $1M. Down the street, there are a few places close to the Rideau Canal getting >$2 M for sales.

          Quite crazy actually.

          We could have spent less on the condo, but my wife really wanted this condo (and I did as well), and we were willing to work more to pay it off.

          Once our mortgage debt is gone I suspect a world of options will open up for us. At some point I will share our mortgage debt and highlight the countdown is on; what we are doing about that to get rid of it.

          At the end of the day, it is all about balance and finding your own.

          Reply
          1. I think that’s a good decision in your case. I chose differently as we upgraded twice more. Just cashed unregistered/savings and paid it out. I could see our savings were well on track, mortgage rates were higher then and the debt free peace of mind for us was priceless. That gave us huge options when I had a career crisis.

            Could be right about the $250K. I guess it probably isn’t “normal” regardless of now or then. I managed to swing a very high paying job (for the time) in my early 20’s, had no education debt, made some money from a rental property and from my first house at age 26, so combination of saving and investing for a bigger down stroke. I was also frugal, and paying room and board for a time and then lived in crap holes for several years.

            I wont bother putting down price info etc here but its likely about 60-67% of your area, but location has huge impact.

            Your options without debt will be incredible. Your discretionary cash flow for lifestyle or further savings as needed awesome.

          2. House cost 183K in ’89. Sold it it ’02 for 231K. Now worth approx 450K. Mortgage in ’89 = 90K plus my down of 93K. I estimated that is equivalent to $250K today. Didn’t do any serious calculating. Maybe more or less??

            Purchased all ~1984/1985 Sold first home, 2 unit rental property (no money down 2 mortgages), 1 other building lot = approx net from initial purchase 33K as best I can estimate/recall
            My employment income approx : 1984 34K, 1985 44K, kept rising nicely. Saved approx avg 8K/yr x 5 yrs, plus RRSPs 6-7k or so
            My earlier statement did not include that my wife brought ~20K savings into marriage at exactly that time.
            33K+40K+20K=93

            Anyhow that’s roughly how it was done in our case. Hope that helps explain. Making a much smaller down payment and continued investing instead in the markets would have yielded far greater financial results for us. Real estate does not appreciate the same way here. Hindsight. No regret. We’re in a good place. Tomorrow we pull out of here for Europe.

            Yes, wild. Something has to give. Could be ugly.

          3. Thanks for sharing. The reality is, you gotta live somewhere – whether that’s a high cost of living location or lower. The latter is better as long as there are services and amenities you need and use.

            That brings me to a side note. As nice as Vancouver is, if I owned a home there free and clear (worth $3M +) I would be gone in a heartbeat.

            It will be interesting to see where prices go here in Ottawa. Our new condo building has one unit left going for $772k. On the 2nd floor. Nice unit overall but smaller balcony. 1552 sq. ft. ~$500/sq. ft.
            http://www.cornersonmain.ca/admin/uploads/file/2019-16-04-tcom-phase-2-hopewell-only.pdf

            We’ll see where prices go but I don’t see them ever going down where I live now. They may flatline at best as long as interest rates remain low.

            Mark

          4. You’re welcome.

            For sure. I pay little attention to real estate prices. Whatever we get out of this place when we need to move hopefully will just help with either rental or care costs.

            You’re probably right. Somehow I’m less sure of real estate in heated markets staying where it is. I’ve been around around long enough to see differently. Over time its near certain they will rise. When we see recession, with excessive consumer and govt debt/deficits along with already extreme stimulative interest rates there will be pain. Markets normally adjust and there is much global data showing Canada (partcularly some markets) are way overheated. We’re well overdue. Goosing real estate by making it easier for people to buy now is crazy IMHO. Hopefully I will be wrong about the pain.

            Yes, if I was in a place like Vancouver I would leave with $$$$. What we have here might be many millions there.

            Well we’re off soon.

          5. The correction in RE will happen, I just don’t how much nor when.

            In Ottawa, it’s a bit of a bubble. Always has been. Slow and steady increases over time but no real crash. Time will tell of course if history remains!

            I’ve never been a fan of low rates nor government incentives for home ownership. They should stay out of that business. Focus on education and healthcare. Nix the other boutique programs and save billions in the process.

            Vancouver is very nice but Ottawa has a lot to offer as well. We are very fortunate to live and work here.

            Enjoy your voyages!!

          6. Well said. I agree. Ottawa is nice, Vancouver is and so is Halifax.

            On real estate here it’s pretty much a slow steady small climb. We don’t get booms or busts it seems.

            Near ready to board. Thanks.

  5. This is such a common question in the personal finance realm. Personally when we bought our first home we aggressive attacked the mortgage and was able to pay it off in less than 5 years. Although it may not have been the most effective strategy with our money it was a very personal decision and one we didn’t regret.

    Once our mortgage was paid off it felt like we were printing money every month. We used all that “extra” money to top up our RRSP’s and to invest in rental properties.

    Recently we moved to a new home and now have a mortgage again. My first instinct is to aggressively pay it off again so that we don’t have that monthly payment. Although when I think about it and consider other options I’m not sure. We will have to crunch the numbers some more to decide what we are going to do. For now we will just keep saving while we consider our options.

    Thanks for giving me more to think about.

    Reply
    1. I have nothing but respect for people that put mortgage payments over investing. It means they strive to have the piece of mind of being debt-free sooner than later. Investing can always occur “later” after the debt is gone.

      What I’ve learned though, is, when we look at the math, there is tremendous power in compounding money; time in the market/investing should yield considerable wealth as compared to paying down a 3% or 4% mortgage, all other things being equal.

      Only you know what is best for you but looking back, I’m glad we’ve done a bit of both.

      Reply
  6. Based on taxes and average rates of return the most logical order is:
    If you make over 80,000 – RRSP, TFSA, Mortgage, then Unregistered Account
    If you make less than 80,000 – TFSA, RRSP, Mortgage, then Unregistered. RRSP and Mortgage can be swapped in this scenario based on how much under 80k is made or current interest rates. Either one is very close over the long run.

    Reply
    1. In terms of investing, to keep things simple, I would always suggest contributing to your TFSA first. If you max that out, great!

      Then if you make good money, there is likely a chance that you can contribute to your RRSP – strive to max that out.

      In any event, paying down debt and investing is a good thing. Whether it’s RRSP or TFSA or mortgage or any combination – as always, “it depends”.

      Thanks for your readership Brett.
      Mark

      Reply
      1. Mark , i think i’m going this path too contributing to TFSA first , the thing is i just opened my TFSA this past year and i got ton of room , before that it was all into my RRSP and the wife , but since i started learning about the benefits of TFSA i realized that it makes more sense for us to do so , I’m worried that once i retire and with two rental properties that counts as income my OAS will be hit hard so yeah i’m trying to maximize my yearly TFSA contributions and at the same time taking advantage of my employer’s matching RRSP wich i love ( free money who says no to that 🙂 , so yeah trying to balance between both RRSP and TFSA .

        Reply
        1. For what it’s worth – I definitely see the use of the TFSA as a great tax-free retirement account. Some folks don’t see it the same way but when I think about getting dividend income, soon to be $1,000 per month in the coming year or so tax-free, that’s pretty awesome.

          RRSP = great tax-deferred account for higher-income earners.
          TFSA = great tax-free account for everyone.

          Cheers!

          Reply
  7. Another great article Mark.
    I appreciate that you don’t tell people “this is what you should do”. Personal Finance is personal and we all travel a different path. Diversifying beyond housing is incredibly important. Even if you put small amounts away at a young age into TFSA and RRSP, it will pay off. I have always looked at mortgages as forced savings. Currently 65% of each payment comes back to me as equity in the house which I can use in the future. The house is an asset that stores money that I can use, but I don’t rely on it as my only only source of potential income. If you have a paid for house that’s wonderful, you have now created options for yourself. Borrowing against the house to invest for example.
    Hope everyone had an amazing Thanksgiving weekend.

    Reply
    1. Thanks Gruff.

      I know my wife and I believe in diversification beyond RE (real estate). Still others, including some very successful U.S. bloggers and podcasters, have done very well with RE over the years. To each their own I guess.

      I also look at my mortgage as a forced form of saving but I’m changed my mind a bit in recent years since our debt-load is more manageable (now) and we’ve since diverted more dollars to my wife’s RRSP to try and max that out in 2020. It’s been many years in the making to realize that.

      In speaking to my wife this weekend about all things early retirement, I know we’d be financial independent now if we rented vs. sought to own this condo but home ownership was (and remains) important to us for a few reasons.

      I think for those who have no debt, no mortgage in particular and own their home (but also have some money in the bank) it must be an incredibly liberating feeling…I hope to get there!

      Reply
  8. We’ve recently moved to a hybrid strategy – we’ve moved 1/2 our mortgage as a non-arms length mortgage inside our RRSPs (paying ourselves 5.79% interest) and are aggressively tackling the second half as a HELOC at 3.2%. We hope to be essentially mortgage free in five years when we don’t count the RRSP portion. The RRSP portion is essentially a fixed income product (generating ~5% after fees) and moves a steady monthly return into our RRSPs which doesn’t impact contribution room and which we invest regularly back into the market. I’m looking forward to feeling mortgage free though we will still have a cash flow requirement to continue paying off the RRSP portion for years to come.

    Reply
    1. Interesting call on the mortgage inside RRSP. Those are usually much higher borrowing costs. More details on the strategy?

      Less diversification (of using RRSP for other assets) vs. your real estate/home/mortgage is another drawback.

      Finally, there is the opportunity cost. Long-term, equities should earn at least 6-7% after fees are accounted for.

      I would be curious as to the reasoning. This product always seems like a great deal for the lender!

      Cheers,
      Mark

      Reply
  9. We’ve just bought a new house last week and will be renting out our current mortgage-free home (huge demand for rentals in our city that is a bit unprecedented elsewhere). However, we do have investing outside of real estate with regular contributions at 20-25% of our income. For the time being, we will be slightly aggressive with paying down the mortgage for the first 5 years to bring it down to our comfort level due to the nature of my SO’s job (he was laid off in 2008 and was almost laid off in 2012) so we do need to keep debt lower than what most people will do. The house rental will actually pay for our new mortgage so we have that going for us. After that, we’ll boost our investment savings a bit more. You’re right in that needs will change over time and need to factor in all aspects.

    Reply
  10. Thanks Mark,

    Appreciated as always, enjoy reading the comments there is always something to learn from the experience and perspective of others.

    We prioritise investing over mortgage courtesy of our ridiculously low rate (that was luck not skill). That said we do pay biweekly and have increased our payments over time. I feel we are “ahead” but our renewal is coming up in the spring so depending on our new rate we might pay down more and switch focus. It is good to have options and flexibility so our decisions can change based on our circumstances. I personally feel you should work both sides all the time and try to make the best use of every dollar you spend. My first world finance problem of the week is to decide if I put money in one of my favourite dividend stocks on a little dip now or keep saving up for a possible lump sum payment.

    I do not see our house as an investment I do not associate worth to it in the traditional sense. If you believe our assessment it’s worth shy of 500K (we paid 225K back in the day I’d say it’s fair value is 350K) but that’s all funny money and IMO driven by a false dogma given that to many folks can no longer afford a home in this country. I find this both interesting and disturbing have a look at https://www.gensqueeze.ca . Call it a bubble or call it what you like but the outcome will unlikely be good. The main reason I seek ownership is that I want to have stability plus some control over my cost of living I also do like to paint my rooms in any colour I like (vs. renting).

    Reply
    1. Thanks Ben-R.

      I think while debt control is very important (I mean, you still owe money if you don’t have a job…) investing is very important at a young age, even some.

      With our almost stupid low borrowing rates, while it might make you a genius to borrow excessive amounts of money, you can get into trouble very quickly by paying other people first.

      Your “first world finance problem of the week” is an excellent one to have.

      re: house as an investment – I absolutely see it as one but it’s not liquid, it demands expenses to maintain it’s value, and it’s very geo-centric. I prefer to diversify away from real estate over time. Working on that.

      Congrats on your ownership plans and investing discipline. I suspect it’s going to serve you very well in time!
      Mark

      Reply
  11. Yes, this is a great debate and very personal. I think we all would like to have less debt. But investing for retirement should be a priority as compounding is so powerful.
    But Mark, your calculation over 40 years in example one should get you well over 2,000,000. when you invest in dividend paying stocks that increase their dividends every year, and you re-invest all, and capital appreciation, that compounds to over 2M.

    Reply
    1. I was just on your site – well done 🙂

      Investment compounding is absolutely incredible. We’ve made mistakes over the years but we’re getting better with time in our mid-40s now.

      $2 M would be nice for sure. I will stop working full-time if we get there me thinks!

      Best wishes and stay in touch,
      Mark

      Reply

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