Weekend Reading – Is paying off your mortgage a mistake?
Higher house prices in many cities across Canada (and in the U.S.), combined with rock-bottom rates, have decreased the urgency when it comes to answering one of the oldest personal finance questions around:
Should you invest or pay off your mortgage?
Is paying off your mortgage a mistake?
I wrote about my answer to these questions here: here is the definitive answer to paying off your mortgage or investing instead.
The definitive answer to paying down your mortgage or investing
Anyone with a McMansion and super-sized mortgage to go with it, in some shape or form, is likely going to benefit from having less debt. Debt, based on my personal experience alone, can be stressful and time consuming – there are simply more obligations to keep track of.
My thesis is: debt must be managed.
Meaning, even with leveraged investing there is no issue with taking on some debt as long as you are somewhat solvent – you could pay off debt in a reasonable timeframe if you really had to.
Over the years, although we have and continue to make some lump sum mortgage payments, I’ve decided to prioritize investing while paying down my mortgage. I’ve followed this formula for a few reasons, and will keep doing so, until the mortgage is done. Here are my priorities when it comes to investing that might apply to you:
1. Max out contributions to my TFSA over my RRSP. I prefer this approach since I believe the Tax-Free Savings Account (TFSA) is a gift of an account all adult Canadians can and should benefit from. Where else are you going to get tax-free income and wealth-building, as long as your money stays in the account??
Don’t get me wrong. The RRSP is an outstanding account to use for any retirement planning. Just remember if you decide to focus on your RRSP to save for retirement, which is great, then you need to manage the RRSP-generated tax refund well – it’s the linchpin in any RRSP vs. TFSA debate.
2. Maximize contributions to our RRSPs. After any TFSA contributions are made, the contributions to the RRSP come next. I have a bias to put U.S. assets in my RRSP for a few reasons – I believe most investors in Canada should consider the same.
Read on: Low-cost ETFs for the U.S. market.
3. Live my life. Some investors will keep going, filling up their RESPs (makes sense) or even their taxable accounts. That’s more than fine. For the most part now, I simply don’t invest in my taxable account any longer. Once contributions to both TFSAs and RRSPs are done, I live my life. I don’t really take on additional savings or think about savings. I save any money leftover for future travel, we try and enjoy some short getaways in our area, we support the local economy by shopping and dining-out local, I go to more sporting events, and we spend money as we please. I’m at the age now in my 40s whereby because I’ve prioritized investing over paying off my mortgage, for a few decades, my money is actually working very hard and compounding away at a rate I can actually see it.
“Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.”―
The ol’ adage to save early, save often has literally paid me dividends. Something you can read much more about here on this dedicated Dividends page but my highlights are below:
Is paying off your mortgage a mistake?
Heck no….yet….while your mortgage pays itself through disciplined payment obligations over the years, wealth-building beyond your real estate will never happen unless you choose to take more meaningful action. I think investing AND mortgage payments are actually the priority. There is no debate. Maybe your mileage may vary.
Weekend Reading
Rob Carrick, on a similar theme, answered a reader question this week when they asked: “now what?” – since they have already invested inside their TFSAs, RRSPs, and RESPs.
His answer (subscribers only) made reference to the following including a cool tax tool:
“A suggestion for a next investing step: Open a non-registered investment account and then stock it, as much as is practical, with investments with tax advantages. There’s a handy little tool to find out whether dividends or capital gains will get the lighter tax hit in your personal situation – it’s a 2021 income tax calculator from Ernst & Young (online at bit.ly/EYtaxcalculator).”
Speaking of TFSAs – can you retire by just investing inside the TFSA? This young couple wants to. The answer we had for them might surprise you too!
I enjoyed early retiree Liquid’s interview on the Explore FI Canada podcast. I would never invest in Twinkies myself, but I agree based on my thesis above that some form of leverage is more than OK, if debt is well-managed.
A reader asked me about my goal to “live off dividends” to a degree – am I worried about paying too much in taxes? Nope. I don’t really think most of us can have too much income from dividends.
Wild charts in Ben Carlson’s post – demonstrating the ownership inequality in the stock market. I don’t see a shift coming anytime soon.
Source: A Wealth of Common Sense.
Physician on FIRE also tackled the paying off your mortgage debate – calling it a mistake!
“Therefore, given the difference between the two figures, I theoretically would have had double the return if I had invested in the stock market (5.8% vs. 2.9%).”
An inspiring tiny thought from one of my favourite blogs – Farnam Street:
“Spend the best hours of your day on the biggest opportunity, not the biggest problem.”
A shoutout and thanks to MoneySense and Dale Roberts for including my post in one of their recent editions. Always a fan of their write-ups!
Prolific podcaster Jessica Moorhouse had Robin Taub on her show, to share everything about her new book The Wisest Investment, an update to her bestselling book, A Parent’s Guide to Raising Money-Smart Kids. A great new book/guide for parents.
I know because I recently read Robin’s book too. I hope to publish my interview with Robin soon and giveaway copies of her book to some lucky parents as well – stay tuned!
On the giveaway front, many winners for my The Money Master review and giveaway will be announced soon so watch your inbox for an email from yours truly! Here is the interview I had with author, real estate investor and speaker Sandy Yong.
Last but not least, on my site this week and also highlighted in The Globe and Mail, I wrote about how much real estate you should have in your investment portfolio. What do you make of my answer? What’s yours??
More FREE content – investing vs. why paying off your mortgage a mistake?
How I invest in dividend paying stocks is always found here. I’ll have another juicy dividend income update soon!
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All my best,
Mark
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Insightful piece, examining both sides of a commonly asked question. We’re all juggling multiple priorities. Use your personal values, the things in life that are most important to you, to help guide and prioritize these types of financial decisions.
Thanks Robin. Please do share in your circles 🙂
I think reflecting on “what’s important” to you and your family is very much key. So is understanding thyself if you will and understanding that if you’re someone who stresses over debt, etc. then maybe paying down the mortgage is a good sleep-at-night factor that works for you. With historical low rates I see both sides of the coin – never been a better time to invest vs. mortgage and kill off debt so cheaply.
Thanks for checking in! I look forward to your book giveaway soon!
Mark
Today our approach is to make regular extra payments to the mortgage from our salary income as well as make semi-annual prepayments to the mortgage via the Smith Maneuver. For these payments, I wait until our non-registered investments (in an account separate from our leveraged investments) reach a certain threshold and then I sell a portion, pay off the mortgage, then borrow back the same sum and repurchase (usually the same) investments in the leveraged account. So we’re using a hybrid of accelerated payments and the Smith Maneuver.
That should see us “mortgage free” in six years when we plan to sell our GTA home and buy somewhere in eastern Ontario. Depending on the market then, we may be lucky enough to buy what we want and pay off the HELOC as well.
We’re prepared to continue with the line of credit in the event the cost of our “forever home” dictates we continue with the investment line so long as the spread between the interest payment and the dividends we receive is substantial and sustainable.
The thing about the SM James is I believe it works well when rates are going down. They are no reason to go down. They should go up?
Thoughts?
Prolonged low-rates are killing our economy. It makes constant borrowing and leverage the right thing to do. I disagree with that. There must be a better balance, including at the federal level.
I think your plan to move to Eastern Ontario seems like a great call – nice towns and better quality of living overall. Kingston-area is nice.
It’s easiest to answer with where I’m at today with my Smith Maneuver/leveraged account – which really I started using in April of 2020 😉
So, predominantly, it is actually just money I borrowed from the HELOC outright, but because I did have some non-registered investments that I purchased with my inheritance money I decided to go hybrid and incorporate SM also.
Without revealing the portfolio values I can say the following:
1) The leveraged account is up 42.46%
2) The annual interest is about 50% of what the dividends generate
3) That 53% is obviously reduced at tax time, so it’s more like 35%
The dividends are all on DRIP so that they will “snowball”, so today the interest expense is covered from our salaries.
Even though it’s not how I pay for the interest I suspect dividend increases will substantially offset the future increases in interest. I would say so long as the net interest expense (taking into account the tax deduction) doesn’t exceed 75% of the dividend income I’m comfortable. Of course, if we go back to a single income I might have to reevaluate that criteria.
Really admire your courage. Wow, started in April 2020. You have really done it: Be greedy when others are fearful. And you are obviously rewarded very well.
Thanks May!
It’s been part luck and part discipline and I’m glad I had the guts to do it.
I think as long as the dividend income can easily cover the expenses (re: SM) then you’re OK. However, risk can also come in other forms such as job loss, other and it’s important never to over-extend. Just me maybe James but I’m a more conservative guy when it comes to investing. That doesn’t make my approach better or worse!
Mark
I really appreciate the thought – I have no problem with being challenged – that’s why I come here!!
I have gone through a job loss (2014) and it was tough. If that were to happen then the silver lining would be the capital gains would be a lot less painful. Today, I’m much more employable than I was when I faced my job loss (somewhat expectedly) the first time. I’ve been headhunted twice in the last 12 months but I’m happy where I am and feel like I’m in control of my own destiny with my current employer and that’s worth more to me than a higher salary.
Good stuff.
OK, good James, since life can happen fast.
“…feel like I’m in control of my own destiny with my current employer and that’s worth more to me than a higher salary.”
Amen.
You know I like your approach Mark. It’s working incredibly due to your planning and discipline. Everything is in place and its a golden opportunity to live it up now while you’re younger or you’ll be taking a lot with you many years later. Its been 26 years debt free here and we so appreciate that peace of mind and freedom.
You’re in a solid investing position and the debt retirement is in the near horizon. People with good jobs holding mortgages and investing have never had it so easy as the last ~10 years. Great returns and a breeze to pay off debt, or even leverage debt for investing if so inclined.
1200 sq ft is the size of our living, dining, kitchen, entry. Have 5 more rooms plus bathrooms and 2 x 2 car garages full, gazebo, greenhouse, and boathouse coming. Good thing we downsized. LOL
I hope all the people betting with a variable and on house capital appreciation don’t get hurt. Prices have spiralled beyond sense and its a shame for those not already in the market.
“People with good jobs holding mortgages and investing have never had it so easy as the last ~10 years. Great returns and a breeze to pay off debt, or even leverage debt for investing if so inclined.”
Yup. Very, very fortunate. I should be near debt-free once the next calamity hits I hope and will borrow any money (a bit?) to invest if needed. $12K for 2022 TFSAs pretty much ready to go. 🙂
“1200 sq ft is the size of our living, dining, kitchen, entry. Have 5 more rooms plus bathrooms and 2 x 2 car garages full, gazebo, greenhouse, and boathouse coming.” Ha. That’s a compound!!
I think our condo is approaching $900K. Insane. Gotta live somewhere. Up 40% since we moved in 2.5 years ago, let alone when we purchased.
Is that picture your apartment, Mark? That’s really spectacular. And yes, 1200 sq should be very comfortable for two.
I love my home theatre and also enjoy being able to play pingpang or pool at home. But eventually need to downsize to a condo I guess.
Nope, I wish, although ours is nice too! 🙂
Home theatre and pool – nice. I see to see that place of yours May!!
Mark
Thanks for the podcast mention, Mark. 🙂 As you know I’m more on the side of paying down the mortgage as slowly as possible as long as interest rates are low. In the meantime I’m putting new money to work buying dividend stocks, such as the Canadian banks since they are still reasonably valued. But I have to admit that not having a mortgage payment anymore would do wonders for my cash flow. 🤗 It looks like you have less than 3 years to go. That’s going to be an amazing day when it arrives!
Thanks Liquid. Yes, looking forward to the mortgage free day and if we time it right, we should be able to semi-retire the same year 🙂 Thinking end of 2024 is our current semi-retirement date.
Nice post Mark and I really like your approach to the mortgage.
We will keep refinancing every 5 yrs to max out our accounts and then after that I plan a hybrid approach more money for life experiences and also increasing those mortgage payments. Once the mortgage gets paid hey retirement or taxable accounts.. Good problem to have then either way!
keep it up
cheers
Nice to hear from you Rob. Sounds good…stay after the mortgage but don’t forget what life has to offer!!
Hi Mark—thanks, as always, for the mention. We thoroughly enjoyed our interview with Liquid.
As you know, I’m, like Liquid, very comfortable with debt. But as you say, the key is to manage it well.
I wouldn’t consider this strategy without the help and guidance of our financial planner. That would be far too stressful for me!
In the end, everyone needs to do what they feel most comfortable with. That’s the only way you’ll succeed long-term—if you believe in and stick to a solid plan.
Great article Mark!
For us our first two properties we paid them off within 5 years almost doing double payments and the 15% or so lump sum but the third one we’re doing a hybrid aproach just like our investment so we increased our mortgage payments as well as doing some lump sum here and there all that while trying to invest as much as possible , my kids are collecting their RESP now which I thank God every day now that we enrolled them in it the day they were born they’re both in universitiy and we don’t have to pay a single dollar on their tuition.
but yeah paying down your mortgage faster while investing is a great balance because on one hand you see the balance of your mortgage shrinking and on the other hand you see your investments and dividends snowballing but we always made sure to leave enough money for a family vacation each year which is to me more important than both because the time that we spend together is pricelss…money is not everything it’s important but def not the most important!
I never liked to have debt. But now my point view began to change a little bit. Now I think the most important thing is not whether or not one has debt, but a positive sustainable cash flow.
Yes, I do think now there is a difference between good debt and bad debt. A debt on consumer goods, definitely bad. A debt on cashflow positive investment, that should be a good debt. So debt on a rental house is not bad, no need to rush to pay it off.
As for mortgage on a primary residence, I think the most important thing is we should never be house slaves and never be house rich and cash poor. Looking back I think we were a little bit too conservative though. We were able to afford a more expensive house in a better area and got much more appreciation on the house. But hindsight is always 20-20 so no regrets whatsoever. Better just looking forward to see what we can do better in the future.
May, you’ve been reading my site! Ha.
It’s all about cashflow IMO. If you have some debt, for asset accumulation purposes, and you can easily cover it that’s not an issue. I think way too many people get in over their heads due to the McMansions they buy. I don’t anticipate you are one of them at all…
Yes, 20-20 for sure. If real estate has worked out for you then awesome.
Agree on sustainable cash flow.
I’m thinking rates and good markets play quite an influence on our thinking re leverage now. Maybe that continues, or not.
Definitely. Borrowing is so cheap and it doesn’t take much to serve the debt. Some people I know will borrow as much as they could and complain banks don’t want to borrow them so much. The question is how long this will last. I think people look at Japan and Europe, believing low interest rate will be here for long. But who knows. Just hope everybody can survive when interest rate goes up.
With interest rate so low, I think a big safe margin is required for any kind of leverage.
Absolutely right. If markets dump 40-50% (and they will) levered investments aren’t going to look so pretty. Especially if it lasts 10 years instead of 2 months.
Anyone I know is trying to rid themselves of debt and not leverage for investing.
Yes on safety margin. You’re singing my song. Stretching to buy something or stretching to reach some financial goals is not my style.
I just read the news that central bank of Canada might hide the rate 8 times for next two years.
Surely I am happy I am debt free right now.
That was a prediction from a economist from BNS. Maybe but I very much doubt that. “Maybe” 3-4 hikes.
But yes, I am also super happy to be debt free.
Ya, they (experts) have no clue. From one of my recent Weekend Readings:
https://duncanweldon.substack.com/p/we-have-no-theory-of-inflation
Even if we get a few rate hikes, that’s what, maybe 25 basis points at a time? Peanuts and nowhere near what it needs to be….
Just my $0.02!
Alas, in a few years I won’t care much. No debt. Ha.
Mark
Yep.
Join the club!
Debt, whether it be mortgage or not, is an obligation to pay in good times and bad.
Aside from CV-19, we have been living in pretty good times with low inflation and an outstanding stock market. Unless you were in the service industry – hotel/restaurants/movies, etc
That may change soon enough. So the sooner you get rid of the debt albatross the better.
RICARDO
I can see that. Technically, I could pay it off tomorrow but I won’t and I’ll pick away at it in the coming 3 years. That’s all we have. I prefer to invest at this point and need $12K for x2 TFSAs in a few weeks and likely another $20K to invest inside our x2 RRSPs in the spring.
Agree or disagree?
I always managed to put money in to the RRSP even in the hard times and even if it wasn’t the max for that year. Didn’t want to lose the habit.
Don’t get me wrong on debt. I run a HELOC for investment purposes. The difference is that it pays its own way and lowers the principal every year. So called “bad” debt is mortgages, car loans and that type of debt. At least with a mortgage there is a possibility of increasing your asset value although I can find some people who sold below value because of an employment move. For those types of debt the sooner they are gotten rid of the better. Obviously the recent prime rates have skewed the mortgage rates to the positive side in that you can make more money investing rather than paying down the debt. You still have to keep in mind that putting money in to a taxable account means you need to get close to 6% in order to cover the lost debt payment – at present prime. And if rates go up, which seems very very likely, then your debt payment will be that much higher due to lost debt reduction momentum. But my memories are of 14% interest on the mortgage back in the 90’s. So I was in a hurry to get rid of it. That is when the RRSP did not get the max.
Once the TFSA came along I have maxed that every year. It is a no brainer – as long as you have the cash.
RICARDO
I couldn’t imagine double-digit borrowing rates. That’s wild. I recall my parents buying their first home in 1980. Check out the rates in the early 80s 🙂
The TFSA(s) are a gift to every adult Canadian. Use it now while we can I say.
Mark
As far as I am concerned the politicians and bureaucrats are already starting to salivate over the value held in TFSA’s. I probably won’t see it but it wouldn’t surprise me if within the next ten years they put some kind of limitation on it or find some way to get some money out of it. Someone who started at eighteen and is a little bit savvy with investing could be sitting on several millions of $$.
Personally I am sitting on double the value of my investment in the TFSA and if I wanted to i could be withdrawing $1K per month, which I am not doing. So the value of my TFSA now increases by $12K(divs) + $6K contribution per year, hopefully increasing every year. Snowball effect!
Explain to me how some politician is not going to want some of that.
Rev Can has already gone after individuals who were trading and making fortunes within their TFSA’s.
I can almost hear the NDP and some others saying TAX THE RICH
RICARDO
I guess I’m naive, but I don’t think it’ll be that bad.
What I could see is that income from TFSA could become part of the GIS/Allowance income test. I don’t think it’s reasonable for even a saavy, stalwart investor to claim the GIS/Allowance while withdrawing a living income from their TFSA. I could support such a change, but not much else.
Oh I totally agree Ricardo – I suspect (although I hope it never happens of course….) that they will eventually put a lifetime contribution cap on the account. Something like $100,000 or whatever. Just a guess and yes, the NDP would say that!!
I don’t think that too much dividend income is ever a problem given the lower tax rates on it even at marginal tax rate levels. G&M had a good article on this a few weeks ago which showed that it was better to have dividend income and forget trying to reduce or eliminate clawback of OAS. After tax you are still better off with dividend income versus trying to reduce OAS clawback.
https://www.theglobeandmail.com/investing/education/article-dividend-investors-dont-lose-sleep-over-the-oas-clawback/
Yes, I recall that one for sure. If I ever have too much dividend income you’ll hear it here on the site first 🙂
We have always prioritized paying off our mortgage (while still investing) for the psychological reason of being debt free. And for the lower cash flow required to cover our monthly expenses. It’s not for everyone but being mortgage free has always been part of our plan. Well, mortgage free on our primary residence that is 😉
Good stuff Maria. Lots of paths to take but yes, to my point I guess, you’re in no rush to pay off those rentals I suspect given the leverage.
Mark – I hate paying taxes and in particular hate paying taxes to Uncle Sam on div paying US stocks inside my RRSP. Had bought some during the C19 buying opportunity..indicated was 52% div but got cut in 1/2..so only 26% div rate. Even with such a lush div..still hated to pay tax in a RRSP. Sold it at a ripe profit and now use a covered call strategy that isn’t taxed and so far this year…doing much better than 52% annualized.
Why do you want to hold US divs in RRSP?
Also..why not max out RRSP and use tax return for TFSA?
Hey Shredder – I don’t understand…you don’t pay taxes on anything as long as your assets are inside the RRSP. It’s a tax-deferred account.
There are withholding taxes owning CDN assets that hold U.S. and international assets inside the RRSP – but – owning U.S. stocks or U.S. ETFs inside the RRSP there is nothing to worry about 🙂
If you max out the RRSP and use the tax-return to fund the TFSA, while good overall, you are giving up the tax-deferred compounding power for the RRSP. Nothing wrong with that per se but you need to know the RRSP-generated tax refund = government loan and must be paid back via RRSP withdrawals that will be taxed.
Mark,
Shredder didn’t name the US security he purchased in his RRSP which was taxed. Perhaps it was an MLP in which there are 37.5% non-recoverable withholding taxes deducted if held by non-US unit holders. This applies to any type account including non-registered, TFSA, RRSP or RRIF.
Very fair Bernie, it could be a Limited Partnership which isn’t quite like a U.S. common stock or common ETF that I was referring to. Thanks for that addition to the conversation.
Buying anything lately yourself?
I’m not adding to any new positions Mark. I’m retired and not adding in any new money other than the annual top up in my TFSA. Any excess dividends I’m not taking in income are being held in cash until the markets come back down to earth. There’s little value out there.
Ha. Good stuff. Ya, ready to max out x2 TFSAs in 2 months here and slowly building up the savings to drop/max out RRSPs as well. That’s our plan until semi-retirement.
Our attitude was always, get out of debt as quickly as possible. We didn’t bother worrying whether it might be better or not, to pay off our mortgage, because the rate was low. Debt is still debt, and no debt is always better.
That’s fair. You lived through higher rates than I am now 🙂
And maybe higher mortgage rates are on their way soon! A good reason to pay down the mortgage.
That’s true. <3 years now for us Roger!
Hi Mark,
Once again great article. That’s why personal finance is very personal. What works for me might not work for others.
Although we might not have low interest rates that long I will still choose variable rate and will not overpay our mortgage. We’ll continue to invest (DGI only) aggressively at this point. Another key point is that if we plan of downsizing in the future no point paying it off also. Will just be contented with the capital appreciation of our property.
Yup, said it from Day 1 here = personal finance is personal.
Not sure about you Rommel, I think I have a few years on you in my later 40s now, but we’ve already downsized here. So, not likely to move for a bit I hope and certainly don’t need anything larger!! 1,200 sq. ft. is fine 🙂
We locked into fixed a year ago as our last mortgage term and the debt will be gone in 2 years, 10 months I think. Semi-retirement is hopefully 3 or so years out 🙂
Have a great weekend!
Mark
I have to please my OH why we became homeowners again. Prior to the pandemic I was ready on semi-retirement mode traveling a fair bit hence we were just renting. Global pandemic came and all plans stopped. Reassess our priorities and went back to working while facing uncertainty.
1200sq ft is exactly the size of our home. How did you know?😉 More than enough for the two of us. With the way RE in BC specially in the island I don’t think price will go down IMHO.
With that in mind, probably downsize or move again in the future hence will never pay off our mortgage as our strategy.
Have a great weekend Mark.
1,200 sq. ft. is really plenty of room for 2 people I believe. We like it, about the right size for us!
I don’t see BC prices coming down at all. Incredible really.
All my best,
Mark