Ending the Mortgage Paydown vs. Investing Debate

This post is from Mark Seed who runs My Own Advisor.

A huge debt can kill your retirement plan.   This is not news.   While servicing debt, you can’t save very much money.   You can’t invest what you don’t save.  Taking on a mega-mortgage could be very stressful for young Canadians.  I should know.   We took on a hefty mortgage when we purchased our current home.

I’ve also read some recent counter-arguments to paying down the mortgage.   Mortgage rates are cheap right now and have been for years, this implies debt is “easy” to pay back and you don’t need to rush to do it.  Folks in favour of investing tout you can earn a better rate of return from investing than the guaranteed rate of return that comes from making your mortgage payment.

Here’s our approach – we do both – we kill debt and save for retirement, every month.

Why?

I have no idea what the future holds.

On reducing mortgage debt

  • We are being fiscally responsible, with our biggest liability.
  • We are reducing risk of our human capital, that is, should we lose any ability to earn an income.
  • We are taking advantage of low-borrowing costs, which may not always be available.

On investing today for tomorrow

  • We are maximizing one of the greatest assets the investment world offers, time in the market.
  • We are leveraging our current human capital, to make investments in our future selves.
  • We are increasing our savings, for any unexpected events.

As far as I’m concerned, we’ll have much more financial flexibility when we’re debt-free.   Being debt-free will also remove any emotional burden I feel owing our bank money, something that’s difficult to quantify.  Diversification principles are also important to me, which means I prefer using Tax Free Savings Accounts (TFSAs), Registered Retirement Savings Plans (RRSPs), and other accounts to build wealth instead of locking up all assets within these four walls.   I have a financial philosophy of trying to do a few things, very well, instead of focusing too much on just one thing.  I think most Canadians would benefit from killing their mortgage debt while investing for the retirement.

In closing I believe most sound (and successful) investment portfolios are a balancing act of managing risk for reward.   Most Canadians would be best served by managing risk (reducing debt) and striving for reward (building retirement savings), becoming proficient in each.

What’s your take on the mortgage vs. investing debate?

 About the Author:  This post is from Mark Seed who runs My Own Advisor.  You can join the 2,500+ Twitter followers of My Own Advisor here and join the 40,000+ monthly visitors by subscribing to Mark’s site www.myownadvisor.ca.

 

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A Frugal Family's Journey
6 years ago

We also do both. Last year we refinance our mortgage to a 15-year loan in an effort to pay of our home sometime on or before I retirement in 13 more years. We saw this as both saving money on interest payments and forced savings. Right now, we are very happy with the amount of progress we are making each month so we do not pay extra towards our principal. Any money we have left after bills therefore go towards retirement, college savings or other types of investments. Seeing our net worth grow each month by almost the amount of my income tells me that we are on the right track and the formula we are using appears to be the right formula for us! :) AFFJ

Godlberg
6 years ago

re SST’s #36: “Both mortgages and the stock market should be neither “emotionally empowering” nor “nerve wrecking”. If they are, then you need to get out of both until you can get those emotions under control.”

I don’t get how mortgages are either of those things but re stock market, that is exactly what I was saying and this is why Ed saying its best to invest for 95% of the people is wrong. By far, most people have not gotten this under control. As I said, I invest 100% but for the very large majority of people I know, repaying the mortgage due to those emotions is optimal.

S
6 years ago

Ed,
Setting your mortgage payoff date to one year before retirement is risky unless you’re retiring at a relatively young age. What about job loss, illness, disability, divorce? A paid off mortgage would help mitigate these circumstances. Few people sail into 65 without some sort of life disruption.

I entered the “No Mortgage Trap” at 40 and was left feeling very happy. I had excess capital to invest and as my investments grew more complex, I was relieved not to have to think about or factor in, a primary residential mortgage.

And what would be the point of spending a lot for one year? Other than getting a really good feel for a lifestyle you cannot afford and will not have. It’s a crappy way to start your retirement.

SST
6 years ago

re: “You guys are debating facts versus emotions.
At the end of the day, sleeping well at night is what matters more. For most being debt free is emotionally empowering while debt and stock market is nerve wrecking.”

Isn’t that one of the Pillars of Investing — being non-emotional?

Both mortgages and the stock market should be neither “emotionally empowering” nor “nerve wrecking”. If they are, then you need to get out of both until you can get those emotions under control.

My Own Advisor
6 years ago

@Ed,

Agreed with points #1 and #2 in your earlier comment. My only quibble with it is, if folks cannot invest and pay down their mortgage, they have too much house.

As for killing the mortgage by 55, that is a good thing, but folks that go on a spending spree are likely the same folks that haven’t saved enough for retirement in their 30s and 40s. Once the mortgage is done, mortgage payments need to be transferred to investments to make up for lost time.

Otherwise, they will have a disappointing retirement no doubt.

I suspect some boomers are in for a big shock in a few years.

My Own Advisor
6 years ago

@Hemgi,

Good advice. As you know from my site, I personally like to focus on a few things and try to do them well, in this case, it’s killing debt while investing for the future.

We’re at #6 in your list, TFSA is full, might as well kill debt.

Mark

Godlberg
6 years ago

You guys are debating facts versus emotions.

At the end of the day, sleeping well at night is what matters more. For most being debt free is emotionally empowering while debt and stock market is nerve wrecking. Many fear losing their job rather than believing in their ability to find equivalent work elsewhere. For them, the OAS and CPP, along with reduced expenses from having no mortgage and no kids at home will allow them a comfortable retirement. Having a small $40k in RRSP will pay their green fees or camping lot fees.

If you’ve been burned in the market in 2000 or 2009, and fear the future market returns, then pay the mortgage, and afterwards invest a little, and you’ll have a simple retirement. Perhaps most important for you is to stay married to share most large expenses in retirement.

I invest 100%. Similar to Ed’s point, my mortgage will be paid off by my 50th birthday, date at which I want the option of early-retirement, if I so choose 16 years from now. Meanwhile, I will continue to invest and benefit from compounding for the next 16 years. At that moment, I should have over a million combined in investment and pensions. I will also have a paid-off house. Whether I leave the challenges my job brings for the boredom of the all-inclusive resort, will be another story… but I will have the options.

Again, its facts versus emotions. Investing is better mathematically but if you’ll sleep better with a $400k paid-off house and little savings versus a $1million portfolio and a $250 mortgage… then pay the mortgage first.

Ed Rempel
6 years ago

Hi Mark,

An important question in this debate is: Is it a good idea to pay off your mortgage early? I have seen the “No Mortgage Trap” leave people unhappy often.

I know this is heresy in Canada, but I’ve seen it many times. People pay off their mortgage by age 55. Then they go on a spending spree taking a few large vacations each year, buy several new cars, buy a larger house, and do a bunch of renovations.

Then they hit 65 and spend the rest of their life below the poverty line. It is always hard to cut back! They had become used to spending lots of money. Now they spend their retirement regretting all the things they want and cannot afford.

If they had not paid their mortgage off early, they would not have become used to a high lifestyle they cannot afford – and they would not be disappointed all the way through retirement.

The “No Mortgage Trap” is real and happens a lot in Canada.

There are many ways to plan your life, but the best advice for most people is to set their mortgage amortization to about a year before you plan to retire. That gives you one year to spend a lot, which is nice – but you don’t get used to it.

Ed

Ed Rempel
6 years ago

Hi Mark,

I think you are missing the mark. (Pardon the pun.) From working with thousands of people and planning their lives & finances, there is a clear winner.

Two of the main goals that most people have are:

1. Pay off the mortgage before they retire.
2. Build up enough of a nest egg to maintain their lifestyle after they retire.

On average, when we first meet people, about 80% are on track for goal # 1 and about 5% are on track for goal #2. On average, what they are doing before they meet us will give them about 20% of the nest egg they need for goal #2 (e.g. what they are doing should get them to $300,000 but they will need $1.5 million by retirement in future dollars).

In other words, the majority of people we see will already pay their mortgage off by the time they retire (or close), but hardly any are saving enough for their retirement.

My advice: the first $1,550/month you have available above your basic budget should ALL go to retirement, so that your retirement goal may be in similar shape to your mortgage goal.

Ed

Hemgi
6 years ago

If you can get a RRSP return on investment over 6%, or a TSFA return on investment, then you can think of not putting all your money on your mortgage.

My personal experience was an easy choice, interest rate for mortgage was at 11.5%, so no choice, everything was going on the mortgage.

However, today with the 3% interest rate in mortgage, this seems to be easy financing and decision need to be taken differently.

1st question to answer is: what is your annual fees for TSFA. If you are paying $100 a year for having an account for a broker, then either you have a lot of money in your TSFA or you got a damn good ROI.

The recommendation I gave to my daughter is the following:

1. Pay you mortgage on the basic that you will complete payment in 25 years. If you cannot do it, you cannot afford your house, buy something cheaper.

2. With your extra money, pay any other loan that have an interest rate higher that your mortgage rate.

3. Still some extra money? Go on the beach with your kids :-), return on investment is unmeasurable.

4. Still some extra money? Calculate what is required to pay your mortgage in 15 years and pay this amount on the mortgage.

5. Still some money? Put money in your TSFA if you can get more than your mortgage rate, e.g. Canadian Banks can give you a 4% that will grow.

6. No more place in your TSFA? Put money on your mortgage.

My two cents.