Downpayment or Investments?

[Feruk]

Originally posted by Strider
OP has already bought a house, he's already committed to the risk attached to the underlying asset and owes the bank principal and interest. Unless house prices drop >20% and he walks away from his house, paying his mtg will be the highest guaranteed return.

Once again, riddled with the same real estate value assumption that makes the word "guaranteed" invalid. After that, house is almost certainly not highest return.

[keyjey77]

ickyflex,
you'd better turn for some professional advice, because the question is rather complex. here are some mortgage tips that should be relevant https://tranio.com/traniopedia/tips/...den-pitfalls/. and moreover Forbes' forecast for 2017 in real estate is overall rather optimistic (no matter what https://www.forbes.com/sites/samanth.../#20a705f47fa0) and I believe it's still wise not to put investments on hold. your plan B seems to me more approachable, but you should research the opportunities thoroughly anyway

[Gestalt]

Always pay off your mortgage first.

Everything becomes easier after that, and if you feel you need to invest in something, you have a very large equity to borrow against for whatever real opportunity comes along.

Going into debt, hoping for meager gains is a fools errand.

[ercchry]

Originally posted by Gestalt
Always pay off your mortgage first.

Everything becomes easier after that, and if you feel you need to invest in something, you have a very large equity to borrow against for whatever real opportunity comes along.

Going into debt, hoping for meager gains is a fools errand.

He says to probably one of the most consistent, long running investors on beyond

I know people worth deep 8 figures who still hold mortgages on properties they could pay for with their pocket change... must be doing it wrong

[Gestalt]

Originally posted by ercchry


He says to probably one of the most consistent, long running investors on beyond

I know people worth deep 8 figures who still hold mortgages on properties they could pay for with their pocket change... must be doing it wrong

I know a guy too.

[ercchry]

I think you heard me wrong... people, plural

[zhao]

Originally posted by Gestalt
Always pay off your mortgage first.

Everything becomes easier after that, and if you feel you need to invest in something, you have a very large equity to borrow against for whatever real opportunity comes along.

Going into debt, hoping for meager gains is a fools errand.

THat is your opinion, but have you actually worked out numbers and can you explain it?

My math says paying off your mortgage first is a terrible idea.

take a 400k mortgage on a 500k house with 20% down. Say both guys are 25 years old. lets average a 3% interest rate over 25 years for simplicity's sake. payments of 1893, total cost of 400k mortgage is something like 575k

say you make double payments and pay it off in <9 years. with 400k equity from the house. 3 years of investing 3786 a month = 150k ish. total equity 550k

say instead of making double payments, you invest taht 1893 a month in a conservative mutual fund, and say it gives lower than average of 5%. the investment after that same 12 years will be 375k or so.... but you'll also be half way into your mortgage, and will have paid about 275k of it off, with 300k owing. So 650k equity assuming no appreciation of the house and no inflation.

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now in scenario one your mortgage is paid off and scenario 2 you have half of it...... so it's pretty obvious who is ahead at the half way point, but here is where your math starts to make a bit of sense.

So for the guy who paid off his mortgage, now he can contribute all his cash to investments. 3786 a month, over 16 years, at 5% = 1.1k + 400k for the paid off house = 1.5m equity.


Not paying off the mortgage still contributing 1893 to the mortgage and 1893 to investing at 5%, after 13 more years the mortgage is paid off with 400k equity, and the investments are sitting at 1.1 million or so. so 1.5m equity after 1.5 years.


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so they break even in the end right? Unlikely. At 9 years when dude A has his house paid off, and dude B doesn't, human nature says Dude A is more likely to say fuck it, and not contribute 3786 a month for the next 16 years to investments, then Dude B is to continue on his investment path. Why that is is because Dude A achieved his goal of paying off his mortgage, while Dude B isn't at a pivotal point in his history (he's at 9 years in his 25 year plan).


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Avoiding human nature we bring up another point. HELOC!!! fuck ya. right? mortgage paid off frees up loan potential for investments!!!

with 20% down, both paths free up just as much money from the Heloc. this means at the 9 year mark their equity is actually equal now. There is now no equity advantage to investing early if 100% of available heloc funds are used to invest as well. however, once one guy has his place paid off, things get interesting.

paid off house = 65% heloc borrowing power. With a mortgage = 80%. Having a mortgage not paid off frees up more cash to invest that way as well, however 1893 monthly at 5% over 16 years = 550k equity, whereas 65% of 400k @ 5% over 16 years = 575k equity.

dude A who paid his mortgage off is actually ahead now by 25k.

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However........ human nature again says absolutely no one is maximizing their HELOC every month to make use of every penny available, so guy who doesn't pay his mortgage off early will be the winner almost every time. The Gap will grow wider as well the higher the ROI interest is.

You'd have to be some sorta robot to come out ahead paying your mortgage off earlier.

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and here is where your idea really falls apart.

RRSPs and TFSA.......... Dude B who has been investing since day 1 has gotten more money back from income tax to reinvest. He has also accumulated far more in his TFSA account thx to maxing it out early and compound interest, so he will pay less tax when he withdraws his investments.

Dude A missed out on 9 years of RRSP contributions to reduce his income tax, and he can't catch up because there are maximum RRSP contributions that Dude B has already been maxing out every year with his 1893 a month investment contributions. I value this at roughly 60k for the benefit in tax returns over 9 years dude B recieved + another 75k or so in compound interest from that money over 16 years.

So not paying your mortgage off first is the smart choice for more than one reason; it doesn't even make sense if you are a robot with your HELOC.

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The other thing is, the gap really starts to grow with a higher ROI. a 10% investment means RRSP and TFSA differences translate into about 375k more for the guy who didn't pay his mortgage off early, and that is only at the 25 year mark. Add another 15 years @ 10% putting both guys at 65, and the guy who didn't pay off his mortgage early is ahead by 1.6 million.

Anyway, that's my math.

(hey, maybe I really fucked up the math on that one or didn't factor something in that actually matters, but that's me putting it all out there for you to pick apart. As far as I am concerned you're correct for a lot of people. A lot of people should pay their mortgage off first because they do not understand investments, and wont invest even if they have spare cash)

[Gestalt]

Hopes and dreams, versus something real.

Fantasy girl versus sure thing .

[zhao]

Originally posted by Gestalt
Hopes and dreams, versus something real.

Fantasy girl versus sure thing .

Lol, Your argument is terrible and contradictory. Completely illogical.

It's the financial equiv. of saying the earth is flat and jesus road a dinosaur to work.

Your house isn't worth shit until you sell it. For all you know you're paying off a 500k mortgage on a house that is going to be worth 50k when you sell it. And if you are right that investments could crash year after year and wipe everyone out, you're going to be in a country filled with people with no money, no jobs because all the companies went under, and probably a collapsed government as well, so your house is likely to be burned down and ransacked by loots. Your house is as much a fantasy girl as any other investment is... with the added bonus of putting all your eggs in one basket, whereas anyone investing using diversifies their portfolio.

[Gestalt]

Your house is debt that needs to be repayed.

You should he debt free before gambling with your money.

You need at least 3% better than your mortgage interest to bother with investment versus repayment, and that is gamble. Paying off debt is a sure thing.

Look at the retirement thread. No one in their right mind wants a salary less than $150k a year. But if you are debt free and retiring, they suddenly consider 150 plenty and extravagant.

Owing nothing to no one is a enviable position to be in. Saving then is twice as easy as when you are debt lade

[HiTempguy1]

Originally posted by zhao


Lol, Your argument is terrible and contradictory. Completely illogical.

Gestalt has a point. Would I rather be richer, or stress free?

Stress free 100%. Worrying about a mortgage (which 95% of people in Canada do worry about, especially if kids are involved) is stressful.

Not having that hanging over your head frees you up to do whatever you want, including being more aggressive in earning money/taking risks.

Pretty easy to live if all you have to pay are taxes, utilities, and for your car, even if you have kids. Pretty hard to do this when you are spending close to $2k/month after tax on a mortgage and you lose your job.

The financial decisions you have made and their outcomes I would argue are not typical. Your scenarios you outlined both have risk to them.

Again, if somebody said "you can retire at age 55 with 2mil in assets/money and not have had a mortgage for 20 years" versus "you can retire at age 55 with 3 mil in assets/money but you were only mortgage free for the last 5 years" I'd seriously consider taking the first choice.

Most people are NOT good at handling stress. Continuous payments/bills are definitely my number 1 stressor in life. Not everyone enjoys min/maxing their finances every month.

[Buster]

You guys need to think about it in terms of your balance sheet. This is just a typical leverage discussion that occur a million times in a million different ways in businesses and homes around the world.

paying down your mortgage is just de-leveraging, which automatically comes with an opportunity cost on growth-of-capital

investing your capital into higher growth assets instead of paying down your mortgage is increasing leverage, which will see an improvement in your balance sheet over time with increased risk.

Do you think you guys are going to win an argument which is essentially a mathematical equation that risk and return are highly correlated?

Here's the one thing that most people don't take into account, and often can't wrap their head around: your home EQUITY is actually an asset allocation decision. So paying down your mortgage is also a de facto allocation of capital towards residential real-estate as an asset class. If you think putting capital towards residential real-estate is a bad idea, then paying down your mortgage and concentrating your capital around residential real estate is also a bad idea - especially since it's also concentrated in a single asset. Given this fact, then I would suggest that paying down your mortgage is actually a bad idea in the current environment in Canada (perhaps not in Calgary, hard to say). If that stresses you out, then you need to shift your thinking towards your balance sheet, and how to improve it over time instead of thinking like most of the middle-class grinders do.

[zhao]

Originally posted by Gestalt
Your house is debt that needs to be repayed.

You should he debt free before gambling with your money.

You need at least 3% better than your mortgage interest to bother with investment versus repayment, and that is gamble. Paying off debt is a sure thing.

Look at the retirement thread. No one in their right mind wants a salary less than $150k a year. But if you are debt free and retiring, they suddenly consider 150 plenty and extravagant.

Owing nothing to no one is a enviable position to be in. Saving then is twice as easy as when you are debt lade

You're out of touch with how things can work.

I had my finances completely reset in 2009 from my business going under thx to the recession, and taking a year or 2 to repay debts (I did not go bankrupt). By about 2012 I had clawed back to about 30k to my name, no debt, so everything I have now is a result of what happened after that point.

I'm not going to go into a lot of personal details here, but through investing (real estate and now primarily stocks) we have about 1.2m in assets and debt of about 500k and a cost to liquidate those assets of about 80-100k. There is more than one year I literally saw ROIs of around double. Using debt and flipping equity in to new investments was the key to big returns.

I'm also 36. I guess i'm not in my right mind, but why do I need a 150k salary again? I'm doing all this on <100k. I actually bought my first place and did my first flip on 5x,xxx a year.

If you re-read that retirement thread virtually everyone is saying you are on crack with your retirement requirements....... and this is beyond. Average Beyonder Drives a AMG G-wagon for a winter beater and eats at Dorsia 5 nights a week.


So you can stuff your mattress with money for all I care.

[Buster]

Don't take this the wrong way... But don't confuse luck with a strategy that can be applied universally.

[KappaSigma]

Not going to lie. Being mortgage free in early 30s is hella nice. Always time to make money but it sure is nice not having a monthly payment.

[Gestalt]

Originally posted by KappaSigma
Not going to lie. Being mortgage free in early 30s is hella nice. Always time to make money but it sure is nice not having a monthly payment.

Where's the like button.

No better feeling than knowing going to work is optional.

[msommers]

At the risk of looking like a complete bafoon, how to calculate various scenarios discussed here, investment strategies and such are completely over my head and feel like I should really know these things at 30 but I just don't, it's just so dry to me. Obviously will take time but where have you guys picked up the knowledge and strategies beyond definitions?

[FraserB]

Originally posted by Gestalt

Where's the like button.

No better feeling than knowing going to work is optional.

Even without a mortgage payment, how is going to work optional? If you have no mortgage, that money should be going to retirement savings, unless those become optional as well once your mortgage is paid off?

[J-hop]

Originally posted by zhao


Lol, Your argument is terrible and contradictory. Completely illogical.

It's the financial equiv. of saying the earth is flat and jesus road a dinosaur to work.

Your house isn't worth shit until you sell it. For all you know you're paying off a 500k mortgage on a house that is going to be worth 50k when you sell it....

I constantly hear on beyond the pretty naive mentality that a snapshot of the current equity you've got in your house = your money. Such a bad way to look at things and the last decade should be a great example of why this idea doesn't hold water...

People forget that housing market downturns often correlate with general market downturn and job loss. Which means if you are forced to sell your house at some point in your life the most probable time will be during a real estate down turn. If you need to downgrade you still need the down payment too so at least 20% of your selling price will be needed for your next house so you have over 20% down (who the hell wants to start from ground level again). So hopefully you haven't used that heloc for something depreciating like a car!!!!

[ercchry]

What? Owner occupied=5% down