Financial Planning Help?

[ExtraSlow]

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OP is already mortgage free.

Yeah, but this hasn't been about the OP for a long time. It's an option for people who have similar questions to the OP who may be reading this thread.

[A790]

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If you want an extremely low risk investment option that is also extremely simple, you can always pay down your mortgage. It's zero risk, which has some value for a defensive portfolio. A decent discussion of the pros and cons in the globe and mail. https://www.theglobeandmail.com/inve...sas-and-rrsps/

Paying down a mortgage is certainly low risk, but it most certainly is not "no risk".

[Masked Bandit]

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Paying down a mortgage is certainly low risk, but it most certainly is not "no risk".

How ya figure, other than a lack of liquidity?

[ercchry]

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How ya figure, other than a lack of liquidity?

yeah, but beyond that too, if market drops, or you lose proof of income it can be expensive or difficult to pull that money back out too... unless of course you have an all in one type product like a manulife one account that readvances the principal back onto the LOC limit

[A790]

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How ya figure, other than a lack of liquidity?

The value of my home has dropped 11% since I bought it four years ago. At the same time, the S&P500 has returned an average of 10.5%/yr. So I could have seen 40%+ capital appreciation, or...

Then there is the liquidity thing, which I consider important. To access the equity in my home, every option to do so costs me money. I either sell or borrow against it, but in either case, I'm paying to unlock my "savings".

Happy to hear counterpoints, btw. I am not at all a beyond baller. More of a baller enthusiast... lol.

[Strider]

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The value of my home has dropped 11% since I bought it four years ago.

Your house value could go to zero and you'd still owe the bank your mortgage value. Paying the principal on your mortgage guarantees a return of however much your mortgage interest rate is which is why it's "no risk".

[ercchry]

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Your house value could go to zero and you'd still owe the bank your mortgage value. Paying the principal on your mortgage guarantees a return of however much your mortgage interest rate is which is why it's no risk.

alberta is still the home of non recourse mortgages... if they are not insured

[Masked Bandit]

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The value of my home has dropped 11% since I bought it four years ago. At the same time, the S&P500 has returned an average of 10.5%/yr. So I could have seen 40%+ capital appreciation, or...

Then there is the liquidity thing, which I consider important. To access the equity in my home, every option to do so costs me money. I either sell or borrow against it, but in either case, I'm paying to unlock my "savings".

Happy to hear counterpoints, btw. I am not at all a beyond baller. More of a baller enthusiast... lol.

The value of your home going up or down is irrelevant because it doesn't change how much interest you're paying on the outstanding mortgage. The value of your home only matters when you sell and for the purpose of this conversation we're not worried about that. As for historical averages of S&P being 10.5%, what time frame is that over? I would use a 25 year history matching a standard amortization period for a residential mortgage.

The thing with a mortgage is that the interest rate might only be 3% right now but you're paying that with after-tax dollars, so it's really more like 5%. Paying off that mortgage is like getting a guaranteed 5% return, tax free.

[ExtraSlow]

Investing in a second property isn't zero risk. The home you already own absolutely is. Liquidity issue is real, so it probably shouldn't be your only investment.

[roopi]

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As for historical averages of S&P being 10.5%, what time frame is that over? I would use a 25 year history matching a standard amortization period for a residential mortgage.

9.824% with dividends reinvested from May 1994 - May 2019.

[Xtrema]

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The thing with a mortgage is that the interest rate might only be 3% right now but you're paying that with after-tax dollars, so it's really more like 5%. Paying off that mortgage is like getting a guaranteed 5% return, tax free.

Math checks out if you are using 3% mortgage, 15 year amortization.

Paying off early has the same effect at 5% return in a protected portfolio.

So the lesson here is don't waste your money on GIC if you still have a mortgage.

[A790]

Well TIL

[Misterman]

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If you want an extremely low risk investment option that is also extremely simple, you can always pay down your mortgage. It's zero risk, which has some value for a defensive portfolio. A decent discussion of the pros and cons in the globe and mail. https://www.theglobeandmail.com/inve...sas-and-rrsps/

Paying a mortgage off early is like putting extra money under your mattress. It's better than nothing, but not by much. But if the choice is having 100k in savings that makes you 10k/yr and no debt. Or having a 250k investment that makes 25k/yr and a 150k mortgage debt that costs 12k/yr to service. Then you can see that one nets more than the other, especially when part of that mortgage debt servicing is essentially going to savings since part of it is principle on the house you're paying off.

I'm not sure how the person that is quoted arrived at those numbers though? If you diverted all your extra capital to paying mortgage instead of investments, it's unlikely you'd end up in that sort of either or place. You'd be more likely to be choosing between zero mortgage debt and zero savings, or mortgage debt plus 200k investments. Plus it misses the major downside to paying the mortgage off instead of investing. For that 10 years you plow all your money into the mortgage, you miss out on the compound interest of what you could've been making on investments instead. The money you would make from that period of compound interest would likely have serviced a good portion of your mortgage payments the entire time. So essentially paying down the mortgage is a waste.

Everyone has different risk tolerance though. If you're worried about being laid off and having to service your mortgage, than it is nice piece of mind to pay it off early. Or if you're the type of person that money just burns a hole in your pocket, it's better to just dump it on the mortgage immediately than be out blowing it on cars and bottle service or whatever.

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Werd... OP needs to leverage property to get some big gains!

Boom!! HELOC that house and get that money working for you.

- - - Updated - - -

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How ya figure, other than a lack of liquidity?

Ask anyone that bought in Fort Mac or Tumbler Ridge prior to the housing markets shitting the bed never to return.

[ExtraSlow]

Your exposure to the risk in the housing market is the same if you pay the minimum on your mortgage or if you pay more.

Reducing interest owed on a debt is the same as increasing interest on an investment.

[Buster]

I've spent my entire internet career waiting for an internet forum to finally get around to discussing mortgage-paydown vs. investment.

I never thought I would actually see it.

[bjstare]

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I've spent my entire internet career waiting for an internet forum to finally get around to discussing mortgage-paydown vs. investment.

I never thought I would actually see it.

@Buster you were the first person I thought of when the discussion turned towards mortgage vs. investment haha.

[killramos]

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Paying down a mortgage is certainly low risk, but it most certainly is not "no risk".

The “return” on not having to pay the forward interest is both risk free and tax free. Assuming you are incredibly risk averse to the point of buying risk free securities, I would take the “return” in reduced interest costs rather than buying GIC’s or something.

You are exposed to the equity in your home regardless of leverage, and unless you consider bankruptcy to be an option, then you own all of that exposure. The bank realistically takes no true exposure on your mortgage except in pretty dire circumstances.

That’s the way I would look at it at least.

Plus once your mortgage is paid off you can use that equity to margin trade and make real bank while writing off the interest. Though admittedly you don’t need to be mortgage free to do this.

Edit: did not realize this has been iterated by like 5 other posters. TLDR

[Buster]

Paying down your mortgage increases your blended liquidity risk.

Up to you to decide if that increased liquidity risk is properly compensated for by the benefit of the "guaranteed return" of a mortgage paydown.

On a risk-adjusted basis (personal liquidity risk mentioned above excluded), the return on a paydown vs investing should be a wash. After all the market determines the relative yield of a stock portfolio to mortgage interest - so the relation of those two yields should be largely priced in already.

[killramos]

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Paying down your mortgage increases your blended liquidity risk.

Up to you to decide if that increased liquidity risk is properly compensated for by the benefit of the "guaranteed return" of a mortgage paydown.

On a risk-adjusted basis (personal liquidity risk mentioned above excluded), the return on a paydown vs investing should be a wash. After all the market determines the relative yield of a stock portfolio to mortgage interest - so the relation of those two yields should be largely priced in already.

In a tax free world

[Buster]

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In a tax free world

Are you investing with pre-tax dollars?

edit: you're referring to the gains on the investment, which is fair. But taxes are tricky because people pay different amounts of tax. Just like RRSPs are tricky, because you can't tell what tax bracket people will be in when they retire.