Financial Planning Help?

[killramos]

Irrelevant to this situation comparing apples to apples.

Investment returns are taxed, “return” from paying down mortgage and saving interest costs is not.

For example, if you had the opportunity to invest in mortgage debt on the market at 3% and pay taxes on those earnings, or pay down your 3% interest mortgage.

Investing in the debt securities would yield you a 2.1% return net of taxes, paying down your mortgage pays you 3%. These are risk adjusted returns.

Both decisions carry the same risk profile. Which do you choose?

This is fun. And fwiw I am not nessecarily advocating for paying down your mortgage instead of investing in the market, just that I think the effective return on a risk adjusted basis is technically attractive.

Feel free to hand my ass to me on this one, I realize you do this for a living.

[ickyflex]

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Irrelevant to this situation comparing apples to apples.

Investment returns are taxed, “return” from paying down mortgage and saving interest costs is not.

For example, if you had the opportunity to invest in mortgage debt on the market at 3% and pay taxes on those earnings, or pay down your 3% interest mortgage.

Investing in the debt securities would yield you a 2.1% return net of taxes, paying down your mortgage pays you 3%. These are risk adjusted returns.

Both decisions carry the same risk profile. Which do you choose?

This is fun. And fwiw I am not nessecarily advocating for paying down your mortgage instead of investing in the market, just that I think the effective return on a risk adjusted basis is technically attractive.

Feel free to hand my ass to me on this one, I realize you do this for a living.

My Mortgage is at 2.39%. I struggle with the idea of paying it down as soon as possible..but maybe it isn't such a bad idea haha

[ercchry]

But... TFSA

[killramos]

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My Mortgage is at 2.39%. I struggle with the idea of paying it down as soon as possible..but maybe it isn't such a bad idea haha

It’s likely a better idea than investing in risk free securities like GIC’s.

This goes out the window when comparing to TFSA or RRSP as mentioned. But that’s apples to bananas comparison.

[ercchry]

I don’t know why it has to be a fight?

RRSPs till maxed, returns into TFSA, invest, invest, invest... pull out up to 20% of mortgage balance and pay down without penalty right before the new year, repeat

Pay the lowest taxes on income, pay no taxes on cap gains, pay down the mortgage quicker all while still having a big nest egg of tax diverted investments for retirement

[Buster]

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Irrelevant to this situation comparing apples to apples.

Investment returns are taxed, “return” from paying down mortgage and saving interest costs is not.

For example, if you had the opportunity to invest in mortgage debt on the market at 3% and pay taxes on those earnings, or pay down your 3% interest mortgage.

Investing in the debt securities would yield you a 2.1% return net of taxes, paying down your mortgage pays you 3%. These are risk adjusted returns.

Both decisions carry the same risk profile. Which do you choose?

This is fun. And fwiw I am not nessecarily advocating for paying down your mortgage instead of investing in the market, just that I think the effective return on a risk adjusted basis is technically attractive.

Feel free to hand my ass to me on this one, I realize you do this for a living.

No, I don't do this stuff for a living, and your points are valid and should not be ignored by me or anyone.

I was being too general/incomplete in my comment, although I would say that because the tax situation is unique to every individual it is much harder to speak in generalities on what is better.

My bigger point is that people might not realize the increased liquidity risk resulting from paying down their mortgage.

[killramos]

Sounds like a reasonable strategy.

[ercchry]

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No, I don't do this stuff for a living, and your points are valid and should not be ignored by me or anyone.

I was being too general/incomplete in my comment, although I would say that because the tax situation is unique to every individual it is much harder to speak in generalities on what is better.

My bigger point is that people might not realize the increased liquidity risk resulting from paying down their mortgage.

The ultimate is still a collateral charge, uninsured readvancing mortgage with HELOC... stuff all money into it, if shit goes south, max out the heloc and mail in the keys... only in Alberta!

[killramos]

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No, I don't do this stuff for a living, and your points are valid and should not be ignored by me or anyone.

I was being too general/incomplete in my comment, although I would say that because the tax situation is unique to every individual it is much harder to speak in generalities on what is better.

My bigger point is that people might not realize the increased liquidity risk resulting from paying down their mortgage.

My bad, for some reason I thought you did.

Liquidity risk is an interesting perspective on it. It’s interesting to think of how much more my money could do for me if I didn’t have so much of my net worth tied up in 4 walls and a roof. But margin trading on HELOC could help that. One day.

[Masked Bandit]

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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.

This is some pretty high-level shit, you're obviously far more elegant when it comes to investing compared to the average suburban-Joe. For the non-pros I still think eliminating mortgage debt is a solid approach. When you have a higher than average skill level such as yourself thing change dramatically. I would love to have that kind of comfort and a chunk of capital to throw around but I think for most of us novice level investor folks, a paid off house is a safe, healthy foothold. Even when amateurs have the capital to throw around we still have to pay someone else to tackle the risky stuff and that creates it's own problems.

[Buster]

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The ultimate is still a collateral charge, uninsured readvancing mortgage with HELOC... stuff all money into it, if shit goes south, max out the heloc and mail in the keys... only in Alberta!

Does this literally only show up as an R-whatever on your Credit report?

[Masked Bandit]

Can someone please help me with the liquidity risk concept? Is the basic idea that if you funnel all your cash into something that isn't generally liquid (like your home / mortgage) then if shit hits the fan you have no cash to pay bills and you're screwed even though on paper you have a boat load of "net worth" sitting there?

[ercchry]

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Does this literally only show up as an R-whatever on your Credit report?

Non recourse loans, so yeah you might end up at R5 (edit: that would be an M5, R is revolving lines, which the heloc would be but for the mortgage to readvance it would have to be an all in one product which would probably show as M, but maybe both? ...M5 is way worse though for future mortgages... lenders really want to make sure you pay mortgages before anything else) as they tend to not like to force the foreclosure process... which does mean you might have issues for a while getting another mortgage. But being non recourse, they can only go after the property... but before anyone actually goes through with this I would highly recommend talking to a lawyer!

[Buster]

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This is some pretty high-level shit, you're obviously far more elegant when it comes to investing compared to the average suburban-Joe. For the non-pros I still think eliminating mortgage debt is a solid approach. When you have a higher than average skill level such as yourself thing change dramatically. I would love to have that kind of comfort and a chunk of capital to throw around but I think for most of us novice level investor folks, a paid off house is a safe, healthy foothold. Even when amateurs have the capital to throw around we still have to pay someone else to tackle the risky stuff and that creates it's own problems.

People need to take stock of their personal cash flow: two incomes? how at-risk is your job? how easily can you sell your house?

If you lose your job, you're much better off with a stock portfolio than you are home equity.

[Buster]

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Can someone please help me with the liquidity risk concept? Is the basic idea that if you funnel all your cash into something that isn't generally liquid (like your home / mortgage) then if shit hits the fan you have no cash to pay bills and you're screwed even though on paper you have a boat load of "net worth" sitting there?

Pretty much.

I'm on-board with the concept of paying down your mortgage to capture all of the benefits of guaranteed returns, and whatever tax benefits come from your particular situation. But I have a hard time rationalizing that your first dollar of after-tax savings should go to reducing mortgage balance, just for this reason. Your investment portfolio should be sufficient to survive on for an extended period: either to sell your house in a non-distressed fashion, or to find another job, etc.

[ercchry]

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People need to take stock of their personal cash flow: two incomes? how at-risk is your job? how easily can you sell your house?

If you lose your job, you're much better off with a stock portfolio than you are home equity.

I think this would shift at some point and it would be interesting to see what the numbers look like. At the right loan to value the ability to show income becomes irrelevant, then of course... if you saved enough in interest by rapidly paying down (or off) the mortgage that 5-9% interest till you have provable income again is cheaper, there will always be someone willing to lend you money on a free and clear home, 9-15% if they are behind another mortgage though

[killramos]

Having a HELOC in place is a nice way to mitigate Liquidity risk from paying down your mortgage.

Trouble with liquidity risk is quantifying it.

[Buster]

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Having a HELOC in place is a nice way to mitigate Liquidity risk from paying down your mortgage.

Trouble with liquidity risk is quantifying it.

I don't have a HELOC, but I think lenders can call this at any time? Also, is a HELOC now non-recourse as @ercchry says? (legit question).

As for the trouble with quantifying liquidity risk: that's exactly my point.

[ercchry]

I think it would have to be non recourse... with the 65% LTV limit that would put it under a non conforming limit, which would make sense. So not even bulk insurable. I would think they could only not renew that loan when your term is up? Force a new appraisal at that point and keep the balance under the new value’s 65% LTV, then if there is still space to convert the remainder to an amortized loan... which would be a refi which is also uninsurable then you’d still be in the same position

Again, recalling it sounds like a bad idea for everyone since it could potential force a foreclosure, which isn’t cheap for the lenders either

Where are the realtor lawyers?

[A790]

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Having a HELOC in place is a nice way to mitigate Liquidity risk from paying down your mortgage.

Trouble with liquidity risk is quantifying it.

The idea of paying interest to access my money is not appealing to me at all.