Why Don’t I Pay Off My Mortgage?

Followers of this blog know that I tend to focus on saving and investing rather than trying to pay off my mortgage faster. Indeed, our household assets are projected to exceed $1 million this year but we’ve still got a $200,000 mortgage to contend with.

So why don’t I make it a priority to pay off my mortgage? It’s not strictly about dollars and cents. Here are three reasons:

1). Higher Priorities

Setting priorities is part of any good financial plan, and those priorities change as you move through different stages of life.

For many years we put all our effort into paying off student loan and consumer debt. Then we became laser-focused on saving for a large house down-payment. Priorities shifted again towards maxing out my unused RRSP contribution room. And now, finally, we’re catching up on years of unused TFSA contribution room.

My wife and I are on the same page with our financial priorities. Right now, we’re focused on these four areas:

  • TFSA – contribute $1,000/month
  • RRSP – max out our available contribution room
  • RESP – max out contributions for our two kids
  • Travel – Visit Scotland/Ireland this summer. Vancouver in October. Maui in February

Paying off the mortgage slides in at priority number five, which leads to the second reason.

2). Finite Resources

In a perfect world we would all max out our RRSPs, TFSAs, RESPs, and start investing in a taxable account – all while doubling up on our mortgage payments and still having money left over for dining, travel, and sending the kids to hockey school.

Reality check. We don’t have infinite resources and so we need to make choices and trade-offs.

I mentioned above that we neglected our TFSAs for many years. That’s because we decided to get a new car and pay it off over four years. Our TFSA contributions turned into monthly car payments.

Now that the car is paid off, we can go back to funding our TFSAs and hopefully catch up on all that unused room before we need a new car again.

Speaking of cars, ours are now 12 and six years old. This “sacrifice” – if you can call not getting a new car every 4-5 years a sacrifice – allows us to increase our savings rate and fund more of our financial priorities each year.

Unfortunately, there isn’t another $800/month money leak in our budget to close that will allow us to fund a fifth financial priority (extra mortgage payments). Not yet, anyway.

And remember, it’s not simply about earning more money. I’m already combatting stagnant wage growth and creating my own raise by freelancing, selling used items online, and earning credit card rewards. That extra income allows us to do everything we’re doing now, plus keep pace with inflation and feed a growing family.

3. Mortgage debt and asset allocation

We tend to think of mortgages and investments in isolation, but if an investor has any debt at all – including a mortgage – then he or she is effectively borrowing to invest.

You could say that I have a leveraged investment loan of $200,000. Another way to think about the mortgage is that I am short fixed income.

A recent video by PWL Capital’s Ben Felix explains why being short fixed income (i.e. holding a mortgage) doesn’t make much sense if your investment portfolio also contains a large portion of fixed income (i.e. a traditional 60/40 balanced portfolio).

My investment portfolio allocation is tilted to 100 percent equities, giving it a higher expected return than a balanced portfolio. This higher expected return is needed to help outweigh the added risk of carrying a mortgage alongside my investments.

Obviously a paid-off mortgage is better than a $200,000 balance. But every mortgage payment reduces my loan balance and lowers the leverage risk.

An asset allocation of 100 percent equities is not suitable for most investors. So, if you’re more of a 50/50 or 60/40 investor, and you’re carrying a mortgage balance, then you’d be better off prioritizing extra mortgage payments.

Finally, we’re not the type of people who abhor debt or obsess about paying it off as quickly as possible. Yes, it’s daunting to have six-figures of debt in the liability column. But we’ve always had a reasonable pay-off strategy (15 years) and the good fortune of low interest rates.

I take more comfort knowing that by the time our mortgage is finally paid off we’ll also have more than $600,000 invested in our RRSPs and TFSAs.

Final thoughts

All of this said, I’m not going to carry a mortgage balance forever. There’s a reason why paying off the mortgage is number five on my priority list. It’s up next!

Indeed, next year both my wife’s and my RRSP will be fully maxed out and, due to the pension adjustment, I’ll only have around $3,600 in available room. Meanwhile, we should be caught up on our unused TFSA contribution room in a few years (end of 2022).

That means we’ll free up an extra $8,000 – $10,000 next year and potentially another $12,000 available in 2023. Barring any major changes or unforeseen expenses we’ll be dumping most of that onto the mortgage to get it paid off by the end of 2025.

By then we’ll have carried a mortgage for 14 years – still a great accomplishment to pay it off so quickly, but not so aggressive that we couldn’t meet our other financial priorities and still live a little.

What’s your take on mortgage debt? Should I pay off my mortgage faster?

Weekend Reading: Blocked By Suze Orman Edition

No, I didn’t get blocked by Suze Orman. But respected journalist and consumer advocate Ellen Roseman did when she had the audacity to call out Suze on Twitter, saying, “giving advice made Suze Orman rich and famous, which makes it harder for her to offer advice to normal people anymore.”

Ellen tweeted in response to this article from A Wealth of Common Sense blogger Ben Carlson, who said Orman has lost touch with reality.

“Orman says she would never waste money on a daily coffee habit but she also owns a mansion on a private island in the Bahamas. And she claims to spend hundreds of thousands of dollars to fly private each year.”

Orman clapped back immediately on Twitter, saying Ellen’s comment was, “the stupidest she’d ever read in her life.” Then Ellen got blocked by Suze Orman.

Indeed, taking advice from the rich and famous can be hazardous to your wealth. Whether that’s Suze Orman, Dave Ramsey, Kevin O’Leary, Mark Cuban, etc., it’s easy to preach from a position of privilege. In the real world, people don’t have infinite dollars to buy a house, pay it off in five years, buy a car in cash, max out their retirement accounts, fill their emergency fund, and save for their kids’ education.

That’s because they’re busy trying to pay down student loans (or other debts), feed their growing families, fix their furnace or the transmission on their car, and pay for expensive childcare, all while trying to set aside a little bit for the future and still have a life in the present.

Orman is completely out of touch telling people that their daily coffee habit is like “peeing $1 million down the drain.” That’s one hell of a coffee addiction! She ridiculously estimates that a $100/month habit would turn into $1 million after 40 years, assuming a 12 percent annual return. That advice is stuck in the 90s along with the original Wealthy Barber and David Bach’s latte factor.

The advice is almost as bad as when an Australian real estate millionaire told Millennials to “stop buying avocado toast if they want to ever buy a house.”

A daily coffee is not going to ruin your retirement. Screwing up big decisions like buying too much home, having too long a commute to work, buying too much car, and not taking advantage of free matching dollars, and spending more than you earn will all hold you back more than any small indulgence.

Orman and company have dispensed a lot of good advice on budgeting and getting out of debt. But, as Carlson writes, “much of what they’re telling you now is more about entertainment than advice.”

This Week’s Recap:

On Thursday I wrote about how investors can control their urgency instinct. This is key to avoiding an emotional mistake when markets are falling or the world is seemingly in turmoil.

We continue to prepare for our vacation to Scotland and Ireland (less than two months away!) and one of the items on our checklist is to see if we can pause any subscriptions or services while we’re away for a month.

We were able to do that with my wife’s gym membership and also with our TELUS home internet and cable package. Pausing these services during our vacation will save us around $230 – not bad!

Next up we’re looking into phone and data plans. I’ve got a lead on a good mobile plan while travelling abroad, so once I investigate more and get it set up I’ll share what it’s all about.

Weekend Reading:

Blogger Alyssa Fischer is back to work after maternity leave and learning to fight the ‘mom guilt’.

Former deep-value investor Nelson Smith shares why he’s no longer trying to beat the market.

Disclosure rules have seemingly fixed the water heater rental business in Ontario. So why can’t the mutual fund industry do the same?

She quit her job and moved home to look after her ailing mother and father:

“I didn’t have parents anymore. I was the parent. It’s the hardest job I’ve ever had. It’s also the best.”

Morgan Housel on why we’ll believe anything if the stakes are high enough.

My Own Advisor Mark Seed shares a reader story about Millennial housing struggles, saying it ain’t all avocado toast.

Rob Carrick on how raising the age for CPP and OAS to 67 would benefit the whole country.

90 percent of women will end up managing their own finances at some point. Here’s why women shouldn’t let a solo retirement catch them by surprise.

Nick Magguilli from Of Dollars And Data says investing is all about the will to survive. By avoiding the big mistakes that befall most investors, you can come out ahead in the long run.

CIBC economist Benjamin Tal says it’s time to rethink the mortgage stress test for homeowners. Why?

“Over the past two years, mortgage originations provided by [non-federally regulated] alternative lenders rose by a cumulative 27% while originations in the market as a whole fell by 11%,” estimates CIBC. That makes sub-prime the fastest growing segment of the mortgage market.

Finally, while a tragic fire ravaged the Notre Dame Cathedral in Paris, two billionaires stepped in to pledge €300 million for the restoration of the building. But does their generous and immediate response tell us something deeper about everyday tragedies around the world?

Have a great weekend, everyone!

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