A discussion on Rob Carrick’s Facebook page today started with a question about debt – how big a priority is it for you to reduce debt?

  1. Top priority
  2. Important, but not my main financial goal
  3. I’m chugging away at debt repayment, and that’s fine
  4. No debt

I answered (2): We put any extra money toward RRSP and RESP contributions rather than paying more toward our mortgage at the low interest rate of 2.05 percent.

Related: Are low rates punishing savers? Hardly

Carrick replied with a comment that made me pause and think about how my approach to debt has changed over the years:

“Robb, that’s smart. I think it’s a form of buyer’s regret that has people with historically low mortgage rates rushing to pay down their mortgages. They’re unnerved by how much they owe. You can get a 25-year mortgage down to 22 years just by paying biweekly.”

Mortgage payments didn’t always take a back seat to investing in our household. Before we built our current home we saved like hell in order to come up with a 20 percent down payment and avoid CMHC insurance premiums.

Still, I was uncomfortable with a mortgage in excess of $300,000. Maybe it was a form of buyer’s regret that led to my extremely aggressive approach to pay down the balance. What started as an extra $500 payment per month turned into $1,100 per month with the idea that we could be mortgage free before the age of 40.

This went on for three years before I relaxed and realized that rates weren’t going anywhere, and that extra money could be put toward more RRSP and RESP contributions, as well as toward developing our basement. Additional years of compound growth for my RRSP contributions, not to mention free government grant money for the kids’ RESPs, would surely beat the guaranteed low rate of return I was getting on the mortgage payments.

Google-Debt

Looking back, you could say it was regret that led us to prioritize our mortgage pay-down ahead of our investments. Maybe I was nervous about the amount we borrowed, or that we might have moved into our forever house too soon. Back then (2011) alarm bells were going off about household debt and impending interest rate hikes (funny, it still sounds like that today).

Related: Why our debt-to-income ratio is misleading

High prices and the constant threat of rising interest rates can have a powerful psychological effect on home buyers. According to a survey by the Canadian Association of Accredited Mortgage Professionals (CAAMP), more than one-quarter of first-time buyers say they would probably not be able to afford their home if the minimum down payment increased from 5 to 10 percent. And with prices still sky-rocketing in cities like Vancouver and Toronto, many home buyers are saddled with mortgages 2-3 times the amount we borrowed.

It’s clear now that I was being overly cautious about our mortgage situation. We could afford to double our monthly payments (which we did, for a year), so an uptick in interest rates wasn’t a concern. We put more than 20 percent down and now have about 40 percent equity in the home. We also plan to stay put for a long time, avoiding the trap of constantly trading up to a bigger home.

Plus, lowering our mortgage balance wouldn’t help us during a bad recession with a prolonged period of unemployment. We needed savings.

Related: Mortgage free at 31 – Worth the sacrifices

We’re comfortable with our financial plan and take a balanced approach to paying down debt and saving for the future. While it’ll feel great when we’re finally debt-free, we don’t want to ignore the asset column of our balance sheet. Especially when the current interest rate on our mortgage is so low and we have decades to let the compound interest on our investments do its thing.

What’s your take on prioritizing debt repayment? Is Rob Carrick right about home buyer’s regret?

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20 Comments

  1. Jim on June 25, 2015 at 6:02 pm

    Excellent post. We did the same thing, made way too many pre-payments on our somewhat small mortgage rather than investing more. I got spooked back in 2009 by all the ‘10% interest rates are coming next month!’ type headlines that oddly we still get bombarded with today. Also I was reading a lot of Garth Turner

    • Echo on June 25, 2015 at 8:02 pm

      Thanks Jim! You can only hear, “interest rates have nowhere to go but up” and, “Canadian real estate is due for a crash” so many times before you start to tune out the noise.

      I think you have to somewhat ignore the macro trends and focus on your own unique situation. How stable is your income, are your finances in decent enough shape to afford a house, what does the next 3-5 years look like in terms of moving or having kids, etc.

      • Richard on June 26, 2015 at 8:27 am

        That’s the way to go – and expect the unexpected too. When I bought a house I had no idea I would be selling it 3 years later. So I managed to buy and sell before the crash 🙂 I think prices may have started going down the year after I sold but I don’t pay attention anymore.

  2. Tom on June 26, 2015 at 4:20 am

    Nothing quite like the feeling of paying off your mortgage. Find me a retiree with a mortgage who is happy that he hasn’t paid It off?

    • Gregg on July 12, 2015 at 9:22 am

      That would be me! My mortgage was for investments in the first place, and the dividend rate is higher than the mortgage rate. Add in the interest tax deduction for being an investment expense and the preferred taxation of dividend income and it works great for me. There are risks to this, but I don’t need the investment income to make the morage payments, so I’m secure and doing well playing the long game.

  3. JohnnyStash on June 26, 2015 at 6:10 am

    I think the piece that is missing is job uncertainty. While it it nice to see the future wealth of an rrsp accumulate, the reality is that without a job over a prolonged basis (ie 12 months), the mortgage is of greater concern.

    Pay it off, sleep better at night and redirect the once destined cash for mortgage payments to a savings vehicle.

    • Echo on June 26, 2015 at 12:39 pm

      @JohnnyStash – I’d argue that the opposite is true. While not ideal, you can pull from your RRSP to get you through tough times. Throwing everything at the mortgage leaves you with no savings in the event of job loss, plus you’ll have to continue paying the minimum on your mortgage anyway.

  4. Kurt Pearson on June 26, 2015 at 6:54 am

    I just bought my “forever home”. I never thought I would say that at 35 but barring big, unforseen circumstances, we’re not going anywhere. I think I lack the regret gene. We kept our other place as a rental…that scared me a little but so far has been awesome. Sometimes I just see two big mortgages, but then I realize someone is paying one for me and I relax a little. I’m terrible at feeling the need to get out of debt. I convinced myself 5 years ago rates weren’t going anywhere. Floating at 0.75% less than prime, it was so close to free money it was almost unreal. I can handle a big jump in rates but I don’t see it coming. I believe 6 or 7% now would have the same effect as the 18% craziness in the 80s. People borrow so much these days.

    • Echo on June 26, 2015 at 12:40 pm

      @Kurt – Forever is a long time 🙂

  5. Michael James on June 26, 2015 at 7:42 am

    I think it’s perfectly rational to focus on paying off a mortgage when it is large relative to your income. An increase in interest rates is always a possibility. The fact that it didn’t happen to you doesn’t mean you were overly cautious. The rational approach depends greatly on the cost of rising rates. If rising rates would force you out of your home, then you can’t afford to gamble. If rising rates would just dampen your lifestyle a little, then you can afford to compare your mortgage rate to potential investment returns and conclude you’d prefer to fill up your RRSP and TFSA.

    • Echo on June 26, 2015 at 12:46 pm

      @Michael James – When I say overly cautious I mean that I’m conscious about not overextending ourselves, to the point where we’ll typically delay big purchases or lifestyle enhancements for longer than necessary.

      We waited 18 months after first seeing our “dream home” in order to save up enough of a down payment and get our finances on better footing. We put 20% down, not 5%. We didn’t borrow the maximum we could afford. So, really, we were going to be fine without three years of aggressive payments.

      • Michael James on June 26, 2015 at 12:52 pm

        To me, the real test is whether you would have been fine if interest rates had risen by 5%. If yes, then you were likely too cautious. I was overly cautious with my first mortgage as well, but it didn’t cost me much. I have far more regrets about losing 6-figure sums on poor stock picks than I have about leaving a 5-figure sum on the table from paying off my mortgage instead of investing.

  6. Richard on June 26, 2015 at 8:26 am

    Paying down a mortgage a little faster has a lot of benefits. It’s not necessarily a form of regret, any more than buying insurance for a car (now if you’re constantly worrying about every scratch on the car that might be regret).

    What you said about a recession or a job loss is really important. Paying down a mortgage is great, but if you need to get part of that back when you have no job is the bank going to co-operate?

    I invest as much as possible. The stock market is not a good vehicle for short-term savings, but I also know that in the highly unlikely event that I need to take it out again I have full control (even if I have to take a small loss in the process).

    For others it would make sense to build up an emergency fund or other savings before doing this. Either way that gives you more liquidity which is better than having a high net worth but no cash!

    • Echo on June 26, 2015 at 12:48 pm

      @Richard – I think our ideal scenario is when the line of credit is fully paid off next year and then we can just keep that open with a zero balance to use for emergencies and start building our TFSA for medium-to-long term savings.

      • Richard on June 26, 2015 at 1:37 pm

        That’s pretty much what I’m doing too. As long as you have enough assets that you could get by if your line of credit is shut down and the markets are down 50%, I think it’s a good way to maximize returns. When you can withstand 2 – 3 major losses at the same time you’re pretty safe! For those who are just starting out an emergency fund would also help.

  7. Sean Cooper, Financial Journalist on June 26, 2015 at 4:41 pm

    Option 2 makes the most sense for people, unless you have high-interest credit card debt. Then I go with option 1. No point in contributing to your RRSP when you’re paying interest of 20%.

  8. Cool Koshur on June 26, 2015 at 6:23 pm

    All good comments. There is no perfect answer. It depends on each individual. Everyone would love to be debt free. Remember there is a loan for pretty much everything except retirement. I would always top up my RRSP and save atleast 30% in taxes. I am basically paying myself first. This is forced saving.Next I would like to have 6 months savings for emergencies. If you have kids, then RESP is another great tool with 20% gain just on enrollment by govt matching. Once I have these taken care of I would then think of lumpsum pre-payments. Not matter what all home owners should be using bi-weekly accelerated payment option. In my case it would be option 2

  9. Dollarsense on June 30, 2015 at 12:42 am

    Another consideration not yet mentioned is mortgage insurance. If one spouse has a job that carries some real risk, then couples may find less benefit in paying down the mortgage early if the worst case scenario were to happen. They might choose to focus on building other assets that add to the family’s security if one spouse is left to raise the children alone. Just another consideration that may factor into decision making around debt.

  10. Marcus on July 9, 2015 at 8:35 am

    I believe there is too much uncertainty in the financial markets and housing markets. They are no guarantees out there in terms of rate of returns (stock market crashes, housing bubbles, commodity fallouts etc..) If you were to pay down your mortgage as soon as possible, you are pretty much guaranteeing yourself a minimum of 3% return (average mortgage rate). Once paying off the mortgage continue investing on a regular basis and any other returns will be on top of the 3%. This will lead to being debt free and a strong savings account.

  11. SIS on July 21, 2015 at 6:56 am

    One thing people often forget is because of the way mortgages are front-loaded, meaning early payments are comprised of more interest than principal, it’s often a huge advantage to pay it down quicker in a low interest environment. More of your money will go to lowering the principal amount borrowed. Hence, when interest rates rise, homeowners will be paying interest on a smaller amount. We’ve never regretted paying down the mortgage. It has the added benefit of better sleep at night. However, it is advisable to take a balanced approach and consider individual overall financial situations.

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