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?
Hi Robb, good article, and I agree. Especially if , and I assume you are in that group, the mortgage rates are very low. It’s much easier now, then say thirty years ago, to be at a point where your principal payment is higher than your interest. Our first mortgage was at 13.75% and I don’t think you would have been writing the same article in a case like that. So, good for you to be in the position you’re in and more power to you to keep the goal.
Hi John, many thanks! Yes, the mortgage rate is (and has been) very low. Under 3 percent right now and has been as low as 1.90 percent.
You’re right that it’s hard to imagine double-digit interest rates. Low interest rates and steady, predictable inflation has made life a lot easier. Add in a 10-year bull market and we really can’t complain, can we?
Great article.
Paying off the mortgage early is a fantastic goal and achievement. It is not foolish to actively pursue this goal, but it is useful to consider two points.
First, are your investments generating a higher rate of return than your mortgage is charging?
Second, if you suddenly loose your income, you must still pay next months mortgage, you do not get any credit or consideration for extra payments you may have made in the past. For the second scenario you might be very glad you invested additional mortgage payment money in an investment account with easy access (TFSA or non tax sheltered) so that you can keep paying the monthly mortgage payments. Additionally if the goal is pay off mortgage ASAP, the investment account will get there quicker if your investments earn higher return than your mortgage is charging.
Thanks keep up great articles/discussions.
Hi Jeremy, great point that extra mortgage payments early on can give you access to payment vacations or holds during a period of job loss. A note on my TD account says I’m eligible for 4 “payment vacations” (great, although they’re quick to point out that interest will still accrue).
And, yes, great to have easy access to an emergency fund and/or TFSA investments in case of prolonged job loss. That’s actually one of the best arguments for not piling every penny into your mortgage and instead building some savings alongside of it.
Why wouldn’t you sell your invesments pay off your mortgage and borrow to buy your investments back at least making the interest tax deductible? Expected return and actual return can be very different.
Brian
With mtg rates about the same as LOC net of taxes, I find it better to have the bird in the hand. I have a mortgage for my windows then heating as well as investment loans.
I don’t see that inflation is low as they say it is. I feel sorry for savers especially the elderly or senior citizens that worked so hard to save their money and are getting 1% to 2% at major banks and not much better elsewhere.
I am benefiting from low mortgage rates of 2.7% to 3.6% this has been my range but come on give them a break. The cost of living, gas, heating, electricity, property taxes, water rates, insurance, food etc. increases of 4% to 10% at least per year. C.P.P, OAS is another problem with only 1.6%, 1.8% annual increases.
People that have money in savings accounts, GIC’s, term deposits should be getting at least 3.5% to 4.5% just to at least get something decent for their money. They should not have to take a risk or get more complicated money matters in their lives.
I agree with your strategy. You are earning higher rate of return than you mortgage interest rate so you are $ ahead.
Bingo:
“Reality check. We don’t have infinite resources and so we need to make choices and trade-offs.”
As long as you understand these trade-offs, and you do Robb FAR better than most :), you’re good.
Continued success to you my friend – you’re doing great.
Mark
Hi Mark, thanks for the kind words. We’ll get to the mortgage…eventually. I know it was a priority for you once you maxed out your investment accounts so I think we’re on a similar path.
Cheers!
Hi Robb, I really like your approach and the way you explained point#3. I’m of the philosophy to hold 90-100% equities, and have been debating whether to pay off my mortgage balance of $110K at 3.12% interest or max out TFSA,RRSP first. I’ve read many articles on this topic, and yours is the one that has helped me come to a decision. I never thought of it as being ‘short fixed income’. Thank-you for your insight!
Hi Jay, thanks so much – glad you found the article useful for your situation. Full credit to Ben Felix who clearly explained a complex topic.
The article is perfectly timed to what I had been thinking in my situation.
I realize now that I should be considering my mortgage as part of my overall risk allocation, and should be switching to aggressive on most of my portfolios (a few of them the tfsas were balanced).
On your RESP, would you say based on your priorities, that you are contributing only up until the govt matches with grants, or is there value to contributing more there?
Hi Ivan, we contribute $2,500 per child per year to their RESP account to max out the $500/year CESG government grant. There’s really no benefit to over-contributing to the account. We just want the grant and the guaranteed 20 percent return that comes along with it.
There actually may be an advantage to contributing to the RESP beyond the government match once all debt is paid off and the TFSAs and RRSPs are maxed.
If your investment gains are otherwise taxable, consider the ability to have the investment tax sheltered for a period, and then later taxed at a lower rate in the hands of your child when they go to school. You would have to compare that to the tax treatment of capital gains and dividends for your personal situation. It may not be applicable to all people, but perhaps to some. YMMV
I paid off an almost 500k mortgage in 6 years this past March. I turn 38 this year. Interest rates were rock bottom. I had to forgo my RRSP and our TFSAs. Spouse has gold plated gov DB. We have invested religiously in both kid’s RESPs. We’ll have another addition to the family later this year.
I work in a high pay high volatility job. My concern was always loss of my income. Too few actually understand the impacts of that loss. I’ve been there, multiple times in my career. Not fun.
Now that the mortgage is paid, we are planning to max my RRSP, and our TFSAs in the next 4 years. We will also contribute an extra 14 k next year into each kid’s RESP to ensure we max at the 50 k limit by the year they turn 14.
There is a huge unquantifiable cost that stress has. It manifests as physical, emotional, mental, relationship-related symptoms. Paying off my mortgage had helped me avoid all of that. My spouse and I never negatively talk about our finances. Our family is super close. And at any point going back 4 years or indefinitely into the future, we never worried about a job loss.
That will be tough for most to say when they lose their job and their investments take a hit due to a slumping economy. Would you be able to liquidate your investments after a 20% or 30% drop to make mortgage payments? The average investor will struggle on multiple fronts if that were to happen to them. For me the guaranteed return of unpaid interest payments is worth the same, if not more than the returns investment would have achieved.
-RD
Hi Ardy, thanks for sharing that. While it’s easy to say theoretically that investing *should* outperform a low interest rate mortgage and therefore would be the more optimal choice, you’ve just articulated the behaviour and emotional argument for paying off the mortgage quickly and giving yourself (and your family) peace of mind.
Well done!
Excellent article and discussion. Doesn’t apply to me personally as I killed my mortgage long ago for 2 reasons :
1) interest rates were double digits -I did say it was long ago 🙂 which made it an easy and essentially risk free “investment” and
2) I, like Ardy, had a potentially unstable employment situation and wanted the roof over my head to be there.
I agree totally with Ardy with the stress reduction that comes with being non-income generating debt free.
I still hold debt but it generates income so in my mind the stress aspect is a wash – liquidity and the investment capital easily cancel the debt – I keep the difference.
That brings up the “Smith maneuver” – have you considered it ? It would seem you have enough investment capital to pull it off and if you use it then you really don’t care about not paying off the debt as long as your investment makes more than the interest cost.
Enjoy Ireland!
Excellent article, in fact if one can create enough cash flow they need never pay off mortgage. it just becomes another bill to pay each month. Not for everyone and of course paying off mortgage is a great idea for most, especially if job security is a factor. Love that you are setting priorities and that paying off the mortgage is down the list.
We raised a family of three boys on a single teachers salary. I stopped putting extra payments into the mortgage when I realized it was better to invest. Still hold a large mortgage and am in no rush to pay it off. Retired at 56 last year from teaching and dropped the stress. Work less and play more is the goal now.
Stagnant wage growth and finite resources is something I have lived with most of my career. What I did have going for me was a great pension and job security. I also don’t abhor debt but see it as a tool that can be used to carefully grow wealth.
We did it a bit different. Paid of the mortgage on first house in 5 yrs (94-99) and the cottage 5yrs (04-09) rates were a bit higher then.
Think I would still do the same though my priorities were different
1. RRSP HBP repayment (since slightly mandatory, filtered money through here just before buying in the 60-90 window after put in RRSP before closing) so got the full amount + the deduction in cash for the mortgage (though paid this off before the 15 years too since then more compound growth in RRSP)
2. RESP (since you lose the 20%, well can double up later, but that would never happen and the compounding effect is important)
3. Mortgage (in a reasonable time period, its as said above good short-fixed income ie forced savings)
3.b TFSA (didn’t exist at the time would be here since RRSP tax bracket wasn’t super high)
4. RRSP was in average tax bracket expecting that in future would be higher (just out of school at the time, 31 in 99) but kept doing a bit every week (ie just like the mortgage)
5. travel/fun (again not strict priority, but during the 1st mortgage time it was simpler/cheaper travel/fun)
6. non-reg
7. leveraged non-reg (only once 1-3 are done is paid off and just a <30% of the non-reg value, I think of it as mortgage that the dividends pay for and tax deductible)
if I was that age today I would likely keep the same priority (again not strict would probably do $25-50 to TFSA, and same to RRSP in amongst the others, just to not have all eggs in one basket)
depends a lot on you age/kids, income, job security and mortgage rate
if I bought a home today and had to do it with current circumstances @ 50 in higher tax bracket its would be a bit different (HBP,RESP,RRSP,Mortgage,TFSA) and if close to paying mortgage off at end of a term would take from Non-Reg or TFSA and pay it off)
again never going overboard on any one of the priorities
now luckily enough the first 3 are all done and concentrating on the back 5)
wouldn't generally do any non-reg till Mortgage paid off (ie 2x each payment + yearly 15% or whatever limits)
of course
0. consumer debt (would do nothing till this is paid off, shouldn't buy a house till then either, this is crippling)
one thing I found was the kids and expenses just shot through the roof from 12-20 till all at Univ now so was happy to have paid off the HBP,Mortgage (and RESP by 14) before that
Solid approach when you have a DB plan and relative job security with essentially no wage growth (or negative in many cases for public servants). What you can do however that is similar with a paid off mortgage is to use your equity to get cash flow in retirement via HELOC or reverse mortgage. Can’t take the house with you when you go so either your strategy of keeping a mortgage, (or the alternate strategy to use home equity), to finance lifestyle improvements is one too many people refuse to consider. Leaving all your hard earned effort to kids is not doing them much favours in terms of how to fend for themselves in this world…and it sure shows in current society.
I prioritized paying off the mortgage early in our home ownership journey and once I was confortable with the loan amount, I deprioritized it and even renew with 25 year amortization to lower my payment.
I make way more money investing (annual average return over 10%) than paying my mortgage at a rate of 2.69%. The math for me is simple now but I did get the mortgage amount in a position I was comfortable with. I can technically pay it off if I sold investments and the mortgage is 10% of my house value today.
Hey Robb,
We met with our advisor recently to review our investments. Right now we are in our early 40’s, mortgage free, debt free, RRSP’s and TFSA’s are maxed. I also have a Defined Pension Plan that I contribute to monthly. I am now out of RRSP room for the year. We also contribute the max to our son’s RESP. We paid our mortgage off in 5 years while investing sort of doing a balanced approach to the process. Recently we made changes to our life insurance for the long-term and are now considering other options to invest our money rather than having it sit in the bank. I don’t think there is a right or wrong answer in terms of paying off the mortgage or investing first so we took the safe route and went down the middle.
You say your mortgage is effectively borrowing to invest, except it’s not. Unless you’re using the Smith Manoeuvre, your mortgage is not tax deductible, unlike other investment loans.
If you are in Canada mortgage interest is NOT tax deductible. The first thing that should be done is paying off the mortgage and then borrowing against the asset to invest which now makes the interest tax deductible effectively cutting the interest in half. You cannot borrow this way to fund an RRSP which was another advantage the government has disallowed.
For about 10 years I focused on getting my RRSPS and TFSA maxed and then started putting more effort into my mortgage. In the last 2 years I have started throwing every spare penny at it so that I can have all that money (and mental security) available for other things.
I have a pretty secure job but I am single and have only myself to rely on so the emotional benefit to paying off my mortgage is huge to me. But I didn’t do it at the sacrifice of my RRSPs earlier.
I am travelling a bit less now than I would like to for a couple of years but soon, oh so soon, I’ll have a lot of freedom to do that.
My car loan isn’t quite paid off but is only 0.9% interest so I haven’t worried about paying it off any sooner but my completely debt free horizon is approaching now and looking at more non-registered investments is going to be my next challenge.
We have 3 contract seasonal jobs in snow plowing, landscaping, courier delivery. This is why when we get large amounts coming in we pay off our mortgage with extra payments of up to 15% per year which is $20,000 currently.
We have paid off 65% of our mortgage since 2008 and we have managed to max out our TFSA’s worth $150,000 or so. We don’t understand stocks, bonds, REIT’s etc. investments. This is why just were putting in compound interest GIC’s for 5, 7 years at peak rate periods of 2.75% to 3.5% over the years. Our reserve account is 2 years of living expenses without our mortgage payments included.
We are now looking at Vanguard ETF’s for future money but that will be from our principal and interest savings of paying off the mortgage. This is $800 a month extra that we will do for sure.
We don’t pay off our mortgage because we use the equity built up to buy other properties using downpayments and we rent them out.
We are paying $10,000 a year interest which we can deduct but we are getting net $20,000 a year in rental income after all expenses, taxes etc.
Why do you prioritize the TFSA over the RESP? What value do you give to the government match?
Hi Nick, while those priorities may not have been listed in any particular order I do put my retirement savings ahead of RESP contributions. The 20% match is terrific, don’t get me wrong, but if I had to choose between contributing to my tax-sheltered accounts and making RESP contributions, I’d go with the RRSP/TFSA every time.
I’ve seen parents who are struggling to get by, yet max out their kids’ RESPs. I don’t think that makes much sense. Your kids can get student loans, work part-time, and apply for scholarships. If you don’t save enough for your own retirement you have to work much longer and/or reduce your lifestyle.
My kids are 10 and 7. We did not max out our RESP contributions for the first few years. Instead we started with $50/month. Now we max it out and still have the opportunity to catch up on those missing grants (you can catch up one year at a time by doubling your contribution).