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.
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?