Pay off your mortgage? Or invest the money? That’s a question that gets asked an awful lot in the personal finance space and it’s one of the many questions that never seems to have a clear answer as there are people adamant about their own stances on completely opposite sides of the argument.
For us, we’re somewhere in the middle and we’d like to discuss what that is as well as what our plans are moving forward.
We reference mortgage payments in a lot of our posts, we’ve made a fair few double up payments on our mortgage as it stands but we’re also avid investors who love to see our passive income increasing month over month.
So, let’s get to some of our thoughts on the matter:
The Numbers
This is perhaps the most ill-used argument in the entire finance ecosystem. The fact that if you can get a higher rate of return on your investments than your mortgage interest rate you should be investing. Period.
While there is a little bit of truth to that argument that doesn’t tell the whole story as you can never predict what the market has in store for us nor should you ever feel so confident that the market “will” return any specific %, you hear 7% a lot, 10% a lot and in some cases you even hear that a 12+% return can be expected as though these numbers are somehow pre determined and destined to happen. This is false, nobody has a clue what the future holds.
On the flip side of that argument, you also hear people talking about how they only pump money into their mortgage because they’re worried if they invest in equities that their money will “go to zero” which is also completely misguided and shows more of a lack of interest/knowledge about the stock market than anything in my humble opinion.
So why would I pay a mortgage off first?
The simple answer to this is that it is a safer investment. Yes you can lose money in the real estate market, but if you’ve already bought the house then guess what? You’re on the hook for the entire value of that mortgage whether the market goes up or down, so since you’re going to have to pay it off 100% at some point, speeding up the process and saving yourself the interest in the process is a good path to take if you’re a conservative investor.
Another thing to take into account is the relief or lack of stress one would feel if they suddenly didn’t have to make a mortgage/rent payment ever again in their lives. We’re not even close to feeling this yet but I can only imagine that it’s amazing.
The third reason I’ll give that may not apply to everyone (but I believe it does?) is that when we make our mortgage payment at the start of each month we have the option to double up this payment interest free! And a very nice side part to this principle only payment is that should we ever lose our jobs or encounter any hardships we can then use this pre payment in place of our scheduled mortgage withdrawal for no extra penalties. In a sense it’s a bit like having an emergency fund.
Workplace Investment Accounts
In our specific case, we both have investment accounts set up through our workplace that we have locked in automatically coming out of our pay checks. For Mr. FIC this equates to about 25% of take home pay between a DC pension and an unregistered savings plan, and for Mrs. FIC this equals about 10% in the form of a DB pension.
I highlight these numbers to make it clear that even if/when we stop investing into our personal investment accounts and switch to more rapidly making mortgage payments we are still saving a decent amount of our income that would keep us in line or above the 15% people like Dave Ramsey suggest.
When will we start focusing solely on the mortgage?
As I’ve said, we do make some additional payments towards our mortgage but haven’t focused on it yet. Why do I say “yet”? That’s simple, we have an order of operations we plan to follow and have to date been following that we feel best preps us for our later years. This goes as follows:
Our first priority each year will be to max’ing our tax advantaged accounts, for those of us who live in Canada we have 2 main vehicles to do this in.
The first is the RRSP account, where however much you contribute you can then deduct come tax time (with limitations of course). So for a very simple example let’s say this year you earned $100,000 and deposited $20,000 into an RRSP account, now let’s also assume that $80,000 to $100,000 is taxed at 30%. The math would go like this:
$20,000 RRSP Deposit x 30% = $9,000 back at tax time.
If you then take that $9,000 plus kept up investing $20,000 you were able to invest last year you’d then have $29,000 to invest in this new tax year.
We have been heavily pouring money into RRSP accounts this year because we feel we are at/near the top of our earning potential as a couple and definitely don’t plan on being in this tax bracket when we retire and ultimately get taxed on the withdrawals of these funds.
The next account is the TFSA (or Tax Free Savings Account) where you can invest or save your money and the gains you make in this account are never taxed plus you’re free to withdraw from it at any time. For us the tax free benefit makes this a priority as well over mortgage so we will continue with these accounts as well prior to full on blitzing the mortgage.
So what’s our plan then? It’s simple:
- Invest in RRSP’s until they’re maxed out and reap those tax returns.
- Invest in our TFSA’s until they’re maxed and take advantage of the tax free compounding of our money.
- Once these accounts are maxed out continue only with our workplace investments and funnel the rest of our pay onto making additional mortgage payments and really hammer down!
A note to make would be that the RRSP and TFSA’s have a little extra space open up each calendar year, so early on we’ll use up that contribution room and then revert back to the mortgage.
As it stands we’re just now closing in on having these accounts filled for the 2019 year, and will hopefully have the 2020 calendar year filled by the start of the second quarter.
The wrap up
That’s all we have for you today. Agree? Disagree? Let us know in the comments below or over on Instagram @FindependenceCanada and we’ll be sure to get back to you.
As always we are not certified financial planners and are only giving our thoughts on these subjects, not advice for your personal situations so please consult with a professional before making any financial decisions.
Thanks for stopping by,
FIC.