Canadian Mortgage, Car Loan, and Investment Questions

[ScotianPeachFuzz]

My wife and I have started reading the MMM blog not long ago and want to build our stash.  To that end we have examined our finances and have a couple of questions.  We live in Canada so as far as I am aware there are no tax benefits to pay off the mortgage early.

Debts:

Mortgage
Principal - $194,000
Interest Rate - 2.79% (until Dec 2016)
Amortization - 18.5 years
Payment - $560 (semi-monthly)

Car Loan
Principal - $12,000
Interest Rate - 3.25%
Amortization - 3.6 years
Payment - $145 (semi-monthly)

Monthly Savings (for debt payment or investing):
$1000

+ $5000 lump sum that can be used now


We currently have $7000 in cash accounts.  We would like to keep $2000 as an emergency buffer, so that leaves $5000 towards debt or investment.

I set up a spread sheet with both loans and if I did it correctly putting it on the mortgage is a $3300 savings in interest, while for the car it is only $480.  It seems obvious that it is much better to put it on the mortgage.  Am I missing anything?

The other option is obviously putting that money into index ETFs.  What is the best option?

Edit: added info from posts below.

[kindviking]

Do you have any other debt? If not, then I would invest. Ideally, max any tax-advantaged accounts, then after-tax accounts. Your debt is pretty low interest and not a huge amount. (Unless you are struggling to pay these loans. In that case, pay off the car or sell it for something cheaper.)

[alsoknownasDean]

If you put that money towards the mortgage, you're effectively earning 2.79% (admittedly tax-free) on it.

If you invest it in something that generates 7% pa, theoretically you're better off investing it, even if it increases your taxable income (although that depends on your marginal tax rate as well).

Most of us would say downgrade the car and be rid of the car loan, but as kindviking said, it depends on your financial situation.

And that's before considering stuff like RRSPs and whatever else is available in Canada.

[ScotianPeachFuzz]

Thanks for the replies, here is some more info.

No other debt and no struggles paying the current set amounts on the loans.  The car is a Hyundai Elantra Touring, so quite practical even according to MMM.  We have three kids so even though we don't drive much at all (20,000km in three years) sometimes we do need the car.

We do have lots of room in our RRSPs and TFSAs.  But if I work for another 13 years I will have a very good pension so as far as I understand putting investments in TFSAs would be the better option.

I can see why investing is better... but it would be so nice to get rid of that debt...

[gecko10x]

I think you are not being clear enough for people to answer appropriately.

Canadian mortgages aren't fixed, AFAIK, so when does your rate reset, or when do you have to refinance? That will have an effect on the responses you get.

[ScotianPeachFuzz]

The mortgage is a fixed rate for another 20 months.  At the current amortization the mortgage will be finished in 2033.  But we think it would be good to move that up to at least 2028.  That is the year I will be eligible for a pension of about $40,000 - $45,000.

In addition to the $5000 we can use immediately, there is $1000 per month (until we trim more fat) that we can use for investment or paying down debt.

Is paying down debts quicker a good idea?  I know that the interest rate on the mortgage is quite low now, but I don't think it will be that low for the life of the loan.  Would paying some of it early now protect us from future rate hikes?

I will edit the OP reflect this additional info.  Is there anything else that is required?

[RichMoose]

You don't have any high interest debt. For this reason you are best off maxing out your tax-advantaged investment accounts first (TFSA & RRSP). If you are counting on receiving a large pension and won't be retiring very early, focus on the TFSA. After this, there is nothing wrong with cutting down the car loan and the mortgage. Get rid of the highest interest rate loans first.

There are significant tax advantages to paying off your loans because you interest expenses are all in after-tax dollars. For someone living in Nova Scotia (guess based on name), you will likely have to earn $1.70 pre-tax for every $1 that you pay to your loan.

I wouldn't be too concerned about paying off your mortgage because of future higher interest rates. At the rate this country is going we will have low (historically speaking) interest rates for the next few years.

[ScotianPeachFuzz]

Thanks Tuxedo, very helpful advice.

[daverobev]

Statistically you will be better off investing. Is your pension guaranteed, or is there any risk (company could go bust vs government not likely)?

Considering you'll be in the 30%(ish) band on $45k you probably want to max TFSAs before doing RRSPs. Unless you are earning enough to be paying top rate tax now.

TFSA is awesome.

I am going to be completely contrarian at this point. We have our mortgage set up to be biweekly and are doing the 15% extra on each payment plus lump sum payments. Interest rates could be low when our mortgage comes for renewal, but then again... and I just like the cashflow side of it. Mortgage gone? Boom, much less going out each month!

We have a smaller mortgage on a smaller house, though, so I'm doing what I'm doing with a 5 yearish goal to pay it off. Chances are we'll be upsizing in a while anyway... but, again, it means the debt we'll take out won't be as large.

In the US with a 30 year fix? I'd be paying the minimum and investing the rest. Here, I'm investing most and paying off some extra.

Car loan, meh, well it's done. No point worrying about it now as the depreciation has likely mostly happened, it's a car you've known since new, assuming you like it and it works for you keep it for 10+ years and it's all good.