Author Topic: Cost/benefit analysis of not paying down my mortgage (Canada)? Feedback please.  (Read 1850 times)

RetiredAt63

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Question at bottom, this is background to explain why I am asking it.
Background: like many Canadians I have been wanting to pay down my mortgage ASAP since the interest is not tax deductible, as it is in the US.  And like many who posted in the "Divorce as a weapon of mass financial destruction" thread, I went into debt big time after the separation.  Now that the divorce is final, and I am not bleeding money to lawyers, I am actually paying down debt, and the mortgage was planned to be next.  Seriously, personal line of credit, from over $40,000 to $0, car loan, $0, credit cards, $0 (paid off weekly), only thing left is a small RRSP loan (only took it out because the interest rate was lower than the LOC and it will be gone by June) and the mortgage (at 3.65%, which is pretty good for Canada).

I did my taxes yesterday and realized that this may not be a good idea after all.  To buy this house I had to cash in investments that I had wanted to keep, so once I owned the house I took out a mortgage and bought similar investments.  That means the interest on the mortgage is an "investment expense" for tax purposes.  The difference in my taxes with and without the interest cost is about 15% of the interest (i.e. for every $1000 of interest I had a tax refund of about $150).

So, I am seriously rethinking the mortgage payment acceleration.  At the moment it is not an issue, since I have maybe an extra $750-$1000/month freed up, and I have major maintenance on the house to do this summer that is a better use of the money.  But when ex-DH and I eventually sell the matrimonial home (it is about to go on the market) there will be a big chunk of cash available, enough to pay about 1/2 to 2/3 the mortgage on my house.  That is what I had planned to do.  But now?  Maybe not.

Question: For the big chunk of money I will eventually have from selling the matrimonial home - from a financial analysis viewpoint, is it more effective to:
Option 1. put the money into the mortgage, pay less mortgage interest over the long term, but have a smaller investment interest deduction for taxes,  or
Option 2. invest it (max out my TFSA, then other investments, maybe a small amount to the mortgage), pay more interest on the mortgage over the long term but have a larger tax benefit?
 
This is similar to the tax situation in the US, but not totally, since my income has no effect on how useful the "interest as an investment expense" is. I am in the middle of my tax bracket, so any extra income from investments won't bump me. However, the interest expense comes before the calculation of net income, so it does affect how much my future OAS will be clawed back (the more interest, the lower my net income, and the less clawback).  Also, at least some of any extra income would be tax sheltered (whatever goes in the TFSA). 
My gut reaction is to still put it into the mortgage, since I am retired, but gut reactions are not always reliable.

I haven't put in dollar values since 1. this is as much detail as I am willing to put out into the ether, and 2. I don't think it would affect the principle of the analysis.
« Last Edit: April 20, 2015, 08:29:47 AM by RetiredAt63 »

Retire-Canada

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Re: Cost/benefit analysis of not paying down my mortgage (Canada)
« Reply #1 on: April 20, 2015, 07:26:50 AM »
I'm in Canada. My only debt is a mortgage. I've considered accelerating the payments, but with rates so low and no real expectation for that to change any time soon my money is better off in the markets.

I'm maxing out my TFSA and that set of investments can be liquidated and applied to my mortgage if I wanted to do so at some point down the road. In the mean time it's earning me more money that the interest it could save me on my mortgage.

My mortgage is pretty flexible. I can double the payments any time I like and pay off a large lump sum every year. I can lock into a fixed rate at any time and I'm renegotiating the variable rate every 5 yrs.

Since I didn't buy too much house for my income I can deal with a significant rate bump and not have any cash flow issues.

I'm also not tied to owning a home. At the moment I'm paying $12K/yr to live there and getting $9K/yr in equity with my GF paying me rent to live with me. So it makes sense to have a mortgage at the moment.

I haven't done any detailed analysis of all the options so take my opinion with a grain of salt.

-- Vik

RetiredAt63

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Re: Cost/benefit analysis of not paying down my mortgage (Canada)
« Reply #2 on: April 20, 2015, 07:53:12 AM »
Vik

That is pretty similar to my situation -  a low variable mortgage rate, open so I can dump some money into it any time, and if I do pull up stakes and go to BC I have no prepayment penalties.  I would pay more for rent in Ottawa (would not buy a house there) than I pay for PIT here.  The investment I bought with the mortgage covers PI and most of taxes so I am not out there.

It is reassuring to see someone in a similar situation not rushing to get the mortgage down - get mortgage-free is so typically Canadian that it feels odd to go against the flow.

Retire-Canada

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Re: Cost/benefit analysis of not paying down my mortgage (Canada)
« Reply #3 on: April 20, 2015, 08:18:46 AM »

It is reassuring to see someone in a similar situation not rushing to get the mortgage down - get mortgage-free is so typically Canadian that it feels odd to go against the flow.

I've had the instinct to hit the mortgage hard a couple times as I think it's a legacy cultural imprint from my parents' generation for security.

When I look at it logically a diversified investment portfolio with decent liquidity and compound interest provide me more security with the benefit of a lot of flexibility.

Most of my friends are hell bent of paying off their mortgages fast.

-- Vik