Author Topic: Invest in the markets or pay down the mortgage?  (Read 6080 times)

IngaB

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Invest in the markets or pay down the mortgage?
« on: January 29, 2015, 12:24:06 PM »
Hello all,

There seem to be a lot of so called experts that say that one should not worry about aggressively paying down the mortgage and instead pay the regular mortgage amount based on 25 year amortization and place the savings into financial markets.

I disagree and I wanted to seek your opinion on the issue.

About the household: My husband and I are in our mid 30s, no kids yet and the annual gross income is $150,000. We have a 4-bedroom 4 bathroom townhouse in Toronto, Canada and we have a fixed rate mortgage at 2.31% interest rate. I will have a full pension from my work when I retire, my husband will not.

We talked and we decided that we would feel much happier if the house was fully ours. So we set a goal of being mortgage free within 7 years of purchasing our house. So one income pays the mortgage ($1,000 a week) the other income pays for everything else, including our annual vacation and about $3,000 into husbands' retirement savings. We live paycheck to paycheck and have have a rusty 10-year old car that still drives well and not to expensive to maintain, but there is no car payments. We have an "emergency only" fund of $12,000 tucked away in a credit union.

Our mortgage strategy makes us feel a little bit tight but our house will be paid off next year. Our friends call us crazy for doing what we are doing, our mortgage broker encourages us to just pay the regular amount and invest into financial markets because we could earn higher return than our 2.31% annual mortgage interest rate.

We want to be mortgage free buy the time we have our first child so there is financial breathing room. Only when the mortgage is paid off, we want to catch up on our retirement savings for my husband and get into exchange traded funds or something.

Is this approach wrong? Are we "leaving money on the table"?
Thank you everyone for providing your input.
IngaB

JLee

  • Walrus Stache
  • *******
  • Posts: 5444
Re: Invest in the markets or pay down the mortgage?
« Reply #1 on: January 29, 2015, 12:33:46 PM »
Just to take a guess, say you're paying an extra $2500/mo on the mortgage.  $2500/mo at 7% for 7 years would give you ~$259,620, or almost $50k in growth. If you stopped contributing entirely at that point and let that grow from there for another 18 years, you'd end up with $877,498.

To compare, how much interest would you be paying over the course of the mortgage?

MustachianAccountant

  • Bristles
  • ***
  • Posts: 433
  • Age: 41
Re: Invest in the markets or pay down the mortgage?
« Reply #2 on: January 29, 2015, 12:36:06 PM »
Here we go again!!
OP, you might want to check out the myriad of other threads that discuss this same issue.

Prairie Stash

  • Handlebar Stache
  • *****
  • Posts: 1763
Re: Invest in the markets or pay down the mortgage?
« Reply #3 on: January 29, 2015, 12:49:00 PM »
Cue the mathematics!

One year left, I get it about reducing risk. Since you want to be mortgage free before kids, there's your answer. Get mortgage free ASAP. There's more to life than money, there's also benefit of a stress free existence. Having kids also means a year off work, reduced pay. Then daycare when you return, reduced income.

Optimally you should look into maxing out RRSP, especially if either is over 80K income (wow, there's a lot of brackets in Ontario!). A small contribution gets a hefty rebate. Personally I'd bring my income below $72K through RRSP contributions before mortgage. Do your taxes ASAP, you can still contribute to last years RRSP and get a hefty (~35% refund) on monies invested.
« Last Edit: January 29, 2015, 12:51:22 PM by Prairie Practicality »

IngaB

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: Invest in the markets or pay down the mortgage?
« Reply #4 on: January 29, 2015, 12:57:36 PM »
Prairie, Mustachian Accountant and JLee,

Thank you for providing your 2 cents. (I am a very recent addition to the Mustachian Family)

We did think about 7% market returns, but we were concerned that these returns are not a sure thing. Staff happens, people get sick or laid off but the bills still need to be paid.

I just want to say FU to the bank and own my own roof and do not worry about housing costs at all because without a mortgage, we can leave on one income and then some.

IngaB

JLee

  • Walrus Stache
  • *******
  • Posts: 5444
Re: Invest in the markets or pay down the mortgage?
« Reply #5 on: January 29, 2015, 01:00:10 PM »
Prairie, Mustachian Accountant and JLee,

Thank you for providing your 2 cents. (I am a very recent addition to the Mustachian Family)

We did think about 7% market returns, but we were concerned that these returns are not a sure thing. Staff happens, people get sick or laid off but the bills still need to be paid.

I just want to say FU to the bank and own my own roof and do not worry about housing costs at all because without a mortgage, we can leave on one income and then some.

IngaB

7% is generally a solid average. It sounds like your mind is already made up (and at this point, you're close enough to the end of the mortgage that you might as well finish it). Your rationality isn't based on financial gain, but emotion: "We talked and we decided that we would feel much happier if the house was fully ours." Not saying that you are "wrong," but in my opinion it is not the best financial decision.  If that is what you truly want, I don't think anyone here is going to slam you on it. You've made huge progress on it so far and if you can start investing that $4k/mo once the house is paid off, you will see gains very quickly. :)

Gone Fishing

  • Magnum Stache
  • ******
  • Posts: 2741
  • So Close went fishing on April 1, 2016
    • Journal
Re: Invest in the markets or pay down the mortgage?
« Reply #6 on: January 29, 2015, 03:06:26 PM »
2.31% fixed is unheard of, if the market doesn't do any better than that over the next 25 years we will all need to make some serious adjustments.  I know it feels good and all to get a mortgage paid off, but that is about as close as you get to "free" money.

JLee

  • Walrus Stache
  • *******
  • Posts: 5444
Re: Invest in the markets or pay down the mortgage?
« Reply #7 on: January 29, 2015, 03:35:43 PM »
2.31% fixed is unheard of, if the market doesn't do any better than that over the next 25 years we will all need to make some serious adjustments.  I know it feels good and all to get a mortgage paid off, but that is about as close as you get to "free" money.

Mortgage rates in Canada are way lower than in the States.

act0fgod

  • 5 O'Clock Shadow
  • *
  • Posts: 87
Re: Invest in the markets or pay down the mortgage?
« Reply #8 on: January 30, 2015, 05:14:21 AM »
We talked and we decided that we would feel much happier if the house was fully ours.

It sounds like you are in a financial situation where you can make decisions that make you happy, so the above statement says it all.  Only you can determine if the happiness/joy/feeling you get from not having a mortgage is worth more than the money you are foregoing if you were to instead investing in the market.  Sounds like you are very risk averse.  Nothing wrong with that.

chasesfish

  • Magnum Stache
  • ******
  • Posts: 2995
  • Age: 37
  • Location: Texas
    • Years in the making, I created a journal!
Re: Invest in the markets or pay down the mortgage?
« Reply #9 on: January 30, 2015, 06:07:27 AM »
Can we make a sticky topic at the top with all the various replies over the past few months?

Psychstache

  • Pencil Stache
  • ****
  • Posts: 797
Re: Invest in the markets or pay down the mortgage?
« Reply #10 on: January 30, 2015, 08:31:55 AM »
Prairie, Mustachian Accountant and JLee,

Thank you for providing your 2 cents. (I am a very recent addition to the Mustachian Family)

We did think about 7% market returns, but we were concerned that these returns are not a sure thing. Staff happens, people get sick or laid off but the bills still need to be paid.

I just want to say FU to the bank and own my own roof and do not worry about housing costs at all because without a mortgage, we can leave on one income and then some.

IngaB

This specific part of the 'pay down the mortgage' argument has always confused me.

Let's say that I send an additional $5000 towards principal payment along with normal payment on 2/1. If I lose my job on 2/2, the bank is still going to expect the full normal payment on 3/1 and if I don't come up with it, they will start to drop the hammer. They won't care that i just sent a big fat bonus check, they want their monthly payment. Correct?

Assuming that is the correct way of things, it always made sense to me to invest the extra into the stock market, get the returns, and when they day comes that you had enough in investments to pay off the mortgage, cash out and pay it off.

jms493

  • Stubble
  • **
  • Posts: 118
Re: Invest in the markets or pay down the mortgage?
« Reply #11 on: January 30, 2015, 08:55:44 AM »
While I like the idea you then have to factor in the risk you are taking on in putting the money in the market.  Say I had 7 years left on my mortgage and I decided to sock all the money away in investments and then boom...crash.  I then have to try and time to the market.  I guess this is a way to do it but I would not be in an aggressive portfolio.

Good idea but there is quite a bit of risk.  We want to pay off our mortgage and are looking at different ways to do it.  We are just thinking of every 10K we save we will throw at the mortgage instead of extra monthly payments.  At least we have access to the money for a few months as extra security on top of our normal emergency fund.  We both will fully fund our 401K accounts first then anything extra goes towards the mortgage.

frugalnacho

  • Magnum Stache
  • ******
  • Posts: 3327
  • Age: 36
  • Location: Madison Heights, Michigan
Re: Invest in the markets or pay down the mortgage?
« Reply #12 on: January 30, 2015, 10:26:34 AM »
Prairie, Mustachian Accountant and JLee,

Thank you for providing your 2 cents. (I am a very recent addition to the Mustachian Family)

We did think about 7% market returns, but we were concerned that these returns are not a sure thing. Staff happens, people get sick or laid off but the bills still need to be paid.

I just want to say FU to the bank and own my own roof and do not worry about housing costs at all because without a mortgage, we can leave on one income and then some.

IngaB

This specific part of the 'pay down the mortgage' argument has always confused me.

Let's say that I send an additional $5000 towards principal payment along with normal payment on 2/1. If I lose my job on 2/2, the bank is still going to expect the full normal payment on 3/1 and if I don't come up with it, they will start to drop the hammer. They won't care that i just sent a big fat bonus check, they want their monthly payment. Correct?

Assuming that is the correct way of things, it always made sense to me to invest the extra into the stock market, get the returns, and when they day comes that you had enough in investments to pay off the mortgage, cash out and pay it off.

I agree it's risky until the house is actually fully paid off, but I think they are thinking more long term.  Sure I might lose my job in the next 5 years before my mortgage is paid off...but if I don't lose my job in the next 5 years then I am home free because the house will be mine outright.

Psychstache

  • Pencil Stache
  • ****
  • Posts: 797
Re: Invest in the markets or pay down the mortgage?
« Reply #13 on: January 30, 2015, 10:31:20 AM »
Prairie, Mustachian Accountant and JLee,

Thank you for providing your 2 cents. (I am a very recent addition to the Mustachian Family)

We did think about 7% market returns, but we were concerned that these returns are not a sure thing. Staff happens, people get sick or laid off but the bills still need to be paid.

I just want to say FU to the bank and own my own roof and do not worry about housing costs at all because without a mortgage, we can leave on one income and then some.

IngaB

This specific part of the 'pay down the mortgage' argument has always confused me.

Let's say that I send an additional $5000 towards principal payment along with normal payment on 2/1. If I lose my job on 2/2, the bank is still going to expect the full normal payment on 3/1 and if I don't come up with it, they will start to drop the hammer. They won't care that i just sent a big fat bonus check, they want their monthly payment. Correct?

Assuming that is the correct way of things, it always made sense to me to invest the extra into the stock market, get the returns, and when they day comes that you had enough in investments to pay off the mortgage, cash out and pay it off.

I agree it's risky until the house is actually fully paid off, but I think they are thinking more long term.  Sure I might lose my job in the next 5 years before my mortgage is paid off...but if I don't lose my job in the next 5 years then I am home free because the house will be mine outright.

Couldn't you take the funds out of the market and use that if you lost your job in <5 years? Granted, the investments might be down at that point, but it still seems less risky than locking the money up in a really illiquid form (home equity). I may also be biased as my wife and I have incredibly stable employment, no kids, and are risk tolerant math nerds.  :)

frugalnacho

  • Magnum Stache
  • ******
  • Posts: 3327
  • Age: 36
  • Location: Madison Heights, Michigan
Re: Invest in the markets or pay down the mortgage?
« Reply #14 on: January 30, 2015, 10:35:31 AM »
Prairie, Mustachian Accountant and JLee,

Thank you for providing your 2 cents. (I am a very recent addition to the Mustachian Family)

We did think about 7% market returns, but we were concerned that these returns are not a sure thing. Staff happens, people get sick or laid off but the bills still need to be paid.

I just want to say FU to the bank and own my own roof and do not worry about housing costs at all because without a mortgage, we can leave on one income and then some.

IngaB

This specific part of the 'pay down the mortgage' argument has always confused me.

Let's say that I send an additional $5000 towards principal payment along with normal payment on 2/1. If I lose my job on 2/2, the bank is still going to expect the full normal payment on 3/1 and if I don't come up with it, they will start to drop the hammer. They won't care that i just sent a big fat bonus check, they want their monthly payment. Correct?

Assuming that is the correct way of things, it always made sense to me to invest the extra into the stock market, get the returns, and when they day comes that you had enough in investments to pay off the mortgage, cash out and pay it off.

I agree it's risky until the house is actually fully paid off, but I think they are thinking more long term.  Sure I might lose my job in the next 5 years before my mortgage is paid off...but if I don't lose my job in the next 5 years then I am home free because the house will be mine outright.

Couldn't you take the funds out of the market and use that if you lost your job in <5 years? Granted, the investments might be down at that point, but it still seems less risky than locking the money up in a really illiquid form (home equity). I may also be biased as my wife and I have incredibly stable employment, no kids, and are risk tolerant math nerds.  :)

Yea you could.  I think we are in agreement, I pump most of my money into the market and not my mortgage.  I did the calculation last week, and I could eliminate both mortgages within 3 years if I focused like a laser on it.  But I would rather pump into stocks and let the mortgages ride.  I think some people just want the freedom that axing a mortgage would bring, even if it's not the most optimal long term financial decision.

Vilgan

  • Bristles
  • ***
  • Posts: 452
  • Location: Seattle, WA
Re: Invest in the markets or pay down the mortgage?
« Reply #15 on: January 30, 2015, 11:04:46 AM »
In Canada, is tax advantaged space (aka RRSP and the other one I forget the name of) a use or lose thing? Or can unused space one year still be used the next year?

In the US, the max 401k contribution is X and you either use it and get that advantage forever or you don't and you lose the space for that year forever. I could defer 17.5k for my 401k in 2014 and then 18k in 2015. If I deferred 0 in 2014, my cap for 2015 is still 18k.

If tax advantage space is use or lose in Canada, I think you'd be crazy not to max that out that space first before paying extra on a mortgage. That space is SUPER valuable and I wish I could go back in time and convince my younger self to slow down on paying down debts and instead max out my 401k each year.

frugaldrummer

  • Pencil Stache
  • ****
  • Posts: 629
Re: Invest in the markets or pay down the mortgage?
« Reply #16 on: January 30, 2015, 11:09:22 AM »
Well, there are a few different aspects to consider in these discussions:

1) Cash flow - from a cash-flow viewpoint, paying off the house makes sense, because it reduces monthly payments and makes living on one income feasible.  This is a valid point for people considering having children, or for people concerned about the stability of one person's job. 

2) Investment standpoint - yes, the market may return higher rates, but it's not really fair to compare paying off a mortgage (pretty safe return on your money, especially if you plan to stay put and therefore are not really affected by any fluctuations in the value of the house.  Also, I believe somebody here said Canadian mortgages are not fixed for 30 years, but for a shorter term (like maybe 7 years?).  In that case, getting it paid off before interest rates rise has value.  It is true that sinking all your money into real estate, if you don't have other savings, may not be wise.  And I don't think this couple has a big enough emergency fund (I'd prefer to see 6-12 mos expenses).  Still, once the house is paid off, you can weather a lot of financial storms, like: 

3) Crashes - during the most recent financial crash, in the U.S., people who had kept large mortgages on their homes in favor of stock investing, were doubly screwed.  Their investments tanked, they lost their jobs, and their houses were underwater, all at the same time.  Many people lost their homes to foreclosure because they didn't have enough savings left to ride out the storm, or because they had to move to find work and couldn't sell their home for what they owed. A paid-off house would have significantly softened the impact of that crash on many people (i.e., if your house was paid, you could probably live on unemployment until the crisis was over, and let your stocks rise back up without having to sell at the bottom).  There's definitely some value to this, especially in an over-valued market like Canada (where housing prices never did crash, I think they inevitably will at some point.)

MDM

  • Walrus Stache
  • *******
  • Posts: 9290
Re: Invest in the markets or pay down the mortgage?
« Reply #17 on: January 30, 2015, 11:10:05 AM »
Can we make a sticky topic at the top with all the various replies over the past few months?
It's already in http://forum.mrmoneymustache.com/forum-information-faqs/frequently-asked-questions/.  Not a separate topic, but at least it's in there....

Prairie Stash

  • Handlebar Stache
  • *****
  • Posts: 1763
Re: Invest in the markets or pay down the mortgage?
« Reply #18 on: January 30, 2015, 12:26:18 PM »
In Canada, is tax advantaged space (aka RRSP and the other one I forget the name of) a use or lose thing? Or can unused space one year still be used the next year?

In the US, the max 401k contribution is X and you either use it and get that advantage forever or you don't and you lose the space for that year forever. I could defer 17.5k for my 401k in 2014 and then 18k in 2015. If I deferred 0 in 2014, my cap for 2015 is still 18k.

If tax advantage space is use or lose in Canada, I think you'd be crazy not to max that out that space first before paying extra on a mortgage. That space is SUPER valuable and I wish I could go back in time and convince my younger self to slow down on paying down debts and instead max out my 401k each year.
RRSP and TFSA are rolled over, contribution room accumulates. For RRSP you can contribute 18% of your income (minus whatever your employer contributes). For TFSA its currently $5500/year. Canada is nicer allowing rollovers, its helpful for people who are just starting to save later in life. If you have earned $1,000,000 in lifetime earnings you'll have $180,000 in RRSP room accumulated.

RRSP can also be accessed at any time, people often raid them during job losses (not advisable). I have a 30 year old friend who cashed theirs in for a major home repair :(

In Ontario, where the OP is, without knowing exact details the OP and husband are paying 33% (or more) in tax in their tax brackets (see link). If they put some money into RRSP they get the tax back, a $6000 contribution today (before March 2, 2015) will give them $2000 back as soon as they file 2014 taxes. They can then use the refund to pay down the mortgage. This strategy will instantly increase NW by $8K. ($6K is half of their EF ).

http://www.taxtips.ca/taxrates/on.htm

In Canada a "Fixed Rate Mortgage" is usually only fixed for 5 years, max (sometimes 4 years when you see it that low). Then you automatically renew it at the current rates, if you don't you've just defaulted on your mortgage. Its so common people don't realize that in the US a fixed rate really means fixed for 30 years. Call it a cultural difference.

c-kat

  • 5 O'Clock Shadow
  • *
  • Posts: 59
Re: Invest in the markets or pay down the mortgage?
« Reply #19 on: January 30, 2015, 12:38:22 PM »
If it gives you peace of mind to pay it off, it is the right decision.  Also, once it is paid off your monthly expenses will drop drastically and you can start investing the difference.

I'm in Ontario too and would love to know which lender you went though for a fixed 2.3% rate. We are close to renewing our mortgage and I'd love to get that rate. :)

IngaB

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: Invest in the markets or pay down the mortgage?
« Reply #20 on: June 30, 2016, 12:51:00 PM »
Hi everyone,
Just wanted to provide an update on this post.

Hubby and I are expecting our first baby. She will be born the same month our mortgage is paid off!

I feel super revealed. Our costs will go down by about $4,000 a month and I do not think a baby cost a lot of money during the first year.
My income will go down during my 12-month maternity leave but not a lot. My employer pays 93% of my $90 K salary for 8 months and I get 55% of my salary months 9-12.

We are not financially independent yet but it feels good to get the mortgage piece of the way.
Happy Canada day!

IngaB

ltt

  • Pencil Stache
  • ****
  • Posts: 739
Re: Invest in the markets or pay down the mortgage?
« Reply #21 on: June 30, 2016, 06:53:53 PM »
Congrats!!

Remember that wonderful financial crisis back in 2008 where people lost their homes and jobs......we made our final mortgage payment.  We had inherited some money and decided that with the withdrawals we were required to take that we would pay off our home.  I don't regret it for one minute!!  We haven't had to write a monthly check--I can't even remember what our payment was--something around $1,000, I believe.  Do we miss the gains we could have made in the market---not really.  We don't even really think about it, but we do love the fact that we're not having to make a payment of that size, and it gives us more breathing room.

Choices

  • Pencil Stache
  • ****
  • Posts: 516
    • ChooseBetterLife
Re: Invest in the markets or pay down the mortgage?
« Reply #22 on: July 01, 2016, 09:05:02 AM »
Hi everyone,
Just wanted to provide an update on this post.

Hubby and I are expecting our first baby. She will be born the same month our mortgage is paid off!

I feel super revealed. Our costs will go down by about $4,000 a month and I do not think a baby cost a lot of money during the first year.
My income will go down during my 12-month maternity leave but not a lot. My employer pays 93% of my $90 K salary for 8 months and I get 55% of my salary months 9-12.

We are not financially independent yet but it feels good to get the mortgage piece of the way.
Happy Canada day!

IngaB

Well done! And congrats on your new baby!
Regardless of the math, the markets can be volatile and we are also willing to pay a price for peace of mind. We paid off our mortgage and didn't regret it one bit. In fact, we both started working part-time and our quality of life skyrocketed. Having fewer monthly payments opens up a whole new world of life options.