Author Topic: My two cents on paying off the mortgage, advisors and debating on the Internet  (Read 8066 times)

techwiz

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My two cents on paying off the mortgage, advisors and debating who is right and wrong in personal finance on the Internet.

Mortgage:
We paid off our mortgage before we started index investing. In hind-sight doing the math we would have been ahead (net worth wise) if we had started index investing before paying off the house.  However, there are more factors than just the math calculation (such as the sleep at night factor). I also think today with the raising interest rates the math is also changing. As Canadian's we also need to make sure we are not factoring in the interest write offs or ability to get 30 year locked in rates that our American neighbors can benefit from.

Advisors:
The person most likely to care about your money is yourself. I have experienced both good and bad advisors. One quick way to tell if an advisor has your best interests at heart is look that their motivation or incentive. If the only way they get paid is by selling some overpriced mutual fund they will make sure selling that to you is part of their advice. The pay for service or by the hour advisors are normally better.  I also have seen first hand how if you show you know what you are talking about and start quoting MER numbers their advice quickly changes. I think most of the time they are brainwashed or conditioned by their company so much they really don't know they are selling over priced investments.

Internet debating who right and wrong in personal finance or anything else for that matter:
There is a lot of crap on the internet these days, but still a lot of good if you sort through it and not fall into the echo chambers of hate and mindless.  Everyone should be able to have an open mind and understand both sides can be correct from their point of view. As my example above on paying off my mortgage. I was open minded enough to listen and learn about the math why my choice was not optimal mathematically, but instead of entering the debate to prove my other reasons were worth it I am able to see both sides and move on. One thing about personal finance is that is it personal!  Grateful for  this forum and this section.   

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Yeah, Iím not in the housing market yet, hopefully the new FHSA and a bunch of years of saving will get me there, but Iím definitely more in the camp of paying off the mortgage before retirement because of the variable mortgage rates here in Canada.  Iím actually pretty astonished that the market can be so high here comparatively to the US when the mortgage options arenít as forgiving.  If we ever had our own 2008 housing crash with high inflation, it could be potentially way worse because even financially prudent people canít get a fixed rate mortgage longer than 5 years (without locking in near credit card levels of interest that is). 

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Mortgage:
We paid off our mortgage before we started index investing. In hind-sight doing the math we would have been ahead (net worth wise) if we had started index investing before paying off the house.  However, there are more factors than just the math calculation (such as the sleep at night factor). I also think today with the raising interest rates the math is also changing. As Canadian's we also need to make sure we are not factoring in the interest write offs or ability to get 30 year locked in rates that our American neighbors can benefit from.   

As an American who recently moved to Canada (and is approaching FI) I am increasingly leaning in this direction.  For me, there are a few reasons.  #1 - As we close in on our FI number, I love the idea of lowering our annual budget.  This means we'll need less income, which also means lower taxes (and a higher CCB).  #2 - I have no idea what interest rates are going to do, and we aren't able to lock in 30 year rates.  #3 - As you mentioned, we don't get any deductions for the interest.  In fairness, when I lived in America, my house never cost so much that I did there, either.

With that in mind, I'm leaning towards paying off our mortgage when it matures in ~2 years.  That said, I live in semi-rural Nova Scotia, so the mortgage isn't nearly as big as it could be elsewhere in Canada.

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Mortgage:
We paid off our mortgage before we started index investing. In hind-sight doing the math we would have been ahead (net worth wise) if we had started index investing before paying off the house.  However, there are more factors than just the math calculation (such as the sleep at night factor). I also think today with the raising interest rates the math is also changing. As Canadian's we also need to make sure we are not factoring in the interest write offs or ability to get 30 year locked in rates that our American neighbors can benefit from.

We renewed our mortgage in January and opted for a 4 year terms with the best prepayment options available from our lender, which in our case is up to 15% of our original balance annually rather than the balance at renewal. We have maxed our tfsa's and are close to maxing rrsp's so rather than open up a taxable investment account, we'll divert extra toward the mortgage over the term. Like you, we're looking at it from a 'sleep better' perspective rather than purely financial.

That said, I live in semi-rural Nova Scotia, so the mortgage isn't nearly as big as it could be elsewhere in Canada.

Semi-rural Nova Scotia ... isn't that everywhere outside of HRM? :)

Stasher

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@techwiz I found this post of yours which is perfect for me right now to try and lure some followup discussion. I am at a crossroads on wanting to figure out if I should PAY OFF my mortgage. I enjoyed about 7 years of low low rates as I always did variable and that treated me well but of course the last year has seen rates creep up fast and now I'm at 6.60% for my mortgage. I have a small remaining mortgage term and principal, at the start before hikes was only paying $1050 per month so I could put a lot towards savings. Now with the higher rates I am paying over $1650/month.
(Holy crap the Joneses' with their McMansions must be getting crushed with higher rates)

My first action was to change from monthly payments to bi-weekly to pay down the mortgage faster, and now I have added the 15% extra to each payment as that is an option my bank provides. This dropped me from 18yrs to 15yrs left thanks to the frequency change and then the extra 15% dropped it down to 13yrs remaining. My last remaining option my bank provides is 15% top up payment, which is based on the original loan agreement and gives me $43,000yr I can drop on the principle.

Therefore, my question is should I pay my mortgage off immediately, but the biggest part of that question is should I use my TFSA !! ??
I can be mortgage free in the next 3 years based on the extra payout options my mortgage provides. I have 2 yrs left on this term and even then I don't see rates dropping and cheapest will be sticking to variable to catch the ride down. I looked at interest and ballpark now my mortgage annual interest is costing me $12,000 annually.

To me it makes sense to not throw that $12,000 a year away in interest and to pull $43,000 this year and next year from my TFSA to pay half of my principle remaining off. Then at the very start of my 3rd year my mortgage term comes up for renewal and I will pay the full amount owing off. Basically a 2.5 year game plan to be 100% debt free, we owe nothing anywhere else.

My TFSA has enough to pay the full mortgage off and the TFSA is probably only earning about the same annually as my Mortgage is costing me, with high rates now it screams "pay me off". Then over the next years we will put the amount that was going to our mortgage back into the TFSA to rebuild it. (My TFSA is all held in XAW)

Details > $196,000 left on mortgage and $140,000 in TFSA, plus enough in savings and extra income over 3 yrs to bridge the remaining gap to pay off.

I should also add that I was done with my career and went "Barista-FIRE" in 2017 so haven't had any real extra income to put towards savings, my wife has started earning a lot more though which helps me not worry about rebuilding the TFSA.

Thoughts on this , bat signal to @Chaplin and @Experimental_FIRE as well...of ya and @Lews Therin

« Last Edit: July 30, 2023, 09:18:24 AM by Stasher »

techwiz

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I believe there is no one size fits all right answer to this question and it really comes down to a personal decision. 



I know personally not having a mortgage and being debt free was a big deal to both DW and I. However, looking back financially we would have been better off investing those extra payments. The math is easy to do in hindsight, not so easy for making a decision for the future where there are risks and unknowns changing the math.

The factors and numbers for your situation as I see them:
-Mortgage rate 6.6% (could go up or down)
-XAW  rate of return for the upcoming years?  If similar to S&P500 (the average annualized return since adopting 500 stocks into the index in 1957 through Dec. 31, 2022)  10.15%.

TFSA
-Investments growing tax free pull money out could limit that growth.
-Pulling money out to pay off mortgage will lock in current returns and will also create more TFSA room in future years.

Emotions
-Second guessing if you are making the right decision.
-Having to worry about interest rate changes


With the current numbers I believe mathematically the best answer is to keep investing and not pay off the mortgage. However, these numbers can change and there is the peace of mind and risk tolerances to consider.

I am also interested in seeing what @Lews Therin advice would be on this. 

Chaplin

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Similar but different situation for me. Fixed at 1.8% until 2026, so no urgency to do something today. However, once it comes due in just under 3 years the rate is likely to be somewhere in the 5-7% range, and our remaining balance will be $70k so my plan is to pay it off out of a TFSA rather than renew.

With the mortgage, or rebuilding the TFSA, you have to pull the income from somewhere which means more income tax. It's a double-whammy with the higher mortgage rate - more interest plus more income tax. The question is always whether it's still a good idea because investment returns could be higher. The decision was super-easy when mortgage rates were <2%. People loosely talked about 4% mortgage rates as a line where paying it off rather than investing might start to make sense, at 6+% mortgage rates we're well beyond that.

Also, as early retirees SORR is important to bear in mind, so lower cash flow requirements early on are nice. With a mortgage you have to keep paying it which means generating income (by selling from RRSPs, for example) whether the markets are up or down. If you pay it off with the TFSA you can rebuild your TFSA at whatever pace you want (of course if you're just selling from RRSPs to fill the TFSAs you're buying and selling at essentially the same price and you can pick and choose when to do that to maximize tax efficiency). My son will be approaching university age just as we kill the mortgage, so we'll be replacing one cash flow issue with another.

I like your plan, but you could add one more option to the mix and then cost them out under a few different market scenarios, just so you know what you're really choosing between. That option would be starting a brand-new 25-year mortgage. That would probably mean a full assessment and income verification (probably based on your wife's current job). It would delay the ultimate payoff, but could be a good cash flow choice or at least point of comparison.

Stasher

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Even with liquidating my TFSA and rebuilding I will have enough money to feel confident and safe for the future plus a house with massive amounts of equity. As for the refinancing, by having chosen the path of leaving my career and earning a small income it makes refinancing so erroneous and a pain, the ROI isn't there in my mind.

My thought is that by removing my now $1900/month payment I immediately reduce any pressure to create enough post-tax income from working or from pulling from our RRSP. Both of our kids have moved out and graduated and we just want simplicity in our lives now, part of that would be having no debt. Also it allows me to immediately put that $1900/month back into my TFSA to rebuild it each month and as Chaplin stated or spend the money if something comes up, with a mortgage I have no choice but to make that payment.

I understand there is dividends and index growth on XAW over the next few years but right now the thought of paying all that interest on the mortgage principle when I have funds at my disposal is eating at me a bit because it feels like I'm just burning those dollar bills on something I will never get back.


Lews Therin

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I HAVE ARRIVED.

Cloak billows in the wind.

I'm answering Stasher here, since there's a completely different situation in the first post, that seems like it's been beaten to death.

Mortgage VS TFSA.

Since you've had a TFSA for a long time (140k) it would be worth checking what the annual return is of that TFSA.
If it's above the mortgage rate: Go to point 1)
If it's below your mortgage rate: Go to point 2)

1) When TFSA is returning more than the mortgage: You wouldn't pay taxes on this money, so the simple thought is you are making more money leaving it alone, AND**** BIGGEST FACTOR **** This money is easily accessible. If you pay off the mortgage and get a HELOC, the money can be accessible, but it would be a higher rate than the simple mortgage itself.
As for your income, tax related points, it's a long term wash. You might pay more now, but pay less taxes later (when you start pulling from TFSA)
Stasher that pays off his mortgage has a lower income immediately, but it would require looking at a ton of factors to see if it's the optimal choice
(helpful factors examples, having children, looking poor on paper - with low income if you are above the second bracket in most provinces, it's of little importance that extra money. (most brackets don't jump up be large numbers, but by small 3-5%)

-Taxes: There's also the option of simply pulling the mortgage payment amount from your TFSA, which would have the same effect of lowering your taxes by a fully paid off mortgage amount, thus reducting taxes, and also keeping the most money available for investments.

2) If it's below the mortgage rate, Might as well pay it off, since you will get a guaranteed return of your mortgage rate, and can always re-mortgage or pull the money out with a HELOC in the future if rates go back down.


3)This is all because his money is in a TFSA, so the line of 6% could still not be a high enough mortgage rate. If it was in unregistered or RRSP, you'd take taxes off the returns, which would likely mean that 6% is too high.

Feel free to query for clarifications!

Lews Therin

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Using my numbers as an example: 145k TFSA, lifetime return of 9% annualized. Current mortgage: 6.25%

2.75% X 145k is 4k yearly.

That's a lot of money to leave on the table for me, but everyone's situation is different, my TFSA is 100% stocks.


Stasher

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Using my numbers as an example: 145k TFSA, lifetime return of 9% annualized. Current mortgage: 6.25%

2.75% X 145k is 4k yearly.

That's a lot of money to leave on the table for me, but everyone's situation is different, my TFSA is 100% stocks.

My current TFSA of let's sat $140k (and has been for a long time) 100% all in XAW with a YTD for XAW currently @ 11.06%
My mortgage principal left is $196,000 at a current VRM of 6.66%

Your excercise of doing the math on the difference between ROI of XAW and cost of MTB interest was helpful @Lews Therin

I realized I can't pay of my mortgage for another 2.5yrs at maturity of this term.  That means my plan I'm thinking now is to pull about $20,000 from my TFSA in December 2023 and match with cash savings to max out my annual lump sum payment limit of $40,500. I will then put excess cash savings monthly onto my mortgage and again in December 2024 top up the max allowable lump sum amount by pulling from the TFSA.

Mid 2025 is when my mortgage comes up for renewal, I think based on what i have heard here it will be best to just renew again into a variable and continue to take advantage of annual lump sum payments.  My TFSA still has investments in it and will generate growth/dividends on the remaining stocks by not taking out the full amount. I will do my best to save aggressively to use cash instead of my TFSA to achieve my lump sum payment option annually on the mortgage.

Retire-Canada

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Older thread, but I don't read the main forums regularly so I miss stuff. I'll throw a post in here for any future CDN MMMers who care about the topic.

My GF keep our finances separate and are responsible for our share of the joint mortgage. We had a lively discussion when the rates started climbing as we have a variable rate mortgage. At one point my GF was ruminating that she's love to pay down her share of the mortgage to ease her monthly payment pain. I told her she could. Anytime. She asked how much prepayment our mortgage allowed since I manage that account. I told her it's irrelevant. I'd just take as much money as she wanted to "pay down" and invest it in my portfolio then reduce the % of the mortgage balance and subsequent payments she owed.

She thought that was an odd move and asked why I'd do that. My response was I'd take the risk the market would return more than the mortgage cost over the long haul. I might be wrong, but my expectation was I'd come out on top. After some thought she said "Why would I sell my stocks to give you the money so you could make a profit?" I agreed "Why would you?"

We haven't talked about the mortgage since. I get the impression she's happy to have an option for paying it off even if she doesn't want to. We are just riding out the rates and will stay variable rate for the rest of the amortization. I suspect next renewal cycle we'll extend the amortization back to 25 or 30 years. Further along I'll probably pull money out to put into my investment accounts. Since I provided the down payment my share of the mortgage is smaller than my GF's so I'd like to get things at least even.

LT's comments about checking the TFSA rate of return got me to look at the one ETF I hold in there and I am at ~14% for 5 year and 10 year annualized total returns. We do have enough investments between us to pay off the mortgage comfortably, but at this point I'm keen to keep my money in the market. I also don't want to own my home 100% due to the small, but potentially devastating risk of living in a major earthquake zone.

Although I don't share the emotion of caring about a paid off mortgage/house I can see the appeal of being debt free. My own brain prefers a bigger portfolio and some debt than a smaller portfolio and no debt.  It could be that I rented for a long time so the idea of paying money towards accommodation doesn't really trigger any concern/emotions.



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This is quite BC-specific, unless other provinces have similar programs, but we have another option to maintain debt on houses outside of mortgages or lines-of-credit, and the interest rate is 2% below prime.

Once the homeowner, or either of the homeowners if it's jointly owned, is 55 or older you can have your property-tax deferred. You are charged simple interest at 2% below prime (technically, 2% the prime rate of the Province's primary lender). So right now the rate is 4.95%.

The outstanding balance is due when you sell the house (or, presumably, when it becomes part of your estate).

This means that even as your mortgage gets smaller and smaller despite your best efforts to hold on to it, you can use this tax deferment to create an increasing debt on the house at a favorable rate. If we started this year, and plan to stay for 20 years, we could have an extra $100k invested and be ahead roughly by the difference between the interest rate and the returns of wherever we kept the money. Additionally, the improved cash flow means that you don't have to withdraw from investments to pay that property tax.

As with the BC "homeowners grant" the politics of these policies is questionable. Their goal to help make housing more affordable, especially for seniors, but they seem to be even more beneficial to people with the means to use them to increase wealth. So, given the option, I would probably vote to replace them with better policies, but while they exist I will use them in the best way I can.

More details:

https://www2.gov.bc.ca/gov/content/taxes/property-taxes/annual-property-tax/tax-deferment-interest-fees

ETA: I haven't started doing this yet, and maybe there's some detail I'm missing that makes this a bad idea or ineffective, but ever since I read about the program it struck me as a way to have most of the same benefit we talk about for keeping a mortgage. Am I missing something here?
« Last Edit: February 11, 2024, 11:24:40 AM by Chaplin »

Retire-Canada

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This is quite BC-specific, unless other provinces have similar programs, but we have another option to maintain debt on houses outside of mortgages or lines-of-credit, and the interest rate is 2% below prime.

Once the homeowner, or either of the homeowners if it's jointly owned, is 55 or older you can have your property-tax deferred. You are charged simple interest at 2% below prime (technically, 2% the prime rate of the Province's primary lender). So right now the rate is 4.95%.

I'll be 55 this year so we are eligible. Thanks for the head's up. I knew this program existed, but I had not thought of it in the building debt context.

Part of the reason I want a significant mortgage is to have the liquid assets to deal with the aftermath of a big earthquake on the island where we'll likely relocate for a long period to some other location. The other part is I expect a bunch of Gov't support programs in that event and an easy test would be having a mortgage. The tax deferral program would assist with the first goal, but not the second. Of course we don't have to choose and could always do both.


Chaplin

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This is quite BC-specific, unless other provinces have similar programs, but we have another option to maintain debt on houses outside of mortgages or lines-of-credit, and the interest rate is 2% below prime.

Once the homeowner, or either of the homeowners if it's jointly owned, is 55 or older you can have your property-tax deferred. You are charged simple interest at 2% below prime (technically, 2% the prime rate of the Province's primary lender). So right now the rate is 4.95%.

I'll be 55 this year so we are eligible. Thanks for the head's up. I knew this program existed, but I had not thought of it in the building debt context.

Part of the reason I want a significant mortgage is to have the liquid assets to deal with the aftermath of a big earthquake on the island where we'll likely relocate for a long period to some other location. The other part is I expect a bunch of Gov't support programs in that event and an easy test would be having a mortgage. The tax deferral program would assist with the first goal, but not the second. Of course we don't have to choose and could always do both.

We're eligible too. One detail I have to figure out is whether the terms of a mortgage can preclude participating because the property is the collateral for the mortgage and you may not be able to have another debt also using that collateral.

Lews Therin

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This is quite BC-specific, unless other provinces have similar programs, but we have another option to maintain debt on houses outside of mortgages or lines-of-credit, and the interest rate is 2% below prime.

Once the homeowner, or either of the homeowners if it's jointly owned, is 55 or older you can have your property-tax deferred. You are charged simple interest at 2% below prime (technically, 2% the prime rate of the Province's primary lender). So right now the rate is 4.95%.

The outstanding balance is due when you sell the house (or, presumably, when it becomes part of your estate).

This means that even as your mortgage gets smaller and smaller despite your best efforts to hold on to it, you can use this tax deferment to create an increasing debt on the house at a favorable rate. If we started this year, and plan to stay for 20 years, we could have an extra $100k invested and be ahead roughly by the difference between the interest rate and the returns of wherever we kept the money. Additionally, the improved cash flow means that you don't have to withdraw from investments to pay that property tax.

As with the BC "homeowners grant" the politics of these policies is questionable. Their goal to help make housing more affordable, especially for seniors, but they seem to be even more beneficial to people with the means to use them to increase wealth. So, given the option, I would probably vote to replace them with better policies, but while they exist I will use them in the best way I can.

More details:

https://www2.gov.bc.ca/gov/content/taxes/property-taxes/annual-property-tax/tax-deferment-interest-fees

ETA: I haven't started doing this yet, and maybe there's some detail I'm missing that makes this a bad idea or ineffective, but ever since I read about the program it struck me as a way to have most of the same benefit we talk about for keeping a mortgage. Am I missing something here?

I'll take a look at the program tomorrow and let you know if there's something you are missing. It's got me curious.

AJDZee

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On the classic 'mortgage vs investing' debate, everyone is different but the approach I took a 'split down the middle' with some target dates that bring some method to my madness...

I'm making just enough 'extra' mortgage payments to be mortgage free at age 55 (about 7 years earlier).

Reason being is a big chunk of my investments are in a group DC plan that's locked in until age 55 anyway.
Additionally, since I'm in a high cost of living area, practically speaking FI is not possible until I'm mortgage free.

Finally 55 just seemed like a good target age to be FI, so it made sense to throttle my mortgage payments & investing to coincide there. To me is strikes a good balance.


And to address good/bad content on the internet - if you haven't checked out Ben Flex's channel on YouTube I highly recommend it.

Retire-Canada

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For those you want to pay down their mortgage my favourite strategy is to simply save/invest those extra dollars and when you have enough to pay off the mortgage in full do so. It has the advantage of the potential extra growth of equities over the, usually significant, time it takes to save up that money plus you keep the flexibility of having that money liquid if an unexpected job and/or health crisis were to hit.

I essentially did that except I can't bring myself to actually sell stocks and pay off the mortgage. Nevertheless being able to crush your debts at any time is a nice feeling of security even if you don't take action.

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Right now with GIC's being quite high it makes sense to put extra savings into GIC's until it's time to renew the mortgage. I would probably not keep money earmarked for mortgage in the stock market. Otherwise it suspiciously looks like trying to time the market.

Lews Therin

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This is quite BC-specific, unless other provinces have similar programs, but we have another option to maintain debt on houses outside of mortgages or lines-of-credit, and the interest rate is 2% below prime.

Once the homeowner, or either of the homeowners if it's jointly owned, is 55 or older you can have your property-tax deferred. You are charged simple interest at 2% below prime (technically, 2% the prime rate of the Province's primary lender). So right now the rate is 4.95%.

The outstanding balance is due when you sell the house (or, presumably, when it becomes part of your estate).

This means that even as your mortgage gets smaller and smaller despite your best efforts to hold on to it, you can use this tax deferment to create an increasing debt on the house at a favorable rate. If we started this year, and plan to stay for 20 years, we could have an extra $100k invested and be ahead roughly by the difference between the interest rate and the returns of wherever we kept the money. Additionally, the improved cash flow means that you don't have to withdraw from investments to pay that property tax.

As with the BC "homeowners grant" the politics of these policies is questionable. Their goal to help make housing more affordable, especially for seniors, but they seem to be even more beneficial to people with the means to use them to increase wealth. So, given the option, I would probably vote to replace them with better policies, but while they exist I will use them in the best way I can.

More details:

https://www2.gov.bc.ca/gov/content/taxes/property-taxes/annual-property-tax/tax-deferment-interest-fees

ETA: I haven't started doing this yet, and maybe there's some detail I'm missing that makes this a bad idea or ineffective, but ever since I read about the program it struck me as a way to have most of the same benefit we talk about for keeping a mortgage. Am I missing something here?

I'll take a look at the program tomorrow and let you know if there's something you are missing. It's got me curious.

So i've been reading, and I don't see any negatives to doing it, as long as you are doing something that is better than an interest rate of 5% with that money. That said, the interest rate can change as well, so you have to be prepared for fluctatuations, but it seems lower than even HELOC rates.

There seems to be a small note that they don't want you doing a HELOC and this at the same time, as you need at least 25% of the value of the home paid off:

''You must have and maintain a minimum equity of 25% of the property's assessed value. This means that all charges registered against your property plus the amount of taxes you want to defer canít be more than 75% of the BC Assessment value of your property in the year you apply.

If you have a secured debt on your property, such as a mortgage or a line of credit, contact your lender before you apply to ensure your approval into the tax deferment program doesn't conflict with the terms of your loan.''

Lews Therin

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Right now with GIC's being quite high it makes sense to put extra savings into GIC's until it's time to renew the mortgage. I would probably not keep money earmarked for mortgage in the stock market. Otherwise it suspiciously looks like trying to time the market.

For most people doing it that way, they are looking long term, with a ''mortgage principal'' investment account for example. There no exact date to pay it off, just letting the value rise in the stock market instead of simply paying the interest on the mortgage

Chaplin

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This is quite BC-specific, unless other provinces have similar programs, but we have another option to maintain debt on houses outside of mortgages or lines-of-credit, and the interest rate is 2% below prime.

Once the homeowner, or either of the homeowners if it's jointly owned, is 55 or older you can have your property-tax deferred. You are charged simple interest at 2% below prime (technically, 2% the prime rate of the Province's primary lender). So right now the rate is 4.95%.

The outstanding balance is due when you sell the house (or, presumably, when it becomes part of your estate).

This means that even as your mortgage gets smaller and smaller despite your best efforts to hold on to it, you can use this tax deferment to create an increasing debt on the house at a favorable rate. If we started this year, and plan to stay for 20 years, we could have an extra $100k invested and be ahead roughly by the difference between the interest rate and the returns of wherever we kept the money. Additionally, the improved cash flow means that you don't have to withdraw from investments to pay that property tax.

As with the BC "homeowners grant" the politics of these policies is questionable. Their goal to help make housing more affordable, especially for seniors, but they seem to be even more beneficial to people with the means to use them to increase wealth. So, given the option, I would probably vote to replace them with better policies, but while they exist I will use them in the best way I can.

More details:

https://www2.gov.bc.ca/gov/content/taxes/property-taxes/annual-property-tax/tax-deferment-interest-fees

ETA: I haven't started doing this yet, and maybe there's some detail I'm missing that makes this a bad idea or ineffective, but ever since I read about the program it struck me as a way to have most of the same benefit we talk about for keeping a mortgage. Am I missing something here?

I'll take a look at the program tomorrow and let you know if there's something you are missing. It's got me curious.

So i've been reading, and I don't see any negatives to doing it, as long as you are doing something that is better than an interest rate of 5% with that money. That said, the interest rate can change as well, so you have to be prepared for fluctatuations, but it seems lower than even HELOC rates.

There seems to be a small note that they don't want you doing a HELOC and this at the same time, as you need at least 25% of the value of the home paid off:

''You must have and maintain a minimum equity of 25% of the property's assessed value. This means that all charges registered against your property plus the amount of taxes you want to defer canít be more than 75% of the BC Assessment value of your property in the year you apply.

If you have a secured debt on your property, such as a mortgage or a line of credit, contact your lender before you apply to ensure your approval into the tax deferment program doesn't conflict with the terms of your loan.''

Thanks. Yes, that aligns with my understanding of it. Your last sentence is probably the most significant for most of us. I suspect that most mortgage agreements will preclude tax deferral. I'll look at mine - perhaps there's some equity threshold that will make it ok. Our mortgage represents under 10% of the assessed value.

aloevera1

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Right now with GIC's being quite high it makes sense to put extra savings into GIC's until it's time to renew the mortgage. I would probably not keep money earmarked for mortgage in the stock market. Otherwise it suspiciously looks like trying to time the market.

For most people doing it that way, they are looking long term, with a ''mortgage principal'' investment account for example. There no exact date to pay it off, just letting the value rise in the stock market instead of simply paying the interest on the mortgage

Yea, that makes sense. Gotta make the market pay the mortgage off :D

Prairie Moustache

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Not sure if anyone read this post over on millennial revolution but it is a good example of why you might consider paying down your mortgage in the Canadian context. https://www.millennial-revolution.com/rent/when-to-pay-off-your-low-interest-mortgage/

As a younger millennial who entered the nesting phase of life with a 6 handle mortgage, I better appreciate the absolute cheap debt orgy of the 2010's.

aloevera1

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Not sure if anyone read this post over on millennial revolution but it is a good example of why you might consider paying down your mortgage in the Canadian context. https://www.millennial-revolution.com/rent/when-to-pay-off-your-low-interest-mortgage/

As a younger millennial who entered the nesting phase of life with a 6 handle mortgage, I better appreciate the absolute cheap debt orgy of the 2010's.

Agreed. There is so much advice written for the situation NOT applicable to Canadians at all. Mortgages with a reset are a completely different beast than a true fixed rate mortgages.

Interest on a primary residence is also not a tax deductible expense which makes carrying mortgage even less desirable. However, this is also not something I generally see in the "don't pay off the mortgage" discussion for Canadians.

We will all forever mourn cheap mortgages of the last 10 years. Amen.

Chaplin

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Not sure if anyone read this post over on millennial revolution but it is a good example of why you might consider paying down your mortgage in the Canadian context. https://www.millennial-revolution.com/rent/when-to-pay-off-your-low-interest-mortgage/

As a younger millennial who entered the nesting phase of life with a 6 handle mortgage, I better appreciate the absolute cheap debt orgy of the 2010's.

Agreed. There is so much advice written for the situation NOT applicable to Canadians at all. Mortgages with a reset are a completely different beast than a true fixed rate mortgages.

Interest on a primary residence is also not a tax deductible expense which makes carrying mortgage even less desirable. However, this is also not something I generally see in the "don't pay off the mortgage" discussion for Canadians.

We will all forever mourn cheap mortgages of the last 10 years. Amen.

I have to disagree. They didn't do the math showing the alternative where they had invested the extra they could have put on the mortgage. Without that the math they show doesn't have a useful conclusion. They were trying to solve a discipline and/or a psychology problem, which can be very important, but they tried to use math on a non-math problem. I do agree that the situation and analysis is much more straightforward for US mortgages, and more favourable to keep mortgages in the US context.

aloevera1

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Not sure if anyone read this post over on millennial revolution but it is a good example of why you might consider paying down your mortgage in the Canadian context. https://www.millennial-revolution.com/rent/when-to-pay-off-your-low-interest-mortgage/

As a younger millennial who entered the nesting phase of life with a 6 handle mortgage, I better appreciate the absolute cheap debt orgy of the 2010's.

Agreed. There is so much advice written for the situation NOT applicable to Canadians at all. Mortgages with a reset are a completely different beast than a true fixed rate mortgages.

Interest on a primary residence is also not a tax deductible expense which makes carrying mortgage even less desirable. However, this is also not something I generally see in the "don't pay off the mortgage" discussion for Canadians.

We will all forever mourn cheap mortgages of the last 10 years. Amen.

I have to disagree. They didn't do the math showing the alternative where they had invested the extra they could have put on the mortgage. Without that the math they show doesn't have a useful conclusion. They were trying to solve a discipline and/or a psychology problem, which can be very important, but they tried to use math on a non-math problem. I do agree that the situation and analysis is much more straightforward for US mortgages, and more favourable to keep mortgages in the US context.

I am less concerned about the math they are showing as I find their analysis way too simplistic. They did not consider any prepayments after renewal either.

There is a conceptual question though.

Investing the $100k does not produce guaranteed return. However, the mortgage produces a guaranteed increase at renewal. So this boils down to which risk you want to take. Essentially, one path is betting on stock returns being higher than cumulative interest rates. The other path is betting on interest rates overtaking the stock returns for the equivalent period. These two things have different time horizons though. What US mortgages do is that they extend the time horizon to 30 years and make both risks comparable. In Canadian mortgage they are not as comparable. We are kind of apples to oranges situation and one has to pick one. So yea, I agree with you, it is not a fully math problem.

Lews Therin

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The math there isn't super. 70% return on 25 years isn't very good.

Prairie Moustache

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The math there isn't super. 70% return on 25 years isn't very good.

Hmm yeah you're right. I didn't take the time to think about annualized index returns over 25 years... Glad you're the financial advisor, and I'm just, an engineer? Whoops.

Retire-Canada

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Every time issue of high inflation got brought up in the media the last while, I felt better about having a large loan. It's a pretty critical component to consider when thinking about the true cost of borrowing money for a house.

Lews Therin

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Also, investments are compound interest, mortgages are not.

All points that should be raised instead of: we saved money.

Yes, putting money on a mortgage is better than not doing it, but there should be a discussion for other options, not just burning the money or putting it in the mortgage.

Prairie Moustache

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Also, investments are compound interest, mortgages are not.

All points that should be raised instead of: we saved money.

Yes, putting money on a mortgage is better than not doing it, but there should be a discussion for other options, not just burning the money or putting it in the mortgage.

Maybe specifically the returns on prepaying a mortgage, X amount at Y rate is not compounding, but the mortgage itself is indeed compounding, semi-annually?

I'd be afraid of burning the money due to the likely carcinogens in our polymer bills.

Lews Therin

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Simplest way to explain it: the interest on a mortgage only compounds if you have a negative amortization.

Negative amortization: interest on interest.

Normal mortgages, simple interest annually. (Since you pay off the whole interest for that portion of the year + some principal, or else the loan would be infinite length)

rocketpj

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I have never met a competent investment advisor in their professional capacity, because the competent ones move up the ladder very quickly and only work with high net-worth individuals.  Any advisor you meet at a local bank branch or investment is just a placeholder and you are better off just using Canadian Couch Potato or something similar.

Our last 'advisor' was so incompetent that I fired him and moved everything into indexes (12 years ago).  Best investment decision ever.

I do know some very skilled investment advisors socially (I play hockey with them).  They do not work with regular folk.  I suppose I'd qualify for their client base nowadays, but I'm doing fine without paying someone else's fees at this point.