Author Topic: [CANADA] Invest vs Mortgage - discussion and spreadsheet  (Read 5337 times)

powersuitrecall

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[CANADA] Invest vs Mortgage - discussion and spreadsheet
« on: April 17, 2015, 10:55:57 AM »
With so many invest vs mortgage discussions centering around the US perspective, I thought it might be useful to have a discussion regarding the Canadian perspective all-too-common question.

For those who are unfamiliar, in Canada 30 year terms are not available.  One must renew their mortgage every couple of years (5 years is the most common).  Additionally, there is no tax write-off on mortgage interest.  Mortgages are paid with after-tax dollars, so investments have to beat mortgage rates by more to make it worthwhile.

The common argument for paying off a mortgage early is to offset the risk associated with possible future rate hikes.  But how much extra should you pay?  How much would rates have to rise to make a negative impact?  This is incredibly difficult to answer without a host of assumptions and calculations that are bound to be specific to individual scenarios, so I made a spreadsheet!

The attached spreadsheet compares 2 scenarios over a 30 year period where mortgage interest rates can change every 5 years:
  • Mortgage Only: All extra available funds are used to pay off the mortgage. Once the mortgage is paid off (early), all available funds are invested.
  • Mortgage + Invest: No extra payments are made to the mortgage.  All extra available funds are invested.

So play around with it and let me know what you think.  If you find any errors let me know and I'll update it.

Here are some examples results:

==============================================
Case 1:  Mortgage rates rise 1% every 5 years.
==============================================

Mortgage amount      $300,000
Amortization period  30 years
Amount available per month for mortgage/investing  $2000
Mortgage rates
 year 1-5   2.8%
 year 6-10  3.8%
 year 11-15 4.8%
 year 16-20 5.8%
 year 21-25 6.8%
 year 26-30 7.8%
Investment ROR after tax 
 year 1-5   4.9%
 year 6-10  4.9%
 year 11-15 4.9%
 year 16-20 4.9%
 year 21-25 4.9%
 year 26-30 4.9%

At year 30 the totals in the investment account are:
Mortgage Only, then invest    $468,505 <=== wins by a bit
Mortgage & Invest throughout  $453,361

==============================================
Case 2:  Same case as above, but assumes first 10 years Investment ROR will not be taxed (because investments will be in taxed advantage accounts)
==============================================

Mortgage amount      $300,000
Amortization period  30 years
Amount available per month for mortgage/investing  $2000
Mortgage rates
 year 1-5   2.8%
 year 6-10  3.8%
 year 11-15 4.8%
 year 16-20 5.8%
 year 21-25 6.8%
 year 26-30 7.8%
Investment ROR after tax
 year 1-5   7%
 year 6-10  7%
 year 11-15 4.9%
 year 16-20 4.9%
 year 21-25 4.9%
 year 26-30 4.9%

At year 30 the totals in the investment account are:
Mortgage Only, then invest    $468,505
Mortgage & Invest throughout  $489,967 <=== wins by a bit

==============================================
Case 3:  Same case as 1, but with 0.5% increase every 5 years
==============================================

Mortgage amount      $300,000
Amortization period  30 years
Amount available per month for mortgage/investing  $2000
Mortgage rates
 year 1-5   2.8%
 year 6-10  3.3%
 year 11-15 3.8%
 year 16-20 4.3%
 year 21-25 4.8%
 year 26-30 5.3%
Investment ROR after tax
 year 1-5   4.9%
 year 6-10  4.9%
 year 11-15 4.9%
 year 16-20 4.9%
 year 21-25 4.9%
 year 26-30 4.9%

At year 30 the totals in the investment account are:
Mortgage Only, then invest     $490,634
Mortgage & Invest throughout   $543,622 <=== wins

PharmaStache

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Re: [CANADA] Invest vs Mortgage - discussion and spreadsheet
« Reply #1 on: April 17, 2015, 02:31:24 PM »
Thanks, I enjoy seeing a Canadian perspective on this issue.  I'm doing a combo of investing & mortgage prepayments- I haven't been totally swayed in either direction.

Heckler

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Re: [CANADA] Invest vs Mortgage - discussion and spreadsheet
« Reply #2 on: April 17, 2015, 05:25:34 PM »
We're Canadian, right?  That means we balance evenly and say sorry.  :)   We did both (minimal RRSP and Mortgage payment acceleration), and are quite happy with the results.


We paid down a $260k, 25 year mortgage by increasing mortgage payments as soon as cars were paid off, and when raises or bonuses came through.   Right now, 65% of after tax spending is on mortgage and condo fees.  That 25 year mortgage is now only a 13 year mortgage - done February 2016! 

On the flip side, since 1996 I've put 5% into RRSP, with a 5% employer match.  Even with lousy 2.85% MER because I knew nothing about indexing, we're now sitting on our first quarter million with $200K RRSP limit still available between the two of us.  Not bad for 43 y.o. dinks with 3 cars and only one debt.

Since meeting MMM and CCP in July, we're now putting away 30% to savings, and expect that to jump to MMM respectable levels in February!




Kaypea

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Re: [CANADA] Invest vs Mortgage - discussion and spreadsheet
« Reply #3 on: April 17, 2015, 07:55:01 PM »
I'm in NZ but the same idea applies (ie changing terms - mostly every 2 years here and no tax advantages) so I'm going to download the spreadsheet and play. I think it will work out better paying down mortgage as our rates are much higher than Canada or US - around 5-6.5% at the moment and have been up to 8-9%  in my mortgage paying life. We're 45 and paid off principal residence as of next month but have another mortgage on a secondary property so I'll be looking to see whether I should be doing re a bit of both or just continuing on the accelerated mortgage payment front that has worked to date (with 2 kids and only one main income until 3 months ago).

dess1313

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Re: [CANADA] Invest vs Mortgage - discussion and spreadsheet
« Reply #4 on: April 18, 2015, 08:24:30 AM »
I did a lot of spreadsheets as well with my mortgage.  one thing i noticed right away was the high interest bite out of the initial payments.  over half was going to just interest.  I sure did not let that happen for long.  Until you hit the point where 50% or more of your mortgage payment goes to principal, its very very hard to make any headway and in many cases i suspect a very good time to make those extra payments instead of savings for most people.  I went from 25 years to 18 to 14 to 12 to 7 years.  With my rates, for every dollar i put in early on, i would save almost a whole dollar in interest down the road.  Cant get that sort of interest anywhere else i have found. 

So my main focus for 7 years was kill the mortgage.  Once i got near the finish i couldn't wait another 2 years and found money to make it happen.   Best decision i did was pick a mortgage company that allowed 15% down payments, 15% payment increases and doubled payments. 

rocketpj

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Re: [CANADA] Invest vs Mortgage - discussion and spreadsheet
« Reply #5 on: April 18, 2015, 04:55:13 PM »
It gets trickier when you include RRSPs in your calculation.  Yes, I will pay taxes on that money someday, but that will be post FIRE, and in the immediate year I will get a 15-29% return on anything put into the RRSP, not including any investment return on that money.

The maximum term we seem to be able to get is about 10 years around here (BC), and that is at a 1% premium over a 5 year term.  That means we have to make some effort at 'market timing' in deciding how long to lock in and what the risk might be.  This is very personal for me as our current mortgage term comes up July 2 and I am strongly considering a 10 year fixed rate (with lots of options to make extra payments, lump sums etc).  Once I've done it I will most likely focus on maxing out RRSP contributions, only then followed by reducing the mortgage (and even then maxing the TFSA might come first).


KMMK

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Re: [CANADA] Invest vs Mortgage - discussion and spreadsheet
« Reply #6 on: April 18, 2015, 05:22:27 PM »
I think in most cases, and with today's mortgage rates, as long as your income is moderate to high, and not likely to shoot up soon, it's best to max the RRSP, then pay extra to the mortgage (or max TFSAs which could be used as a lump sum payment if rates are higher at renewal time). Mortgage vs TFSA comes down to your personal preferences about debt vs investing.

powersuitrecall

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Re: [CANADA] Invest vs Mortgage - discussion and spreadsheet
« Reply #7 on: April 19, 2015, 06:05:45 PM »
I did a lot of spreadsheets as well with my mortgage.  one thing i noticed right away was the high interest bite out of the initial payments.  over half was going to just interest.

The flip side of this, of course, would be the investment gains over time.  Compound interest is a fierce beast that can work for you as well as against you.  Not that I'm saying it's wrong.  We did the exact same thing.

So my main focus for 7 years was kill the mortgage.  Once i got near the finish i couldn't wait another 2 years and found money to make it happen.   Best decision i did was pick a mortgage company that allowed 15% down payments, 15% payment increases and doubled payments. 

We decided that the mortgage we could afford was one that a single income earner could pay, and then made sure the prepayment options allowed for doubling up (since we are a dual income family).  It's really nice to have that flexibility.  We are with Scotia and we are about 5 years in on a 25 year mortgage ... due to be paid off by the end of 2016 :)

It gets trickier when you include RRSPs in your calculation.  Yes, I will pay taxes on that money someday, but that will be post FIRE, and in the immediate year I will get a 15-29% return on anything put into the RRSP, not including any investment return on that money.

The maximum term we seem to be able to get is about 10 years around here (BC), and that is at a 1% premium over a 5 year term.  That means we have to make some effort at 'market timing' in deciding how long to lock in and what the risk might be.  This is very personal for me as our current mortgage term comes up July 2 and I am strongly considering a 10 year fixed rate (with lots of options to make extra payments, lump sums etc).  Once I've done it I will most likely focus on maxing out RRSP contributions, only then followed by reducing the mortgage (and even then maxing the TFSA might come first).

rocketpj, We have somewhat the same strategy.  We went ballistic on the mortgage for the first 5 years: double payments and bulk prepayments.  Now that we have renewed at such a great rate we are easing off on that and maxing our TFSAs.  We plan to have all of our accounts maxed and mortgage paid off at about the same time.

You might find this post regarding renewal interesting: http://forum.mrmoneymustache.com/welcome-to-the-forum/(canada)-mortgage-renewal-at-a-big-bank-things-i-learned!/ ... although no-one else did - not even one comment!  Anyways.  Good luck with your decision.

powersuitrecall

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Re: [CANADA] Invest vs Mortgage - discussion and spreadsheet
« Reply #8 on: April 19, 2015, 06:10:33 PM »
I'm in NZ but the same idea applies (ie changing terms - mostly every 2 years here and no tax advantages) so I'm going to download the spreadsheet and play. I think it will work out better paying down mortgage as our rates are much higher than Canada or US - around 5-6.5% at the moment and have been up to 8-9%  in my mortgage paying life. We're 45 and paid off principal residence as of next month but have another mortgage on a secondary property so I'll be looking to see whether I should be doing re a bit of both or just continuing on the accelerated mortgage payment front that has worked to date (with 2 kids and only one main income until 3 months ago).

Kaypea - congrats on the hard work paying off.  I'd like to modify the spreadsheet to cover 2 year terms as well.


SandyBoxx

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Re: [CANADA] Invest vs Mortgage - discussion and spreadsheet
« Reply #9 on: April 19, 2015, 08:34:55 PM »
You might find this post regarding renewal interesting: http://forum.mrmoneymustache.com/welcome-to-the-forum/(canada)-mortgage-renewal-at-a-big-bank-things-i-learned!/ ... although no-one else did - not even one comment!  Anyways.  Good luck with your decision.

Thanks for the info ^^^^  I had no idea that you could have your new rate activated right away (within the 120 days I presume), and not have to wait until your actual renewal date.

We have been on the MMM savings train for a couple of years now, and are doing some catch up.  We recently opted to do the Smith Manoeuvre on our mortgage (won't get into the details here, but you can Google it - it is a form of leveraged investing) and to funnel all extra cash into our RRSP's.  We will be maxing those out in the near future, and then will need to decide whether we are better off filling up our TFSA's, or making extra payments on the mortgage balance.  I guess that will be a question for our current FA since I am an amateur with excel!


Retire-Canada

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Re: [CANADA] Invest vs Mortgage - discussion and spreadsheet
« Reply #10 on: April 19, 2015, 09:34:24 PM »
With interest rates low and there being no real reason to expect them to increase a great deal in the term of a 5yr mortgage I'm just getting another variable rate mortgage at prime - 0.75%. I'll max out my RRSP and my TFSA then put the rest of my saved $$ in non-reg accounts.

The benefit of saving and investing the money is the higher return in the market vs. current low interest rates.

I can always dump my entire TFSA into my mortgage down the road should the situation change. That amount of money would be the equivalent of accelerated mortgage payments except I get to keep the difference between the mortgage interest rate and my investment return for as long as I hold the TFSA. I'd then have a huge amount of room in my TFSA I could replenish as fast as I could save.

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powersuitrecall

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Re: [CANADA] Invest vs Mortgage - discussion and spreadsheet
« Reply #11 on: April 20, 2015, 11:27:18 AM »
Thanks for the info ^^^^  I had no idea that you could have your new rate activated right away (within the 120 days I presume), and not have to wait until your actual renewal date.

Yep - It's actually possible to renew even earlier than 120 days.  I was sent an offer in the mail ~6 months before my term was up, but the rate was not great.  I suspect banks may only be willing to renew with their lowest rate at 120 days beforehand because that's when I could potentially lock-in with a competitor.  Regardless, renewing 120 days early saved me a wallet full of interest.

We have been on the MMM savings train for a couple of years now, and are doing some catch up.  We recently opted to do the Smith Manoeuvre on our mortgage (won't get into the details here, but you can Google it - it is a form of leveraged investing)

The Smith Maneuver scares the bloody hell out of me.  You have balls of steel.

Heckler

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Re: [CANADA] Invest vs Mortgage - discussion and spreadsheet
« Reply #12 on: April 20, 2015, 03:45:01 PM »

The Smith Maneuver scares the bloody hell out of me.  You have balls of steel.


from another forum I'm in...


Quote from: heckler
Nope, I'm not comfortable with leverage, as it can be applied in both directions.

I follow the Heckler Maneuver (previously patented and implemented by the better half). Pay off the mortgage in 12 years and then start investing your payments aggressively. Granted, there is an amount of could have/should have, but no one started this thread for me in 2003, so I knew squat about FI. Luckily, my employers helped me squirrel away 10%, which also adds up!




Quote from: another forum member
hmmm, the Heckler Maneuver seems a lot more sound than the Smith Maneuver. you should write a book or go on forums with rabid SM acolytes and 'splain them the technique and wisdom of the HM... on the other hand nevermind. they've got themselves so twisted up in broken logic and bs that they can't see the forest for the trees and you can't convince them otherwise that's it's simply leveraged investing with the end being a lot of debt that you still pay (deductable or not) and a big question mark as to the value of your portfolio. ah well.

« Last Edit: April 20, 2015, 03:46:54 PM by Heckler »

SandyBoxx

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Re: [CANADA] Invest vs Mortgage - discussion and spreadsheet
« Reply #13 on: April 20, 2015, 03:59:10 PM »
I am always interested in learning about other options.  Could you provide a link to the discussion that these quotes ^^^^ were taken from? 

Please and thank you, of course.

Heckler

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Re: [CANADA] Invest vs Mortgage - discussion and spreadsheet
« Reply #14 on: April 20, 2015, 04:02:36 PM »
I am always interested in learning about other options.  Could you provide a link to the discussion that these quotes ^^^^ were taken from? 

Please and thank you, of course.

Just me spreading the knowledge to some dirtbag mountain bikers that spend too much money on carbon frames.

http://bb.nsmb.com/showthread.php?t=161034&highlight=financial


SandyBoxx

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Re: [CANADA] Invest vs Mortgage - discussion and spreadsheet
« Reply #15 on: April 20, 2015, 04:06:43 PM »

Just me spreading the knowledge to some dirtbag mountain bikers that spend too much money on carbon frames.

http://bb.nsmb.com/showthread.php?t=161034&highlight=financial
[/quote]

Bah ha ha ha ha....that was definitely my hubby during our 20's....thank goodness for sponsors, and friends in the industry.  We paid retail for the first time a few years back (Pre YNAB and Pre MMM of course) and the cost blew our minds!

Thanks for the link, I will definitely give it some thought when I get the chance. :)