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:
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Case 1: Mortgage rates rise 1% every 5 years.
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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
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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)
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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
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Case 3: Same case as 1, but with 0.5% increase every 5 years
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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