Author Topic: TFSA vs mortgage  (Read 3536 times)

Le Barbu

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TFSA vs mortgage
« on: October 19, 2015, 11:47:24 AM »
Just to put my question in context, we always maxed out our RRSP and RESP. Everything is low cost ETFs and 100% stock (35%Can, 45%US and 20%Int).

NW +/-850k$ and saving rate +/-40%

Now, our only debt is our mortgage 55k$ and the market value of the house is about 350k$. We have nothing in our TFSA because we put everything available toward mortgage.

Mortgage is @3.5% until may 2017. Now I figure about 2 scenarios. 1-Continue to shovel all we can toward debt and we are done in 30 months, 2-Come back to the regular schedual and fill the TFSA with ZCN for about 15k$/year. This mean we will renew 30k$ for 2 years in may 2017 and the end will be 12 months later.

ZCN dividend is 3% now, pretty close of our actual mortgage rate and there is a potential for a capital gain, maybe another 2-3% so this should put us ahead.

What do you think?

Heckler

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Re: TFSA vs mortgage
« Reply #1 on: October 19, 2015, 11:50:46 AM »
Being three months from mortgage free I can tell you its liberating to have that weigh off your shoulders, even if you could have, might have, done 2% "better".

Posthumane

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Re: TFSA vs mortgage
« Reply #2 on: October 19, 2015, 12:01:09 PM »
I decided to go with maxing out my TFSA rather than a more aggressive mortgage paydown (at 3.09%). However, once my TFSA amount matches the principal remaining on the mortgage I will no longer renew the mortgage but use the TFSA money to pay it off in full. However, high dividend funds are necessarily any more resistant to market swings compared to growth or index funds and putting them in a TFSA doesn't give you much of a tax advantage since certain Canadian dividends are already taxed quite low.

Le Barbu

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Re: TFSA vs mortgage
« Reply #3 on: October 19, 2015, 12:23:08 PM »
Being three months from mortgage free I can tell you its liberating to have that weigh off your shoulders, even if you could have, might have, done 2% "better".

I know what you mean and that exactly what makes the no debt goal so attractive. I wonder if it' really safer to aim for killing the debt while having a smaller safety net (actualy +/-10k$ cash). With a mortgage being 15% of the house value and a pretty small payments, what would be the real risk if our TFSA worth 30k$ in few months from now?

My analytical side also think about protecting our TFSA room in case of sudden death or political changes (to much thinking I know!)

I may do a move (or not!) by the end of november.

FrugalFan

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Re: TFSA vs mortgage
« Reply #4 on: October 19, 2015, 12:52:23 PM »
Paying off the mortgage is something I constantly debate too but we are in a different situation. After a couple of years on parental leave (and discovering MMM) we have now caught up with all of our TFSA room. We are currently debating investing more in our taxable account vs accelerating our mortgage payments. The issue for us is that having a paid off house makes a big difference in how much we need for FIRE, which could happen sooner than our mortgage payoff date at the current rate of payment, and I wouldn't want to have to withdraw more for the first several years because of that, nor save up the extra several thousand k we would need to compensate just for those extra years of increased living expenses. In your situation, with your mortgage being paid off very soon anyway, I would probably do the TFSA. That money is available to you and readily accessible. Having a paid off house is nice too, but if you ever need the money it is harder to access. (on the other hand, when I see the balance getting close to paid off, I could totally see myself throwing everything at it and getting it done for peace of mind!).

powersuitrecall

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Re: TFSA vs mortgage
« Reply #5 on: October 19, 2015, 01:24:15 PM »
We are/were in a similar situation.  We had lots of TFSA room and about 65K left on the mortgage. 

We decided to attempt the ultimate: to max TFSA accounts AND pay off the mortgage at about the same time. 

This is going to happen in sometime in 2018 and it's going to be spectacular.

K-ice

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Re: TFSA vs mortgage
« Reply #6 on: October 19, 2015, 01:36:20 PM »
In the past I paid off my mtg over the TFSA. But I was not a confident investor and only really did GICs back then. So the interest calculation was in favor of the mortgage.

How disciplined are you? Will you really take the extra and put it towards long term savings or will you go on a nice holiday with it?  If you are disciplined do the TFSA. If you don’t trust yourself pay the mortgage.

Since you seem  disciplined & confident in your investments, that helps you to lean towards the TFSA.  Also the TFSA account is so flexible, there is almost nothing stopping you from cashing it out in May 2017 if the mtg rates are really high when you renew.  Sure a complete market crash would be bad, but you seem quite balanced. I do not think a market crash AND high interest rates are likely to happen in May 2017. (But I am not a finance history trend expert or physic.)

Your time line is quite short, which is good and bad. Good because you will be done soon either way. Bad, because if there is a market crash, there is not much time for your TFSA to rebound. 


See if you can aim for your TFSA and your mortgage amount due to converge in May 2017. Then you have your mortgage FU money when renegotiating with the bank.

I may do a move (or not!) by the end of november.


I would focus on TFSA from now until April 2016. In April decide if you want to put a lump sum on your mortgage (usually allowed 10-15% per year depending on your bank).


Le Barbu

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Re: TFSA vs mortgage
« Reply #7 on: October 19, 2015, 01:41:52 PM »
We are/were in a similar situation.  We had lots of TFSA room and about 65K left on the mortgage. 

We decided to attempt the ultimate: to max TFSA accounts AND pay off the mortgage at about the same time. 

This is going to happen in sometime in 2018 and it's going to be spectacular.

Wow!

Our budget is tighter than that* and if I continue to put everything I can (without penalty) toward the mortgage, it's gonna be repaid in about 30 months but nothing left for the TFSA. At this moment, our net cashflow would be 30k$ and TFSA room in the 120k$ ballpark.

*We use to bring 130k$ (gross) couple years ago but since we discovered MMM and stopped lifestyle inflation, DW is now working 4 days/week (28 hours) and I leave my annual bonus to get more hollidays. Our life quality has improved, net tax rate last year was down to 18% but we cant use all the TFSA room while maxing out mortgage repayment...

Le Barbu

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Re: TFSA vs mortgage
« Reply #8 on: October 19, 2015, 02:14:16 PM »
In the past I paid off my mtg over the TFSA. But I was not a confident investor and only really did GICs back then. So the interest calculation was in favor of the mortgage.

How disciplined are you? Will you really take the extra and put it towards long term savings or will you go on a nice holiday with it?  If you are disciplined do the TFSA. If you don’t trust yourself pay the mortgage. XD this one is a good one!!!

Since you seem  disciplined & confident in your investments, that helps you to lean towards the TFSA.  Also the TFSA account is so flexible, there is almost nothing stopping you from cashing it out in May 2017 if the mtg rates are really high when you renew.  Sure a complete market crash would be bad, but you seem quite balanced. I do not think a market crash AND high interest rates are likely to happen in May 2017. (But I am not a finance history trend expert or physic.)

Your time line is quite short, which is good and bad. Good because you will be done soon either way. Bad, because if there is a market crash, there is not much time for your TFSA to rebound. 


See if you can aim for your TFSA and your mortgage amount due to converge in May 2017. Then you have your mortgage FU money when renegotiating with the bank.

I may do a move (or not!) by the end of november.


I would focus on TFSA from now until April 2016. In April decide if you want to put a lump sum on your mortgage (usually allowed 10-15% per year depending on your bank).

Back in 2012, I was in a similar situation as yours. Our TFSA were fully funded...with RBF270 (bonds mutual funds @ 1.3%MER). My mortgage was @3.5% so I was breaking even at best. Now, my average MER across all accounts is less than 0.15% and I do 4-5 trades/year (buy only).

I have made a scenario to renew with a balance of 30k$ and get a fixed 2 years wich is usualy pretty low rate. Depending of the rates at this point, I can always change the focus.

April 2016. You probably meant april 2017?

K-ice

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Re: TFSA vs mortgage
« Reply #9 on: October 19, 2015, 05:34:03 PM »
I ment 2016. If you want to pay lump sums then you get a chance to pay the max but only every year. Sometimes this is mortgage anniversary, sometimes calendar year.

So you may want to put a lump sum towards the mtg when you are 13 months away from renewing. Hen

But it sounds like you will pay slow, invest & renew in 2 years. That should work!

Retire-Canada

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Re: TFSA vs mortgage
« Reply #10 on: October 19, 2015, 05:45:40 PM »
When I renewed my mortgage I dropped the amortization period by an extra 5yrs to pay it back a bit faster. I put the rest of my savings to max my RRSP & TFSA with the rest in my non-reg account.

My interest rate is just over 2% so keeping the mortgage longer is not a bad thing as the principal is getting eaten away by inflation.

I also figure that if I need to I can cash in my TFSA at any time and pay off my mortgage faster so by putting the extra money in my TFSA vs. into the mortgage I get the extra returns and more flexibility.

Le Barbu

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Re: TFSA vs mortgage
« Reply #11 on: October 19, 2015, 07:35:23 PM »
I did not mentioned the initial amortization date was 2032 and now, even slowing things down a bit we will be done by 2019. When we contracted our mortgage back in 2007, our investments worth about the same as our debt, now they worth more than 10x the remaining debt!!

Heckler

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Re: TFSA vs mortgage
« Reply #12 on: October 20, 2015, 04:13:28 PM »
Another thing to consider - TSFA returns are not guaranteed.  I'm currently -2.2% on a one year old 70/30 VSB/VCN, which I setup to try and mimick my old 2.26% MER BMO Income Fund TFSA.

Le Barbu

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Re: TFSA vs mortgage
« Reply #13 on: October 20, 2015, 07:06:27 PM »
Another thing to consider - TSFA returns are not guaranteed.  I'm currently -2.2% on a one year old 70/30 VSB/VCN, which I setup to try and mimick my old 2.26% MER BMO Income Fund TFSA.

Sure enought! The only asset class that I lurke is Canadian stocks so even more swings. I would not hold bonds while having a debt. But thats me!

Usualy, better expected returns come with risk and volatilty

RichMoose

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Re: TFSA vs mortgage
« Reply #14 on: October 23, 2015, 10:21:23 PM »
Just to put my question in context, we always maxed out our RRSP and RESP. Everything is low cost ETFs and 100% stock (35%Can, 45%US and 20%Int).

NW +/-850k$ and saving rate +/-40%

Now, our only debt is our mortgage 55k$ and the market value of the house is about 350k$. We have nothing in our TFSA because we put everything available toward mortgage.

Mortgage is @3.5% until may 2017. Now I figure about 2 scenarios. 1-Continue to shovel all we can toward debt and we are done in 30 months, 2-Come back to the regular schedual and fill the TFSA with ZCN for about 15k$/year. This mean we will renew 30k$ for 2 years in may 2017 and the end will be 12 months later.

ZCN dividend is 3% now, pretty close of our actual mortgage rate and there is a potential for a capital gain, maybe another 2-3% so this should put us ahead.

What do you think?

I think the only reason why you would continue to aggressively pay your mortgage is for psychological reasons. In a worst case scenario (say you lost your job or something similar), you could refinance your mortgage and amortize the remaining amount of $55,000 for another 15 - 20 years. At current interest rates that is a monthly payment of $300 - $400, very manageable.

You already have a large investment account, but I still think there are some nice advantages to building your TFSA.