Why I Won’t Pay Down My Mortgage

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Paying down your mortgage; for most, that’s the goal. Pile every spare dollar onto it and get it gone as soon as possible. I have to say that in today’s financial world, when mortgage rates are so low, I couldn’t disagree more.

I don’t consider my mortgage to be “debt”. I actually see my mortgage as a valuable tool for helping me increase my wealth! Using the equity in my mortgage to add to my nest egg is part of my long-term strategy for getting ahead.

The math is simple, really: My mortgage costs me 3% (or less, these days), but if that equity was invested, I could be making anywhere from 6% to 25% or more on it in the stock market.

I think the people who are opposed have this to say: “But once my mortgage is paid off, I can invest the amount of my mortgage payment each month instead.”

All right. Let’s run the numbers:

Using the following facts for each scenario:

  • a house worth $300,000
  • a fixed rate mortgage at 2.99% renewed every 5 years
  • a 20 year amortization
  • bi-weekly payments on the mortgage
  • 6% return on investments
  • Scenario A: you pay off your mortgage at 50 years old and thereafter invest your $765.94 bi-weekly for the next 15 years. You end up with about $480,000 in your investment account at 65 years old.
  • Scenario B: starting at 30 years old, you take the equity available to you each 5 years when you renew your mortgage (about $60,000 every 5 years) and invest it. You would have about $1.1 Million in your investment account at 65 years old. Go ahead at that point and pay off your mortgage all at once (about $240,000 owing), and you’ll still have about $860,000 invested.

Another opposition I hear is: “You shouldn’t retire with a mortgage still owing.”

Oh wait, I just solved that problem too.

Add to this the facts that:

  • In both scenarios you paid about the same amount out of your pocket over the 35 year period (in scenario A you pay the bi-weekly payment to the mortgage and then into your investments, and in scenario B you pay the bi-weekly payments into the mortgage for the entire 35 year period).
  • You and a spouse could almost put that entire $60,000 into TFSA’s ($5,500 each allowable per year), so now, when you withdraw the entire amount to pay the mortgage down when you’re 65, there are no tax implications.
  • In Canada, when you borrow for the purpose of investing, the interest on the loan is a tax deduction.
  • The value of your house will increase regularly, making the amount of equity available to you more and more each time you renew the mortgage.
  • Since you paid the mortgage down at 65, you now have an extra $765.94 bi-weekly burning a whole in your pocket from that point forward.

Of course, the fundamentals are what make this work; i.e: the fact that the amount of interest you can reasonably expect to make on investments is about twice what you’ll pay for a mortgage. When these stats change, so do the end results. But until then, I won’t be paying off my mortgage!

 

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4 thoughts on “Why I Won’t Pay Down My Mortgage

  1. D

    The upside is great in theory but you should also talk about the downside risk. It took 3 years for the stock market to recover after the 2009 crash. A sudden raise in interest rates combine with another stock market crash could put you in the poor house. Plus interest is not deductible if you invest in a TFSA.

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    • True, there is always risk when investing in the stock market and people should only assume as much risk as their financial situation and nerves will allow them to.

      As far as the prime interest rate goes though, historically the rate has gone down, not up when the economy is in trouble, so a combination of those 2 factors seems less likely.

      I actually didn’t know about that exception to the tax deduction rule, so thanks for setting me straight on that!

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      • D

        You are too young to remember that in the early 1980’s inflation went wild. My five year fix mortgage went from 10.5% to 21%, I was smart enough to renew for one year at 17.5% and was lucky to keep my house. Massive money printing by the U.S. Federal Reserve could clause inflation to spike followed by raising interest rates even if the economy is weak.

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      • True. I guess our own personal experiences are a huge contributing factor when we’re assessing our tolerance for risk. Thanks for sharing your cautionary tale.

        Like

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