Invest or pay down mortgage?

[lolalolalola]

Looking at next year's budget, we should have about $60,000 that we can use to invest or pay down the mortgage.

Details:

We are 45 years old, hope to retire around 60. 
Our mortgage is $3300/month, balance is $410K, will be paid off in 12.5 years. 
We have $1.1 million in our retirement accounts, which is approx 3 x salary.  

We haven't had a tonne of extra spare cash over the last few years as we have had some big purchases and expenses. However, for 2020 I want to focus on saving, and try to have a 'spending freeze' of sorts for the year. Would you direct the funds to mortgage or to investments? 

We are in Canada so no mortgage tax deduction, and our mortgage rate resets every few years. We are currently paying 2.95% but that will be adjusted to then-market rates in 2023. 

We have $60K room in our TFSA so if we invest it, it would go into there. (A Canadian TFSA is similar to a Roth IRA).

I know the math says to invest, but it would be so nice to make some headway on our huge mortgage. Losing a $3300/month expense would be life changing, and it's a guaranteed return. We just met with our investment advisor and he just made his last mortgage payment! 

TIA. I'm happy to share any other info needed. I am really torn between the two options.  This year we did half and half for our extra saving. 

 

[thatgirl2478]

How fast can you pay it off if you throw a bunch at it?

I know it's not popular around here, but Dave Ramsey always asks the question this way: Would you take out a mortgage to invest in the stock market? Most people say no, so the answer is pay off the mortgage asap because having a mortgage while investing extra in the stock market is the same as taking out a mortgage to invest in the market.

That said, he's assuming you're already putting aside 15% of your household income into retirement accounts and are already funding (at some level) your kids college funds.

[imojoebunny]

We have a similar mortgage, except in the US, but given your low rate, even without the tax deduction, I would invest. You have a more potential upside, and investing gives you more options long term, than putting the money into the house, like if you have a health crisis or a job loss, you likely won't be able to refinance, but you could pull money from retirement accounts (In the US, you might have to pay a penalty, but for some situations, the penalty is waived for early withdraw.)

[farmvillelover]

We also have a similar mortgage and are choosing to pay down the mortgage despite it being at 3.75%. By my calculation we'll be done in about 4-6 years which will be just in time for my H to stop working if all goes according to our loose plan.I realize it's not a popular choice to pay it down/off. But we max out retirement options, have saved in 529s and non-529s for our kids, have healthy a taxable brokerage amount, and cash in a high yield account that could cover a few years of expenses if needed.

Given the combination of all that, I just consider money paying down our principal as some diversification for us. If we had a health crisis or job loss and our cash was exhausted and disability policies ran out, and a HELOC wasn't possible, then yes maybe we'd regret paying down the house but I think that would be pretty remote for us.

[waverly]

You could split the difference maybe?

My issue with the house that my parents went through a job loss and a divorce. Yes I suppose the house could have been lost in the job loss, but not likely in that situation. So I think they would have been better off with it in retirement. They are both fine but only because of extenuating circumstances. It’s weird for me to say this since I am extremely debt adverse and would love to have my house paid off.

[goldengirlz]

I would choose investing. You’re probably on track for retirement, but some of the more aggressive calculators think you should have 6x your income by age 50 (and 3x by age 40.)

Also, the psychological boost of paying down a mortgage is somewhat negated by the fact that you’ll still have to pay insurance and property tax.

[tres3]

We paid cash for our current home. You can't put a price tag on the emotional benefits of a paid off home. It has also allowed us freedom to change jobs, start a business, etc.

[tres3]

Dec 8, 2019 15:42:08 GMT -5 goldengirlz said:

I would choose investing. You’re probably on track for retirement, but some of the more aggressive calculators think you should have 6x your income by age 50 (and 3x by age 40.)

Also, the psychological boost of paying down a mortgage is somewhat negated by the fact that you’ll still have to pay insurance and property tax.

My property taxes and insurance total roughly $600/mo if I were to spread them out instead of just paying them once a year... I can't even rent a trailer for $600/mo so I don't find my psychological benefit diminished. 

[goldengirlz]

Dec 8, 2019 19:53:43 GMT -5 tres3 said:

Dec 8, 2019 15:42:08 GMT -5 goldengirlz said:

I would choose investing. You’re probably on track for retirement, but some of the more aggressive calculators think you should have 6x your income by age 50 (and 3x by age 40.)

Also, the psychological boost of paying down a mortgage is somewhat negated by the fact that you’ll still have to pay insurance and property tax.

My property taxes and insurance total roughly $600/mo if I were to spread them out instead of just paying them once a year... I can't even rent a trailer for $600/mo so I don't find my psychological benefit diminished. 

Well, my tax and insurance bill is about $1400 per month in my high tax, VHCOL state. (And I’m not even including earthquake insurance.) So. You know. It depends.

[k3am]

Like goldengirlz, we're VHCOL (and we bought our home at the peak of the market. Darned crystal ball was definitely hazy at the time). Taxes and interest are... a lot. And I still dream of having that be the only thing I'm responsible for.

I don't think there's any "right" answer here - I think you can make an argument either way and have sound justification for both. Personally, we're doing a mix of both.

[sandandsea]

Dec 8, 2019 23:15:06 GMT -5 k3am said:

I don't think there's any "right" answer here - I think you can make an argument either way and have sound justification for both. Personally, we're doing a mix of both.

Ditto this. “Just” taxes and insurance more than halves my current payment and halving your largest payments could make a huge difference. We are also doing a mix. Maxing retirement accounts while paying down the mortgage and trying to save a lot and living mindful of a budget.

[aprilsails]

DH really wants to fill in all his TFSA space. I’m assuming since you are not mentioning it that you are maxing out RRSPs.

As a previous PP mentioned, you can lose a lot of money on the house during a divorce (happened to my parents). Considering current rates of return, I would go for the TFSA. Your money isn’t locked in long term (flexibility if you need it), and you would be ahead on your mortgage rates (and I can’t see a rate reset in 2023 being too much higher).

One option is that when you go to renew your mortgage, you can pull out your gains from your TFSA (should be $10,000 or more on $60k compounded annually at 5%+) and apply them to your refinanced mortgage. The really nice thing about TFSAs is that your capital growth increases your contribution room, so then in the future you would have that $10,000 space in additional contribution room for the next year you have some slush $ around.

Or split the difference and do half and half. We’ve done that a couple of times with bonuses where we’ve done a payment against the principle and a payment to our retirement accounts. It’s nice to do as well and feels like you’ve tried to satisfy both your competing goals.

[lolalolalola]

Thanks everyone. to answer questions:

- We have saved just over $100K in their college fund (our kids are aged 12 & 14). We are comfortable with this amount, given a) they can live at home, b) we can cash flow as needed, and c) college expenses in Canada are much lower than in the US

- if we are able to consistently put $50K extra per year on our mortgage, I believe we would have it paid off in 5 years.

- Regardless of monthly property taxes and home insurance costs (for us they total $650), saving $3300/ month in expenses would be huge!

- aprilsails ,We have maxed our our RSP's. We could max out our TFSA's next year and then going forward, max them out annually and put the remainder on the mortgage. We don't have any savings outside of our tax advantaged accounts, so maybe that is the threshold- we do everything we can that has a tax advantage, and then put the rest on the mortgage.

[Covergirl82]

lolalolalola, based on you most recent response, I would work to pay down/off your mortgage. It will be a big relief to have that paid off around when your oldest is starting college, so you'll have more money in your budget if need be for that, or to start putting in another account for retirement.

[thatgirl2478]

Dec 9, 2019 12:44:06 GMT -5 lolalolalola said:

Thanks everyone. to answer questions:

- We have saved just over $100K in their college fund (our kids are aged 12 & 14). We are comfortable with this amount, given a) they can live at home, b) we can cash flow as needed, and c) college expenses in Canada are much lower than in the US

- if we are able to consistently put $50K extra per year on our mortgage, I believe we would have it paid off in 5 years.

- Regardless of monthly property taxes and home insurance costs (for us they total $650), saving $3300/ month in expenses would be huge!

- aprilsails ,We have maxed our our RSP's. We could max out our TFSA's next year and then going forward, max them out annually and put the remainder on the mortgage. We don't have any savings outside of our tax advantaged accounts, so maybe that is the threshold- we do everything we can that has a tax advantage, and then put the rest on the mortgage.

based on this, I would probably work on paying it off early. If you can do it in 5 years, that gives you easily 10 years to sock away $3300 (or more) monthly.  BUT I'm debt averse and we're planning to have our mortgage paid off with in the next 5 ish years too (much smaller debt, much smaller shovels).