Is it better to switch to accelerated mortgage payments or invest the extra cash?
- Thread starter cwordman
- Start date
@stevebrodie I don't know the going rate for GICs atm but it's possible if high enough. And for sure - having cash on hand for future purchases is definitely something to consider! Thanks.
operatoractual
New member
@cwordman One thing people often miss in the invest vs pay off mortgage fast equation is inflation. Assuming you get cost of living raises at work at a minimum, this means over time, the real cost of your mortgage payments goes down over time, every time you get a raise that matches inflation. If you had a $2000 payment 25 years ago, it would’ve shrank to be equivalent to $1200 today, according to the Bank of Canada inflation calculator on their website.
Another factor is how large the mortgage is, relative to your portfolio, and % of your household income. If it’s a tiny mortgage and tiny payment, why rush to pay it off?
Lastly, you have to think about expected returns on your property. Did you buy something that should appreciate well like a detached house in a good area? Or did you buy something that may not appreciate as well? This impacts the opportunity cost of investing, because rather than shoveling your money into an ETF paying 7%, maybe you are shoveling it into a home that may merely keep its value over time.
There is no right answer to this question, everybody makes different decisions for different reasons. Most people I know pay off their mortgage as soon as they can cause they simply don’t want the payments. If that’s what you focus on, you will want to pay it off fast. If you focus on building your net worth at the maximum possible rate, and check it at least monthly, you may arrive at a different approach.
Another factor is how large the mortgage is, relative to your portfolio, and % of your household income. If it’s a tiny mortgage and tiny payment, why rush to pay it off?
Lastly, you have to think about expected returns on your property. Did you buy something that should appreciate well like a detached house in a good area? Or did you buy something that may not appreciate as well? This impacts the opportunity cost of investing, because rather than shoveling your money into an ETF paying 7%, maybe you are shoveling it into a home that may merely keep its value over time.
There is no right answer to this question, everybody makes different decisions for different reasons. Most people I know pay off their mortgage as soon as they can cause they simply don’t want the payments. If that’s what you focus on, you will want to pay it off fast. If you focus on building your net worth at the maximum possible rate, and check it at least monthly, you may arrive at a different approach.
@operatoractual Yeah the focus long term is definitely net worth...But even then you raise excellent points about inflation, size of the mortgage, and property type. I would always want a smaller mortgage size and it is a condo so perhaps will not keep its value over time - that's definitely the major consideration for me...I wish there was a website that lets you calculate numbers with all of these factors together - le sigh... Thanks for your comment 
@cwordman Personal example:
I paid my 300k mortgage in 5 years instead of 25. I finished paying last July. All my money went to doing that.
Today, this saves me roughly 1500$ of interest per month. That's the equivalent of 18k per year tax free, or about 30k per year before tax, or 10% return on 300k.
Of course the effect is less when interests are lower but... who knows when they'll go back to 2%.
I paid my 300k mortgage in 5 years instead of 25. I finished paying last July. All my money went to doing that.
Today, this saves me roughly 1500$ of interest per month. That's the equivalent of 18k per year tax free, or about 30k per year before tax, or 10% return on 300k.
Of course the effect is less when interests are lower but... who knows when they'll go back to 2%.
@cwordman I must say I have been very lucky for the past 5 years, and I decided to put 100% of my additional income in my mortgage.
But my point was not to talk about me. I really wanted to share with you what I realized by doing so, which was that the return on investment was really crazy compared to investing the money. Indeed, paying my mortgage much faster is saving me today about 18k of interest per year, or 30k before tax. The money I invested was the equivalent of 4k per month for 60 months, or 240k. which means that it is in fact, I would need a return of about 13% today on my 240k investment, to beat the effect of having paid my mortgage in advance.
Really, when you have 6% interest rates and pay about 50% tax... every dollar you put in your mortgage in advance is a very well invested dollar.
But my point was not to talk about me. I really wanted to share with you what I realized by doing so, which was that the return on investment was really crazy compared to investing the money. Indeed, paying my mortgage much faster is saving me today about 18k of interest per year, or 30k before tax. The money I invested was the equivalent of 4k per month for 60 months, or 240k. which means that it is in fact, I would need a return of about 13% today on my 240k investment, to beat the effect of having paid my mortgage in advance.
Really, when you have 6% interest rates and pay about 50% tax... every dollar you put in your mortgage in advance is a very well invested dollar.