*Updated* Ongoing Bank of Canada Benchmark Rate Announcements

[DoubleF]

Originally Posted by Jason14h

You can get 6% GICs (or close) right now

Assuming you have room in a TFSA that’s tax free 6% no risk . Why would
You pay down a 2-3% mortgage faster ?

If it’s not in a tax account you have to account for taxes on interest so it’s closer but you’re almost guaranteed still to come out ahead

Now at 7.2% (prime) you need ~9-10% on before tax investment income , so at that point paying off mortgage faster starts to be economical

If you are a prudent saver paying down a low interest mortgage is a bad ROI

This is all ignoring the max lump sums you can make and if you are worried about hitting that in 3 years if you wanted to do a lump sum on renewal of interest rates are still high

True in short term, but not necessarily true in long term. I think if you look at a 15-20 year path of the two paths, investing is better ROI in the short term, but worse ROI in the long term. Paydown is worse ROI in the short term, but better ROI in the long term.

If you have 20 years left on a mortgage, you'd be penalized if you try paying more than allowed annually on a lump sum. If you don't prepay early, you'll be trapped longer term at higher interest rates due to restrictions on paying down the mortgage.

For me, if I suddenly won the lottery, it would take about 4 years of lump sums to pay off my mortgage. That means a few years paying interest rates that are higher than the current lower one I have for another year. Then add on the penalties I'd pay if I wanted to pay early. That probably around the 3-4% difference in the TFSA right there if not more. So I'm behind if I don't start paying lump sums right away. The penalties and extra years on a higher interest rate mortgage need to be factored in. Even if you TVM it, my ball park estimate was that I think you'd be ahead by immediately paying down the mortgage.

Originally Posted by DiracSpike

This is well reasoned but ultimately the summation is you're taking on more risk by doing this. You're counting on capturing the differential between investing and just straight math of reducing a mortgage amount. It *might* pay off, but it also might not. And for a lot of people if it doesn't they're in a world of hurt. I've yet to hear from anyone I've met that regretted paying down their mortgage. Could they have theoretically come out ahead investing that money instead? Maybe, in a lot of cases, but the peace of mind of securing your family's home base for decades, being impervious to interest rate shenanigans, and having a bunch of cash that was being shovelled into a mortgage available ahead of schedule outweighs that. For the vast majority of people that are not sophisticated investors I tend to believe it's the best move.

Or you can hope your investments pay off while sweating out every time an interest rate announcement comes out and take the risk you have to move your family out of a home everyone presumably likes and is comfortable in because you thought you could beat the market. Up to the individual I guess.

Agreed. I personally do a hybrid. I pay off as much as possible while keeping investments on hand for a just in case. But everyone is a different situation, so each scenario has to be evaluated independently.

My scenario is slightly different in that a reno has been requested by Mrs DoubleF. I've also proactively done things like grey pipe and furnace recently as well rather than waited for a mortgage payoff or investing. I've been doing lump sum payments on my mortgage for the last 3 years (including this one) even before I knew the interest rates were going up. I had no intention of carrying a mortgage for 20+ years. I always wanted to be mortgage free in 10-15 years. I just stopped doing max lump sum this year because a potential reno/repair situation sorta demanded it. That's why I said the evaluations can't just be until renewal, but the overall cashflow over the duration of the mortgage to determine the compound interest attributes of property ownership. Like regular upkeep and utilities don't count, but payment plan expectations and future borrowings for improvements to the house do.

I bought my current home in 2019. I plan to be mortgage free by 2030. If I make the remainder of this years lump sum payment (paid half), I am exactly on track without further lump sums. My only complication with the calculation is the renovations which I anticipate might cost about $150-220K over 3-5 years and I've already spent about $30K of it this year. If I simply had a new build and didn't anticipate these types of spending until 5+ years later on, I would have simply maxed out lump sum payments and monthly payment increases until the mortgage was gone. Unfortunately, I moved out of such new build and into an older home with more space, so my situation is slightly more complicated when I do the analysis.

[powderjunkie]

Originally Posted by DoubleF

In some places in Asia, you build more cities and connect them via high speed rail. Imagine living in Cochrane, Okotoks, Chestermere, Airdrie etc. and getting from your station to Calgary station in 10-20 minutes because it's an uninterrupted high speed rail going 150-200 kmph... and technically that's a slow train. Imagine Canmore being 30 minutes away via train but more like 45 minutes door to door. There are options to avoid ultra densification of an urban environment.

I wonder if high speed rails into Vancouver or Toronto could help alleviate those pricing issues. It would allow for building denser in other areas that can still service the main hubs.

I don't think you build HSR to avoid ultra densification...it's more because you can't densify any further. The problem with the idea is that it presumes everyone in bedroom communities works in the CBD. Also gotta think about the station in the small town - if the point is to grow that community, you'll just end up with a big chunk of population far away from the station.

IMO there is plenty of room to densify within the ~1980 city limits while investing much more in local transit, and high streets/public realm improvements

Originally Posted by you&me

Your other point touches on what I was saying early about the blanket upzoning and why I don't think we need to do that (yet). Your example of Chinook is great, as there are acres of under-utilized land that could be redeveloped into a higher density multi-use node. I know that's an existing strategy for the city, but it would be nice to see some of those come to fruition before, again, rezoning Sliver's house to a 4-plex... I just don't feel like that's necessary with where Calgary is in its current built form.

I think the market itself combined with robust building permit restrictions would regulate itself more effectively than outdated bureaucracy deciding on appropriate designations for each lot.

I'm not sure why people seem to think upzoning means nice SFH will be immediately replaced. Just because the demand for duplexes exists in Killarney doesn't mean it'll be the same in Bonavista.

[Sylvanfan]

I'm not a great saver so I did opt to put a bit more down on the house thru increased payments for now. That said this is on the new 5 year fixed at 4.19...As much as anything it's to condition myself to get used to a higher rate environment. 2 years of being 2% below my required payment was pretty much undone 5 months later with the rapid increase...and I started at a 3.25 payment.

Others are far better financial prognosticators than myself. But I believe the indicators in the short term bond market are that rates will come down eventually. Hence why 5 year fixed are the lowest rates out there right now. It's that the path from today to these eventual lower rates looks pretty volatile in the short term. Than there's the next eventual climb up after.

[DiracSpike]

Originally Posted by Slava

Well that's why things like GICs or bonds or potentially high-interest savings accounts make sense. If you have the mortgage come up in three years, you can buy bonds that mature ahead of that and earn a better rate of return than just paying the mortgage. When the bond matures, you plunk it on the mortgage at renewal and you have paid more down on the mortgage than you would've today and with low risk (depending on the bonds you buy...or really have someone who knows what they're doing buy for you).

And...worst case scenario, you can sell those bonds ahead (again, assuming that you aren't buying a riskier high-yield bond).

And of course, with something like a GIC, you end up with ~5% for three years, and it's virtually guaranteed.

You and others are right, GIC would be different. I mean sure, if you have three years left on a mortgage at 3% you'd be better off by a little bit by putting that in a three year GIC and making more. But ultimately it's still with an eye to paying off your mortgage and having that be your focus, with the GIC as a means to an end in that regard. Have to consider taxes on the interest as well.

[Torture]

I feel like the part we're missing here is that if you have the money sitting around in cash and haven't already put it on the mortgage, in a GIC, or in investments, you're probably not the type to be putting it in a GIC to get an extra 2-3% until your mortgage renews.

[Slava]

Originally Posted by DiracSpike

You and others are right, GIC would be different. I mean sure, if you have three years left on a mortgage at 3% you'd be better off by a little bit by putting that in a three year GIC and making more. But ultimately it's still with an eye to paying off your mortgage and having that be your focus, with the GIC as a means to an end in that regard. Have to consider taxes on the interest as well.

Well if that tax issue is a concern, this is where bonds come in. I know they're more complicated, and heaven forbid people want to ask for help, however at this point you can get capital gains for a piece of that return and the tax efficiency there is fantastic!

Originally Posted by Torture

I feel like the part we're missing here is that if you have the money sitting around in cash and haven't already put it on the mortgage, in a GIC, or in investments, you're probably not the type to be putting it in a GIC to get an extra 2-3% until your mortgage renews.

No reason someone couldn't start though. Even if you have an extra few hundred bucks a month, you could put that into a high-interest savings vehicle with no downside risk and get good interest rates now. By the time the three years comes up you have a little pot of cash there and can pay down the mortgage.

[Jason14h]

Originally Posted by Torture

I feel like the part we're missing here is that if you have the money sitting around in cash and haven't already put it on the mortgage, in a GIC, or in investments, you're probably not the type to be putting it in a GIC to get an extra 2-3% until your mortgage renews.

Isn’t that why the question was asked! To learn strategies

Every % point counts and adds up to huge numbers over the large run

Start making smarter choices ! If it’s intimidating chat with an expert ! Honestly small “mistakes” over 40 years add up to massive compounding interest wealth mistakes

[Sliver]

Originally Posted by CroFlames

Great information guys, thank you. Lots to consider. I really don't ever plan to move, so this is both a long term & short term discussion for me.

Fuuckin pay it off asap. In my 20s and 30s we doubled up every payment and did the 10% annual lump sum. Mortgages carry a mental load that isn't offset by putting extra money into investments imo. I know we're all wired different, but I honestly don't care if I would have come out better in the long run if I had played more shell games with my money. Kick the #### out of your mortgage to the maximum of your ability as soon as possible and then forever more enjoy not having that payment. It rules, has no risk, and buys peace of mind, which is even more valuable than the actual full ownership of your property, which is also pretty awesome.

I would prioritize maxing out your RRSPs and TFSAs (and contributing the minimum to your kids' RESPs, which is $208/kid/month, to get the maximum government supplement) over dumping everything onto your mortgage, but aside from those, mortgage payments are the best to pay.

New cars, fancy vacations, unnecessary renos, fancy shoes/clothes/appointments/stuff/etc should all come second to annhilating your mortgage.

The above is perfect-world talking here. I'm not so dumb to think that's viable advice for everyone, but since you must have some extra money each month to even ask the question some of it probably applies to you.

[Old Yeller]

Yup, I totally get the investment angle if your mortgage is sub 2-3% and GICs are 5+% but the peace of mind of NOT having a mortgage at all is almost priceless with the way I'm wired.

My wife and I are close to paying off our mortgage and we've really committed to it over the last few years... seeing our total interest savings and the remaining amortization rapidly tick off is my ROI.

[Shazam]

Sigh. Absolutely goddamned terrible advice. You know it's terrible when Sliver gives the best advice.

No, just because GICs are paying out @ 6% doesn't mean "you're throwing money away!" if you're paying down the mortgage.

Yeah, hey, so you're going to buy a GIC? What, $5k? $10k? $25k? How much mortgage do you have left? $400k? Yeah, paying down the mortgage is BY FAR the best thing to do, because the ** absolute ** amount of interest is way, way, way more.

The calculus only works if the amount of interest you're going to get on the GIC is more than the amount of the interest you're paying on the mortgage.

[blankall]

Originally Posted by Old Yeller

Yup, I totally get the investment angle if your mortgage is sub 2-3% and GICs are 5+% but the peace of mind of NOT having a mortgage at all is almost priceless with the way I'm wired.

My wife and I are close to paying off our mortgage and we've really committed to it over the last few years... seeing our total interest savings and the remaining amortization rapidly tick off is my ROI.

He's still going to have a mortgage in 3 years....the question is if he has $25k now, does he pay that down now or wait 3 years and pay down $30k. Option B is getting rid of his mortgage faster.

[blankall]

Originally Posted by Shazam

Sigh. Absolutely goddamned terrible advice. You know it's terrible when Sliver gives the best advice.

No, just because GICs are paying out @ 6% doesn't mean "you're throwing money away!" if you're paying down the mortgage.

Yeah, hey, so you're going to buy a GIC? What, $5k? $10k? $25k? How much mortgage do you have left? $400k? Yeah, paying down the mortgage is BY FAR the best thing to do, because the ** absolute ** amount of interest is way, way, way more.

The calculus only works if the amount of interest you're going to get on the GIC is more than the amount of the interest you're paying on the mortgage.

Which in this case it is, as he is on a low interest mortgage for 3 more years.

I would look into how much of your mortgage you can pay down at once without penalty. That's another big factor.

[Slava]

Originally Posted by Shazam

Sigh. Absolutely goddamned terrible advice. You know it's terrible when Sliver gives the best advice.

No, just because GICs are paying out @ 6% doesn't mean "you're throwing money away!" if you're paying down the mortgage.

Yeah, hey, so you're going to buy a GIC? What, $5k? $10k? $25k? How much mortgage do you have left? $400k? Yeah, paying down the mortgage is BY FAR the best thing to do, because the ** absolute ** amount of interest is way, way, way more.

The calculus only works if the amount of interest you're going to get on the GIC is more than the amount of the interest you're paying on the mortgage.

Well yeah, it's difficult to give broad advice when you have no details to consider. If you have the specifics, you can do the math and say "here's the plan". That's not exactly news. We don't know whether there is balloon payment room left, the amortization of the mortgage or really anything else. Of course it's difficult to say what the best course of action is here.

[DoubleF]

Originally Posted by blankall

He's still going to have a mortgage in 3 years....the question is if he has $25k now, does he pay that down now or wait 3 years and pay down $30k. Option B is getting rid of his mortgage faster.

Theoretically: Let's say he's going to have a mortgage in 3 years either way, but paydown might mean 20 years of mortgage vs 22 years.

From now to mortgage payout (ie: 15+ years later):

($400K) mortgage at 22 years of rates + $25K GIC x 3 years interest

isn't the same as

($375K)mortgage 20 years of rates + 0 GIC interest

We just don't completely know what the difference is.

[CroFlames]

I'd love to share more details, except you guys are a bunch of internet strangers lol. Most of my registered accounts are maxed, and I'm finally in a position where I can look at doing some bulk payments to the mortgage or invest. But I'm not exactly in a position to be putting $100k into a GIC for three years.

I think I was leaning towards mortgage because I get antsy investing sometimes and likely woulda picked some attractive ETFs instead of GICs. In my world, the ETFs tank and I'm no better off with my mortgage, and I'm way worse off with my investment dollars.

The thought of being mortgage free is really attractive though.

[Sliver]

Originally Posted by DoubleF

Theoretically: Let's say he's going to have a mortgage in 3 years either way, but paydown might mean 20 years of mortgage vs 22 years.

From now to mortgage payout (ie: 15+ years later):

($400K) mortgage at 22 years of rates + $25K GIC x 3 years interest

isn't the same as

($375K)mortgage 20 years of rates + 0 GIC interest

We just don't completely know what the difference is.

This is the internet. I thought we were just supposed to make a series of assumptions that aligned best with the point we felt like making at that particular moment.

[opendoor]

Originally Posted by Shazam

Sigh. Absolutely goddamned terrible advice. You know it's terrible when Sliver gives the best advice.

No, just because GICs are paying out @ 6% doesn't mean "you're throwing money away!" if you're paying down the mortgage.

Yeah, hey, so you're going to buy a GIC? What, $5k? $10k? $25k? How much mortgage do you have left? $400k? Yeah, paying down the mortgage is BY FAR the best thing to do, because the ** absolute ** amount of interest is way, way, way more.

The calculus only works if the amount of interest you're going to get on the GIC is more than the amount of the interest you're paying on the mortgage.

That doesn't make any sense. The comparison isn't the the interest earned on a GIC vs. the interest paid on the whole mortgage; it's compared to the marginal interest paid if you don't put that GIC amount towards your principal right away.

Yeah, the amount you end up with after tax isn't all that much (so it might not be worth doing), but you're talking like you'd be losing money in the end if you put it in a GIC which is absolutely not true.

[you&me]

Originally Posted by Slava

Well yeah, it's difficult to give broad advice when you have no details to consider. If you have the specifics, you can do the math and say "here's the plan". That's not exactly news. We don't know whether there is balloon payment room left, the amortization of the mortgage or really anything else. Of course it's difficult to say what the best course of action is here.

Wait... We don't have all of the details, but there are some pretty safe assumptions that can be extrapolated depending on the specific case.

Like if you have a spare $25k sitting around and can put it in a GIC at 6%, or pay down your 3% mortgage by $25k, the interest earned in the GIC will be greater than the interest saved by the reduction in the mortgage principle (disregarding taxes, etc).

To argue otherwise would demonstrate a poor comprehension of reading math.

That all said, the peace of mind on having less / no mortgage is priceless.

Edit - opendoor beat me to it.

[opendoor]

Originally Posted by DoubleF

Theoretically: Let's say he's going to have a mortgage in 3 years either way, but paydown might mean 20 years of mortgage vs 22 years.

From now to mortgage payout (ie: 15+ years later):

($400K) mortgage at 22 years of rates + $25K GIC x 3 years interest

isn't the same as

($375K)mortgage 20 years of rates + 0 GIC interest

We just don't completely know what the difference is.

Why would the first example have more years of payments? The point is you'd throw the $25K + the interest you earned against the principal at renewal to reduce the amortization. Using those numbers:

$400K mortgage w/ 22 years left and 3 years in term remaining: $355,202 balance after 3 years, less the $28,940 in GIC + 5% interest = $326,262 balance at end of 3 years

$375K mortgage w/ 20.33 years left (that keeps the same payment as $400K at 22 years) = $328,664 balance at the end of 3 years.

Taxes would likely eat a lot of the benefit up, so it's not necessarily worth doing, but you still come out ahead with the former option.

[GGG]

Originally Posted by you&me

Wait... We don't have all of the details, but there are some pretty safe assumptions that can be extrapolated depending on the specific case.

Like if you have a spare $25k sitting around and can put it in a GIC at 6%, or pay down your 3% mortgage by $25k, the interest earned in the GIC will be greater than the interest saved by the reduction in the mortgage principle (disregarding taxes, etc).

To argue otherwise would demonstrate a poor comprehension of reading math.

That all said, the peace of mind on having less / no mortgage is priceless.

Edit - opendoor beat me to it.

Don’t forget tax on your 6% is treated like cash so if you are on the CP bracket with a 43%-48% marginal rate that 6% is more like 3.4 so is only marginally better. If I’m a TFSA at those spreads it’s much more meaningful.