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mortgage paydown question

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D

destillat

Well-known member
Aug 29, 2001
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I'm in a variable rate mortgage (currently at 2.4%)

I've got some chunks of money (nothing huge, but enough) in some savings.
All non-registered:
Some in a TFSA currently at 2.25%
Some in a mutual fund that is making about 3-4% over the past few years.
Some in a mutual fund that is making about 10-13% over the past few years.

I'm comfortable with my current saving matrix... diverse and safe (including RRSPs that aren't part of this conversation).

Mathematically speaking though, it seems to make sense to push my lower-interest-earning savings toward my mortgage (I'm allowed an annual lump sum deposit).

Am I missing something in that assumption?
 
F

forze

Member
Aug 7, 2010
861
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destillat said:
I'm in a variable rate mortgage (currently at 2.4%)

I've got some chunks of money (nothing huge, but enough) in some savings.
All non-registered:
Some in a TFSA currently at 2.25%
Some in a mutual fund that is making about 3-4% over the past few years.
Some in a mutual fund that is making about 10-13% over the past few years.

I'm comfortable with my current saving matrix... diverse and safe (including RRSPs that aren't part of this conversation).

Mathematically speaking though, it seems to make sense to push my lower-interest-earning savings toward my mortgage (I'm allowed an annual lump sum deposit).

Am I missing something in that assumption?
Click to expand...
That makes sense. TFSA rates suck these days.
 
D

destillat

Well-known member
Aug 29, 2001
2,813
68
48
mississauga
golforge said:
"That makes sense. TFSA rates suck these days."

Unless you are using your TFSA as an emergency fund of sorts, why would you be putting it in a low-interest option? If it's longer term, invest it in the markets, find the right asset-mix and try to stay ahead of inflation at least.
Click to expand...
That's exactly the purpose of my TFSA... easily accessible money in the event of an emergency.
I also have an unused line of credit... which is why I am thinking it's better for me to move most my TFSA money into my mortgage.
 
MzzKarly

MzzKarly

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Actually, Destillat there is an other option to consider.
How long is your ammortization at right now??
 
R

Ringworld

Banned
Jun 29, 2013
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I agree with OP. Sounds like we're in similar circumstances and follow a similar line of thinking.

I bought my house 10 years ago. It was a fixed rate (~5%) mortgage with 25-year amortization. Long amortization period was to keep the monthly payments low for financial flexibility. I paid directly towards the principal when I was feeling confident. Focused on paying down the mortgage over saving because the mortgage was costing me more than the return on the same amount of cash in other investments. The exception was a nominal amount of saving that went directly into my work retirement saving plan. Just finished paying off the mortgage.

I also have an unsecured line of credit with the bank in case I have an unexpected need for cash. Requires that just the interest be paid back every month.
 
I

Imperius

Upstanding Member
Aug 23, 2012
627
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destillat said:
I'm in a variable rate mortgage (currently at 2.4%)

I've got some chunks of money (nothing huge, but enough) in some savings.
All non-registered:
Some in a TFSA currently at 2.25%
Some in a mutual fund that is making about 3-4% over the past few years.
Some in a mutual fund that is making about 10-13% over the past few years.

I'm comfortable with my current saving matrix... diverse and safe (including RRSPs that aren't part of this conversation).

Mathematically speaking though, it seems to make sense to push my lower-interest-earning savings toward my mortgage (I'm allowed an annual lump sum deposit).

Am I missing something in that assumption?
Click to expand...
Think about your "after tax" rate of return on each of the above investments. If you are at a high personal tax rate and depending how your are receiving your investment returns (interest, dividends, realized capital gains, unrealized capital gains), you may actually be earning more "after tax" on your TFSA than on your 3-4% non-registered mutual funds. Similarly, you may be paying more "after tax" on your mortgage than you are keeping "after tax" on your 3-4% investments.

I'm also not a fan of using a TFSA for emergency fund savings in this low-interest rate environment. Might as well leave your emergency cash non-registered and pay minimal tax on the 1-2.5% return, and put your mutual funds earning 10-13% (or even the 3-4% ones) in the TFSA (if they are reasonably stable) and get that return tax free.

Also, if you've got a lot of non-registered investments and an outstanding mortgage of similar size, you could look into something like the Smith Manoeuvre to make your mortgage interest tax deductible. You want to make sure you have an appropriate investment risk profile that fits with your overall strategy if you decide to do this.
 
B

Barca

Active member
Sep 8, 2008
2,058
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38
forze said:
That makes sense. TFSA rates suck these days.
Click to expand...
TFSAs don't have "rates". The mistake people make is that they put the wrong product in a TFSA. They walk into a bank, say they want to open a TFSA and ignorant bank teller or whoever they are dealing with promptly plops them into a High Interest Savings Account or a GIC. Stupid, stupid, stupid. If you're going to do that it's almost not worth it. Pay down your mortgage at 2.5% of whatever and you will be further ahead.

On the other hand, if a person is smart and opens an investment account registered as a TFSA, you make real gains all tax free.

Earning 1.25% tax free is pennies.

I've been making double digit returns in my TFSA since inception. Considering we are heading into the 6th year with January's contribution room reaching a total of $31,000 principal deposit do the math.

For those able to take risk, right now is the time to leverage, not when interest rates are at 5%+.
 
C

camnyc

Active member
Dec 7, 2009
270
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Barca said:
TFSAs don't have "rates". The mistake people make is that they put the wrong product in a TFSA. They walk into a bank, say they want to open a TFSA and ignorant bank teller or whoever they are dealing with promptly plops them into a High Interest Savings Account or a GIC. Stupid, stupid, stupid. If you're going to do that it's almost not worth it. Pay down your mortgage at 2.5% of whatever and you will be further ahead.

On the other hand, if a person is smart and opens an investment account registered as a TFSA, you make real gains all tax free.

Earning 1.25% tax free is pennies.

I've been making double digit returns in my TFSA since inception. Considering we are heading into the 6th year with January's contribution room reaching a total of $31,000 principal deposit do the math.

For those able to take risk, right now is the time to leverage, not when interest rates are at 5%+.
Click to expand...
Where do we get double digit returns and in how many years? My friend is in a bank and he always say that mutual funds are risky. I have maxed my TFSA but no returns. There are tons of options and if your portfolio is not in 6 figure, then I guess no money manager would be interested in. Just you need to work around yourself and if you are not good in investments then you'll loose big time at the end. I might be wrong but that's what I've learned from bankers and reading articles here and there.
 
D

destillat

Well-known member
Aug 29, 2001
2,813
68
48
mississauga
Barca said:
TFSAs don't have "rates". The mistake people make is that they put the wrong product in a TFSA. They walk into a bank, say they want to open a TFSA and ignorant bank teller or whoever they are dealing with promptly plops them into a High Interest Savings Account or a GIC. Stupid, stupid, stupid. If you're going to do that it's almost not worth it. Pay down your mortgage at 2.5% of whatever and you will be further ahead.

On the other hand, if a person is smart and opens an investment account registered as a TFSA, you make real gains all tax free.

Earning 1.25% tax free is pennies.

I've been making double digit returns in my TFSA since inception. Considering we are heading into the 6th year with January's contribution room reaching a total of $31,000 principal deposit do the math.

For those able to take risk, right now is the time to leverage, not when interest rates are at 5%+.
Click to expand...
I can convert some (or all) of my mutual funds into a TFSA if I wish.
Do you have any idea what happens to the profit that I have amassed? Do I get taxed on it once I convert into a TFSA?
 
I

Imperius

Upstanding Member
Aug 23, 2012
627
1
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destillat said:
I can convert some (or all) of my mutual funds into a TFSA if I wish.
Do you have any idea what happens to the profit that I have amassed? Do I get taxed on it once I convert into a TFSA?
Click to expand...
When you transfer the funds in to a TFSA (or RRSP), there is a deemed disposition (sale) at market value, and you will be taxed on any capital gain.
 
J

Jaffo

Active member
Aug 16, 2003
953
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Put the money towards paying off your mortgage.

I’d also suggest making an extra payment, if you can afford it, which is applied directly to your principle with every mortgage payment. Most banks will allow this option. I know the Royal does. Just make it clear to them that it is to be applied towards the principle. Take advantage of the low interest rates and pay down as much principle as possible.

Even if it’s only an extra $40 per payment it will make a difference in the long run. There are mortgage calculator tools which can help you run various scenarios and you can determine what’s best for you. Here is one: http://www.canadamortgage.com/calculators/convhighratio.cgi
 
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