Year-End Decision: Pay Down the Mortgage or Invest?

Historical article note: This article was originally published on 2018-12-13. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.

At the end of each year, before the expiration of the bank mortgage early repayment limit, everyone will consider whether they should repay the loan early, buy an RRSP or TFSA, or invest in other financial assets with their funds. A decision must be made on this issue before the end of the year.

If you pay off your mortgage early, the interest saved will not be taxed, but the investment income will be taxed unless it is invested in a TFSA account. Interest payments on your home are not tax deductible unless you can prove that the funds you have withdrawn from your home have been reinvested. These tax considerations highlight the advantages of early repayment. Then the amount of early repayment allowed by the bank is very important. The size of the prepayment limit of a mortgage indicates the flexibility of the loan contract. For floating rate loans, the prepayment limit is very important. Bank A's early repayment limit per calendar year is 20%, and Bank B allows 10% early repayment every 12 months. The two loan contracts took effect on July 11, 2017. By July 11, 2018, both A and B The bank's prepayment limit differed by 30%. During this period, the central bank raised interest rates four times, from 0.5% to 1.5%. Customers of Bank B can only repay 10% of the principal in advance, while customers of Bank A can repay 40% in advance. If a customer chooses Bank B and has a floating interest rate, and sees interest rates rising, even if he has enough cash for early repayment, there is nothing he can do. For most banks, the use of the repayment limit is based on the calendar year. December 31st of each year is the deadline. The unused limit cannot be transferred to the next calendar year.

In the new interest rate environment, it is easier to choose between accelerating repayment or making other investments: after the interest rate rises, more interest is saved by repaying the loan early, so the benefits of early repayment are greater than before. Of course, I am talking about owner-occupied housing, and there is no need to accelerate repayment for investment properties. There are 15.42 million privately owned housing units in Canada, 6 million of which have mortgage loans, and 61% of the properties have no loans at all. For properties with loans, the average loan amount is 203,300. Anyone who lags behind the average, especially those whose owner-occupied housing amount is higher than 210,000, should take early repayment to reduce the loan amount. Many Chinese people don’t believe this figure. How can Canadians have such little debt? People who don’t believe these figures are probably new immigrants in the past 10 years. The reason your mortgage balance is too high is because you arrived late. If you don’t pay off your home, you can’t retire. Even after you retire, you have to find a way to continue paying it off. Why not pay it off as soon as possible? Many clients who have paid off their home loan told me that they will be able to retire with peace of mind on the day they pay off their home loan. In a word, the self-housing debt is your own business. Before it is paid off, there is no need to worry about the cash in your hand having nowhere to put it, because the self-housing debt will have to be paid off sooner or later. If you cannot pay it off, you will not be able to retire.

One of the reasons why many people are reluctant to speed up the repayment of their home mortgage loans is to set aside some cash for the down payment of real estate investment. This concern is unnecessary. There are too many home loan loans and investment housing loans cannot be approved at all. All expenses for a home, including monthly mortgage payments, land taxes, heating bills, and apartment management fees, are consumer debts, which are the "bad debts" mentioned in my previous articles. When applying for an investment home loan, the monthly payments of all consumer loans will be taken into account. When the borrower cannot support the "bad debts", the bank will not approve the investment home loan. For friends who are interested in real estate investment, the first priority is to speed up the repayment of their home loan. What is the reason for this cannot be explained in an article. There is a video on the Internet, which is a joint lecture held by me and Dapeng Real Estate Company. It plays for 2 hours and 23 minutes. After watching it, you will not be trapped by mortgage problems in your life. Video connection. Sorry, the video is on YouTube, so friends from mainland China cannot see it.

Debt management is not included in the financial plan of many families. If you want to change your home, go to the bank to ask if you can get a loan, plan the down payment yourself, and then take action. In fact, debt management requires more planning and arrangement. In actual work, I encountered many "vegetarians" with mortgage loans: I am now living in House A, the mortgage has been paid off, I have some savings, and I plan to change to a self-occupied house, so I borrowed a mortgage of 5 times the family income, and bought a new self-occupied house B with the cash on hand. After moving into B, I found that I needed to add a mortgage to property A. I went to the bank and asked, but it was no longer possible. The reason was that the loan for home B was a consumer loan and had been borrowed to the limit. House A had been converted into a rental house, and the family income could not support an additional mortgage on the rental house. As a result, the family became a "vegetative" with mortgage loans, unable to move. They watched helplessly as the net equity in the investment house could not be withdrawn, losing capital turnover and the possibility of further investment. The correct approach should be: make a decision before taking action, first increase the mortgage on House A where you live, to the maximum limit, and take out as much house equity as possible as a down payment for the purchase of House B. House B is the owner-occupied house, and the balance of the mortgage loan should always be kept at a minimum. Any family that has the largest loan amount for its own home and very few loans for investment housing is a family that lacks common sense in debt management or has made mistakes in debt arrangements. They are in a wrong posture and should get up and go back to sleep. A wrong mortgage loan plan can ruin a person's lifetime financial planning. A wrong mortgage loan can lead to poverty for the rest of his life.

If your home has been paid off, or the prepayment limit has been exhausted, you can consider investing in financial assets with tax benefits, such as RRSP, TFSA, etc. The choice of each family is different. Some families have high financial skills and have substantial investment returns, so they should give priority to TFSA; some families lack financial knowledge but have high income, so they should give priority to RRSP. If these tax-advantaged items are exhausted, you can consider investing in other financial products. For example, if the trend of interest rate increases is obvious, you can invest in floating-rate bonds or preferred stocks. Finally, if you really don’t want to invest in financial products, you can speed up the repayment of the investment mortgage loan.

Let me remind you that if you don’t have cash when making RRSP deposits, you can apply for an RRSP loan. However, friends who have plans to buy a house loan in the near future need to know that every RMB 100 monthly payment of an RRSP loan will reduce your borrowing capacity by RMB 25,000.

At the end of the year, the priority for using cash on hand is: accelerating the repayment of the owner-occupied mortgage loan, investing in RRSP, TFSA, investing in other financial assets, and accelerating the repayment of the investment housing mortgage loan. Before retirement, we need to achieve three goals: mutual life insurance of 1 million as husband and wife, owning a self-owned home with no mortgage, and financial assets of 2 million. The first goal is the easiest to achieve, but there are still people who don’t even buy life insurance. In short, everyone’s cash is limited. Faced with three financial goals, it is impossible to put your money anywhere.