Investing

50k savings and a mortgage. Best use?

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  • May 29th, 2019 8:53 am
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[OP]
Newbie
Feb 2, 2018
64 posts
11 upvotes

50k savings and a mortgage. Best use?

Hello,

Wanted to get advice on extra cash flow that has been accumulating over the past years. I have a really high mortgage 600 out of the 680 purchase price.

I also have 50k in savings. My bank alots a certain percentage go be paid I believe year end.

Should I throw the savings into the mortgage and lower it?
Or should I use the money elsewhere to invest ? Purchase another property perhaps and flip somewhere down the line?
Or use the funds to invest in mutual funds or tfsa ?

Basically I'd like to have this mortgage paid off asap but not sure if it makes sense to pay it off using these savings or use this money for the other options mentioned above.

Any advice will be greatly appreciated.
16 replies
Deal Addict
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May 11, 2014
2933 posts
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Iqaluit, NU
Hi there;
Your questions comes up quite often. If anything there is no right answer because it really depends on what you invest, what contribution amount you have available in your registered tax-shelter accounts (ie. RRSP,TFSA), what you value more (security vs growth), interest rate on your mortgage and finally what you plan to invest in separately. I will not go into buying a second property as personally I'm not a fan of being overexposed to real estate and two I'm not super knowledgeable in the area. I do know that in general, most mortgages allow 20% prepayment on principal a year, although some mortgages are 10%.


When comparing investing vs mortgage you need to understand a few things. First of all, paying down a mortgage is almost the equivalent of making an investment in a GIC, tax-free. Say you are paying 3.69% on your mortgage, investing in a GIC at 3.69% would be the same thing you would think, however remember you pay income taxes on the interest. Therefore, you would need to actually make a lot more than 3.69% just to break even. Say your top income tax rate on your taxes is 40%, you would need to make approximately 6.15% (3.69%/0.60) on your interest money to be equivalent to your mortgage! That is quite a high rate of return. If you are investing in stocks, your capital gains have to be equal to approximately 4.61% (3.69%/0.80) return. The reason why the rate would be lower is due to the fact that capital gains are taxed at half the rate.
So one merit of paying down your mortgage is that it is effectively equivalent to a guaranteed tax-free investment.

However when looking at the rate of return on equities, you will notice that it is quite possible to beat that 4.61ish% return overtime. Additionally, if you are making investments in a TFSA or RRSP, taxes become less or non-issue in this case. So the argument for investing in investment funds would be that you can easily make more money overtime by investing in investment funds. Additionally, by keeping assets on the side, you also have the ability to access them afterward should the need for cash arise.

So what exactly is the right answer? Honest truth, I wouldn't over think it. Remember, if you pay down or invest that money, you are doing something to better your situation so the best thing to do is not to overthink it. Personally I would base it on what makes you feel more comfortable. Here is a general guideline of what I would do.

1. If you are type that values security over cash growth, I would favor paying down your mortgage
2. If you feel comfortable cash flow wise, and feel that regardless of what happens, you are comfortable with your debt and current income levels, consider investing but with the next steps in mind...
3. You should consider the investments you plan to make when proceeding
i. If you are looking at investing in funds, what kind of investor are you? If you are an aggressive investor (say 100% equity), invest ahead. Worse comes to worse, you can always cash that investment out and apply it to your mortgage
ii. If you are not a fully aggressive investor, say you would look at investing in a balanced fund, such as 60% equity and 40% bonds, I would look at paying down your mortgage with 40% of the funds and invest 60% of your money in 100% equity funds
->the reason for this is that bonds are similar to mortgage in that they are interest and they yield similarly to mortgages however they have the added risk in that should interest rates rise, your mortgage interest rate stays the same and bonds will go down in value
additionally, you must pay income tax at the full rate on your interest income
So in your case, It would look like 30K in a equity fund and 20K as a downpayment on your mortgage
4. Utilize any tax-shelter accounts ! TFSA and RRSPs will make it easier for you to beat out the mortgage. Additionally when utilizing your RRSP, you can do both by taking the increased tax return and apply this to your mortgage!

5. Regardless which option you take, take heart in that you are in a position to do either and regardless which way you go, you are bettering your financial position.

If that is too complicated, split it 50-50 and just go ahead. Either move is prudent. And if you do 50-50, you can always take that invested 50% and apply that to the mortgage** (provided it isn't in an RRSP)
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Deal Guru
Jun 26, 2011
12057 posts
2307 upvotes
Markham
Question #1...what is the rate on your mortgage
[OP]
Newbie
Feb 2, 2018
64 posts
11 upvotes
RolandCouch wrote:
May 24th, 2019 1:04 am
Question #1...what is the rate on your mortgage
3.2%...it is variable and used to be lower.
[OP]
Newbie
Feb 2, 2018
64 posts
11 upvotes
xgbsSS wrote:
May 24th, 2019 12:20 am
Hi there;
Your questions comes up quite often. If anything there is no right answer because it really depends on what you invest, what contribution amount you have available in your registered tax-shelter accounts (ie. RRSP,TFSA), what you value more (security vs growth), interest rate on your mortgage and finally what you plan to invest in separately. I will not go into buying a second property as personally I'm not a fan of being overexposed to real estate and two I'm not super knowledgeable in the area. I do know that in general, most mortgages allow 20% prepayment on principal a year, although some mortgages are 10%.


When comparing investing vs mortgage you need to understand a few things. First of all, paying down a mortgage is almost the equivalent of making an investment in a GIC, tax-free. Say you are paying 3.69% on your mortgage, investing in a GIC at 3.69% would be the same thing you would think, however remember you pay income taxes on the interest. Therefore, you would need to actually make a lot more than 3.69% just to break even. Say your top income tax rate on your taxes is 40%, you would need to make approximately 6.15% (3.69%/0.60) on your interest money to be equivalent to your mortgage! That is quite a high rate of return. If you are investing in stocks, your capital gains have to be equal to approximately 4.61% (3.69%/0.80) return. The reason why the rate would be lower is due to the fact that capital gains are taxed at half the rate.
So one merit of paying down your mortgage is that it is effectively equivalent to a guaranteed tax-free investment.

However when looking at the rate of return on equities, you will notice that it is quite possible to beat that 4.61ish% return overtime. Additionally, if you are making investments in a TFSA or RRSP, taxes become less or non-issue in this case. So the argument for investing in investment funds would be that you can easily make more money overtime by investing in investment funds. Additionally, by keeping assets on the side, you also have the ability to access them afterward should the need for cash arise.

So what exactly is the right answer? Honest truth, I wouldn't over think it. Remember, if you pay down or invest that money, you are doing something to better your situation so the best thing to do is not to overthink it. Personally I would base it on what makes you feel more comfortable. Here is a general guideline of what I would do.

1. If you are type that values security over cash growth, I would favor paying down your mortgage
2. If you feel comfortable cash flow wise, and feel that regardless of what happens, you are comfortable with your debt and current income levels, consider investing but with the next steps in mind...
3. You should consider the investments you plan to make when proceeding
i. If you are looking at investing in funds, what kind of investor are you? If you are an aggressive investor (say 100% equity), invest ahead. Worse comes to worse, you can always cash that investment out and apply it to your mortgage
ii. If you are not a fully aggressive investor, say you would look at investing in a balanced fund, such as 60% equity and 40% bonds, I would look at paying down your mortgage with 40% of the funds and invest 60% of your money in 100% equity funds
->the reason for this is that bonds are similar to mortgage in that they are interest and they yield similarly to mortgages however they have the added risk in that should interest rates rise, your mortgage interest rate stays the same and bonds will go down in value
additionally, you must pay income tax at the full rate on your interest income
So in your case, It would look like 30K in a equity fund and 20K as a downpayment on your mortgage
4. Utilize any tax-shelter accounts ! TFSA and RRSPs will make it easier for you to beat out the mortgage. Additionally when utilizing your RRSP, you can do both by taking the increased tax return and apply this to your mortgage!

5. Regardless which option you take, take heart in that you are in a position to do either and regardless which way you go, you are bettering your financial position.

If that is too complicated, split it 50-50 and just go ahead. Either move is prudent. And if you do 50-50, you can always take that invested 50% and apply that to the mortgage** (provided it isn't in an RRSP)
Thank you very thorough advice. I do not have enough knowledgeable in investing.. your points mentioned in #3 such as 100 equity so invest head" etc.. looks like I need to do some home work before I can come up with a knowledgable decision.

My aim at paying down the mortgage in addition to the points you've mentioned is that This would also help lower my mortgage payments. Is that correct? Approx 50k would be 250$ in monthly savings? Or would it stay the same
Member
Jan 30, 2017
260 posts
32 upvotes
I am kind of in similar position... do I pay off a good chunk of mortgage or use it as down payment for another house

My strategy: my mortgage does not renew till 2021 so instead of paying off my mortgage now, I am going to wait till renewal time to see what the rates are at that moment.

If they are low - then buy another house
If they are high - pay off mortgage

That’s my thinking
[OP]
Newbie
Feb 2, 2018
64 posts
11 upvotes
Eaglesfan99 wrote:
May 24th, 2019 11:59 am
I am kind of in similar position... do I pay off a good chunk of mortgage or use it as down payment for another house

My strategy: my mortgage does not renew till 2021 so instead of paying off my mortgage now, I am going to wait till renewal time to see what the rates are at that moment.

If they are low - then buy another house
If they are high - pay off mortgage

That’s my thinking
I am wondering if we pay off a chunk of the mortgage, does the monthly amount decrease right away accordingly?
Deal Guru
Jun 26, 2011
12057 posts
2307 upvotes
Markham
Jumanji12 wrote:
May 25th, 2019 9:45 am
I am wondering if we pay off a chunk of the mortgage, does the monthly amount decrease right away accordingly?
Your monthly payments stay the same but because of your principal payment, each future payment of the same amount will be paying less in interest.
Deal Fanatic
Mar 24, 2008
5617 posts
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Toronto
Jumanji12 wrote:
May 25th, 2019 9:45 am
I am wondering if we pay off a chunk of the mortgage, does the monthly amount decrease right away accordingly?
Even though the payments will be the same as they are now, you'll save a tonne in interest payments. I would keep a 6 month emergency fund and put the rest against the mortgage. It will save you thousands of dollars in interest over the course of your mortgage.
Illegitimi non carborundum
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User avatar
May 11, 2014
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Iqaluit, NU
Jumanji12 wrote:
May 24th, 2019 7:59 am

Thank you very thorough advice. I do not have enough knowledgeable in investing.. your points mentioned in #3 such as 100 equity so invest head" etc.. looks like I need to do some home work before I can come up with a knowledgable decision.

My aim at paying down the mortgage in addition to the points you've mentioned is that This would also help lower my mortgage payments. Is that correct? Approx 50k would be 250$ in monthly savings? Or would it stay the same
Jumanji12 wrote:
May 25th, 2019 9:45 am

I am wondering if we pay off a chunk of the mortgage, does the monthly amount decrease right away accordingly?
@RolandCouch and @ksgill have said it. The short answer is no. That being said, it isn't impossible to get it changed. Some mortgages (rarely) can readjust the payments accordingly upon request but often with a fee. Another option could be upon renewal of the term to have the payments adjusted.

Because of that and the fact that you want to lowet payments, one factor that might come into play is where you are on the mortgage term. If you are close to the end of the term, prepayment may be helpful as this will allow you to lower payments upon renewal, so where you are along the term could be the deciding factor for you.

My bigger concern on your comment though is are you finding the current payments difficult to digest hence the want for smaller payments? If that is the case, I would be very concerned about placing all your money as a prepayment. If you find that you are struggling keeping up the payment, it may be prudent to keep a portion of the cash as buffer so that you have access to continue regular payments. An option such as prepaying with $40000 and keeping $10000 as a few months of payment buffer can help should you find yourself struggling. This might not be the case for you, however since you mention wanting to lower payments, this concern does cross my mind.

The best answer about the ability to lower payments though is to talk to your mortgage provider. Each mortgage contract is different and therefore will have different rules. Before proceeding, you need to know what exactly you can do before trying to figure out what exactly you will do.
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Jr. Member
Feb 8, 2018
126 posts
40 upvotes
I wouldn't put extra money in mortgage just because money is still cheap these days however the extra money should work
Newbie
May 2, 2019
41 posts
15 upvotes
Jumanji12 wrote:
May 23rd, 2019 11:37 pm
Or should I use the money elsewhere to invest ? Purchase another property perhaps and flip somewhere down the line?
Definitely don't even consider getting into more debt. You already have too much debt, as many Canadians do.

I strongly believe you should pay off your mortgage, subject to its conditions (to avoid penalties).

It's true you might get a better return elsewhere at a cost of more risk. If you were a more experienced investor and/or had less debt, it would be worth consideration.

However, there are risks (including your own psychology) that you cannot fully evaluate now. As explained, safe investments like GICs don't get you ahead. Any benefit would come only from investments which can turn against you.
With the current economic situation, it is very possible you'd put lots of money into stocks only to see your investment drop 30% or more within one year. Many people get stressed / panicked in that case and make costly mistakes.
Things might go the other way too an hit you with another risk - increased interest payments.

You have time to learn more about investments and try that when your debt/assets ratio gets to more reasonable levels.
Keep some safety money available, obviously, to last you through emergencies.
Newbie
May 25, 2019
28 posts
6 upvotes
First of all, if you have other debt, I'll strongly suggest you paid those off ASAP.

If you are looking for some additional ideas I'll suggest looking into Dave Ramsey's 7 Baby Step. Just Google it, his method helps people prioritize where to put their money depending on which step you are in.

But like others have said, it really depends on your own financial goal. I personally think either way works, but if like you have mentioned, paying off mortgage is your number one goal then just dump the 50k into your mortgage. Key though is that you need to make sure that it is actually your main goal, cause like me my goal is to be financially independent. Paying off my mortgage is just a step to get their but my main goal right now is building up passive income. Just do a quick reflection as to why you want to pay off your mortgage. Keep asking why until you found the root cause behind wanting to pay off your mortgage.

Cheers, good luck.
Neighbour Joe
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Slowly But Wealthy
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Mar 24, 2008
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amal1595 wrote:
May 26th, 2019 8:44 pm
I wouldn't put extra money in mortgage just because money is still cheap these days however the extra money should work
Mortgage is paid with after tax dollars and if OP is in 40% tax bracket, he'd have to earn approximately 4.5% rate of return just to break even elsewhere. That's a high rate of return that you probably couldn't easily achieve without investing in equities, which are risky.

Paying off some of the mortgage would get OP a guaranteed rate of return and lower his/her credit risk.
Illegitimi non carborundum
Jr. Member
Feb 8, 2018
126 posts
40 upvotes
ksgill wrote:
Mortgage is paid with after tax dollars and if OP is in 40% tax bracket, he'd have to earn approximately 4.5% rate of return just to break even elsewhere.
How did you come up with 4.5%?

Ty

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