30 year and Invest or 20/25 year

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Feb 5th, 2021 9:34 pm

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Feb 5th, 2021 7:26 pm

Topher86 [OP]: Sr. Member; Jan 22, 2012; 529 posts; 194 upvotes; Bradford

Feb 5th, 2021 7:26 pm

30 year and Invest or 20/25 year

Debating on down payment and amortization .

I’m trying to decide whether to put less down ($200,000) and take a 30 year amortization and invest $125,000 in my index funds. I feel like with interest rates being so low, I would come out ahead investing the money elsewhere and then if rates go up I can put a lump sum on when I renew?

Or am I better to put more down ($300,000-$325,000) and take a shorter amortization of 20-25 years?

7 replies

Feb 5th, 2021 7:40 pm

ozzie16: Deal Addict; Oct 27, 2012; 2137 posts; 3324 upvotes; Toronto

Feb 5th, 2021 7:40 pm

I was/am in a similar situation. Was going to put 40% down and take a 25 year AM. Now I'm going forward with only 20% down and 30 year AM. With rates so low I'd rather hold on to the money and invest it, or leave it as a cash reserve for other opportunities. If rates go up or I don't find any appealing opportunities, I can just pay down 20% of the original mortgage every year.

It comes down to if you're comfortable with the payments and you cash flow. It's better for me to have access to a larger chunk of capital immediately and pay a few hundred extra per month in mortgage payments. Just be disciplined and don't treat it as free reign to spend that cash on frivolous stuff. Also, consider that 25 AM and higher downpayment might get you a better rate than 30 AM with only 20% down, weigh the options and see if they work for your risk tolerance. The gap between two now is pretty narrow so you'll still likely be beating it with a index fund return.

Feb 5th, 2021 7:48 pm

Topher86 [OP]: Sr. Member; Jan 22, 2012; 529 posts; 194 upvotes; Bradford

Feb 5th, 2021 7:48 pm

ozzie16 wrote: ↑ I was/am in a similar situation. Was going to put 40% down and take a 25 year AM. Now I'm going forward with only 20% down and 30 year AM. With rates so low I'd rather hold on to the money and invest it, or leave it as a cash reserve for other opportunities. If rates go up or I don't find any appealing opportunities, I can just pay down 20% of the original mortgage every year.

It comes down to if you're comfortable with the payments and you cash flow. It's better for me to have access to a larger chunk of capital immediately and pay a few hundred extra per month in mortgage payments. Just be disciplined and don't treat it as free reign to spend that cash on frivolous stuff. Also, consider that 25 AM and higher downpayment might get you a better rate than 30 AM with only 20% down, weigh the options and see if they work for your risk tolerance. The gap between two now is pretty narrow so you'll still likely be beating it with a index fund return.

Thank you. For a 30 year with 20% down I was quoted 1.74 for 5 year fixed and for 25 year it was 1.59. I think I can make up the difference with that on an index fund.

Feb 5th, 2021 7:52 pm

ozzie16: Deal Addict; Oct 27, 2012; 2137 posts; 3324 upvotes; Toronto

Feb 5th, 2021 7:52 pm

Topher86 wrote: ↑ Thank you. For a 30 year with 20% down I was quoted 1.74 for 5 year fixed and for 25 year it was 1.59. I think I can make up the difference with that on an index fund.

You can push harder for a better rate. Check with one of the mortgage brokers on the thread in this forum and cross shop all the banks & HSBC. I know people are getting 1.49 for 5 year fixed with 30 AM. Or 1.39 for 5 year fixed, 25 AM with more than 25% down.

Feb 5th, 2021 8:02 pm

silentguy: Newbie; Sep 21, 2018; 64 posts; 125 upvotes

Feb 5th, 2021 8:02 pm

Had to make the same decision, ended up going 30 year and putting down less. In hindsight I wish I put down even less than I did.

OP, having cheap non-callable debt is one of the least risky forms of debt available. Put 20% down and let your money work for you as long as possible.

+2

Feb 5th, 2021 8:06 pm

RichmondCA: Deal Addict; Mar 2, 2017; 1125 posts; 2062 upvotes; Toronto

Feb 5th, 2021 8:06 pm

Least amount down (as long as you avoid CMHC) and everything else invested.

One of the bigger mistakes I've made in hindsight was rushing to pay off as much of my mortgage as possible (was doing the max allowable prepayments monthly + annual top ups, etc) and being super aggressive with it. This cost me a few hundred k in cap gains easily had I invested it instead.

Realtor, Investor, CPA

+3

Feb 5th, 2021 8:56 pm

mao246: Newbie; Jun 28, 2009; 60 posts; 25 upvotes

Feb 5th, 2021 8:56 pm

If you have TFSA and RRSP maxed out, you are paying taxes on gains for any other investment (ie funds that would’ve been DP), which means you’ll need to make close to double (depending on your tax bracket) to equate the cost of borrowing. If you are living in the house, it is currently considered a principal residence so is tax exempt. I would say if you don’t TFSA and RRSP maxed out then it’s worth it to hold back some down payment. Otherwise might not be as worth it. Will have to be very diligent in your self administered funds.

+2

Feb 5th, 2021 9:34 pm

1LoveToronto: Newbie; Feb 10, 2017; 93 posts; 81 upvotes

Feb 5th, 2021 9:34 pm

I put the minimum (~6%) which was a fraction of my networth despite paying ~20k CMHC. Much rather invest the 15% delta. I'm fairly confident even the basic equity premium in a well-diversified ETF will net me more over 25 years.

To me it's just a psychological hurdle - lower monthly payment at the cost of lower networth potential.

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