Personal Finance

Double Up on Mortgage Payments or invest more in TFSA?

  • Last Updated:
  • Jan 24th, 2019 12:12 pm
[OP]
Jr. Member
Aug 8, 2013
187 posts
227 upvotes
Delta

Double Up on Mortgage Payments or invest more in TFSA?

Is it smart to double up mortgage payments on a rental property that I only plan on keeping for the next ~5 years?

Currently, it is cash flow positive where the rental income covers all costs (mortgage/property tax/strata) - but my mortgage went from 2.75% to 3.5%.

I am also investing in an ETF (VGRO) which is in my TFSA and my current strategy is DCA putting $1,000 a month.

I have about another $500 a month to invest, but after last year's ROI, it's got me thinking if I should put it into my mortgage instead?

Any insight will be helpful. Thank you.
32 replies
Deal Addict
Nov 10, 2018
3219 posts
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The former.

If you double up on mortgage payments the upside is that if your renter doesn't pay you for a while, that you can go to your mortgage lender and ask for the equivalent amount of mortgage payments to be "held" or whatever the term is.

E.g. you make 6 double mortgage payments, then you don't have to make any mortgage payments, without consequence, for 6 "months". That's a nice benefit, while having the double payment go 100% towards the principal.
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Deal Fanatic
Nov 24, 2013
6142 posts
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Kingston, ON
You pretty much never want to prepay the mortgage on a rental property. That 3.5% interest expense is tax deductible from your rental income, so in effect you’re only paying 2.8%, 2.4%... as low as 1.7% depending on your income and where you live. You can handily best that with GICs in a TFSA, much less real investments.
Banned
Jan 13, 2019
22 posts
5 upvotes
Toronto
Invest any extra cash in RRSP, RESP, TFSA in that order. Still have more?
Buy some dividend stocks in a margin account.
It's a waste paying off a mortgage that is cheap and tax deductible.
Deal Fanatic
Dec 16, 2005
5251 posts
3259 upvotes
Agreed.

Don't make extra payments on a rental property.

If it was your primary, it could be considered. Mortgage rates are around 3.5% now so it is equivalent of around 5% guaranteed return (using 30% tax rate) depending on your tax bracket and whether or not you have room in a sheltered account.

Even 3.5% compared to sheltered TSFA might be ok since it is guaranteed
Jr. Member
Sep 16, 2013
148 posts
77 upvotes
Calgary, AB
General rule of thumb would be to invest in TFSA instead of make extra mortgage payments for all of the reasons pointed out above.

That said, if you would be able to rest easier at night knowing you're ahead on your mortgage payments and you can still save and invest for the future, then do what makes you feel most comfortable.
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May 11, 2014
4016 posts
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Iqaluit, NU
It depends on

1) Your Income tax rate
2) What you plan to invest in your TFSA
3) Your mortgage rate

If you plan to invest in savings, GICs, or bonds for that matter, don't bother with the TFSA route. Prepaying your mortgage is similar to a tax-free investment. So instead of VGRO, I would go full equity if I took the TFSA route.

While @Mike15 is correct that prepaying your mortgage would mean you could potentially lose the deduction of the property, this is somewhat ignoring the fact that a mortgage prepayment is similar to a tax free investment.

For example, if you are paying 4% on your mortgage, 4% is after-tax.
Pre-tax, the actual interest rate will depend on your income tax rate. If your income tax rate is 40%, your mortgage rate pre-tax is actually approximately 6.66%. In other words, in ignoring the tax deduction, you would have to make an investment earn 6.66% non-registered for it to be worthwhile. This is a hard rate to achieve specifically if you are investing in income instruments in a TFSA, and a mortgage prepayment is pretty much equivalent to a guaranteed investment

So I guess the best answer would be to make some quick calculations:

1)Find out your tax rate. Then calculate the effective pre-tax rate of the mortgage =(mortgage rate/ (1-income tax rate)
2)How much is the mortgage interest deduction (if this is a rental) worth?
3)What percentage do you approximately expect your TFSA investment to earn.

After finding this out, make a decision based on your situation and risk tolerance
Last edited by xgbsSS on Jan 22nd, 2019 11:48 am, edited 1 time in total.
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Deal Fanatic
Mar 24, 2008
5996 posts
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Toronto
Personally, I'd split it down the middle and do both. $250 in TFSA and $250 on your mortgage. You don't know what the future holds so it's prudent to do both.
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Nov 24, 2013
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xgbsSS wrote: While @Mike15 is correct that prepaying your mortgage would mean you could potentially lose the deduction of the property, this is somewhat ignoring the fact that a mortgage prepayment is similar to a tax free investment.

For example, if you are paying 4% on your mortgage, 4% is after-tax.
Pre-tax, the actual interest rate will depend on your income tax rate. If your income tax rate is 40%, your mortgage rate pre-tax is actually approximately 6.66%. In other words, in ignoring the tax deduction, you would have to make an investment earn 6.66% non-registered for it to be worthwhile. This is a hard rate to achieve specifically if you are investing in income instruments in a TFSA, and a mortgage prepayment is pretty much equivalent to a guaranteed investment
What you're saying is a good way for comparing the guaranteed after-tax return of a mortgage prepayment on a primary residence to the pre-tax return on an investment, but the OP's scenario was specifically for a rental property (so presumably a tax-deductible mortgage).

For a tax-deductible mortgage, the nominal rate, 4% to use your scenario, is with pre-tax dollars. The after-tax rate is less than that. With a 30% MTR, the mortgage rate is 2.8% after-tax. You compare that against TFSA investments earning 2.8%, RRSP investments earning 2.8% (because you generate a refund at your MTR for RRSP contributions and the tax on withdrawals is deferred), or 4% less the anticipated tax rate on taxable investments.

Grossing up the mortgage rate to a "pre-tax" figure can make sense when trying to compare primary-residence mortgage prepayment to pre-tax returns on investments, but I don't see how it does in a rental (deductible) scenario.
Deal Addict
Apr 5, 2016
4465 posts
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Calgary/Vancouver
If your mortgage is variable rate and you increase payments, you may not be able to decrease it back to original amount if prime goes up. Another thing to think about if you're looking to increase payment.

My suggestion would also be to invest it, but I know there's the sentimental part which can't be valued in dollar signs.
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Deal Fanatic
Mar 24, 2008
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Toronto
Mike15 wrote: What you're saying is a good way for comparing the guaranteed after-tax return of a mortgage prepayment on a primary residence to the pre-tax return on an investment, but the OP's scenario was specifically for a rental property (so presumably a tax-deductible mortgage).

For a tax-deductible mortgage, the nominal rate, 4% to use your scenario, is with pre-tax dollars. The after-tax rate is less than that. With a 30% MTR, the mortgage rate is 2.8% after-tax. You compare that against TFSA investments earning 2.8%, RRSP investments earning 2.8% (because you generate a refund at your MTR for RRSP contributions and the tax on withdrawals is deferred), or 4% less the anticipated tax rate on taxable investments.

Grossing up the mortgage rate to a "pre-tax" figure can make sense when trying to compare primary-residence mortgage prepayment to pre-tax returns on investments, but I don't see how it does in a rental (deductible) scenario.
I don't buy carrying a mortgage (even on a) rental just for a tax deduction. Basic math, what's paying a $1.00 to get back 35 cents on taxes and still exposing yourself to a risk that you'd default? There have been studies, a 100% of mortgages that default have outstanding loans against the property title. A paid-off rental will actually make money without the risk of foreclosure/power of sale. The concept of risk adjusted returns, people!
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Jan 7, 2019
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Max out the TFSA first and then decide if you want to pre-pay the mortgage on the rental property.

If you are working full time, the interest paid on the mortgage will definitely help you reduce your taxable burden at the end of the year. It's definitely helping me reduce $8000 this year....(interest paid on rental condo)
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Deal Fanatic
Nov 24, 2013
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Kingston, ON
ksgill wrote: I don't buy carrying a mortgage (even on a) rental just for a tax deduction. Basic math, what's paying a $1.00 to get back 35 cents on taxes and still exposing yourself to a risk that you'd default?
You don’t carry it just for a tax deduction. You carry it because your resources are limited and the opportunity cost works out better putting funds elsewhere (probably because of the tax deduction).

A suggestion was made earlier to prepay mortgage because if your renter was ever short you can use a “payment vacation” feature to balance off the cashflow shortfall. But really, if you keep your investments fairly liquid in a TFSA, you can just as readily cover off a shortfall by pulling from that.
There have been studies, a 100% of mortgages that default have outstanding loans against the property title. A paid-off rental will actually make money without the risk of foreclosure/power of sale. The concept of risk adjusted returns, people!
That’s a really odd statement. 100% of mortgages are loans against a property. You can’t default against one unless you have one. In other shocking news, 100% of people who breathe air will eventually die!
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Mar 10, 2018
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LOLUMIRINBRO wrote: Is it smart to double up mortgage payments on a rental property that I only plan on keeping for the next ~5 years?

Currently, it is cash flow positive where the rental income covers all costs (mortgage/property tax/strata) - but my mortgage went from 2.75% to 3.5%.

I am also investing in an ETF (VGRO) which is in my TFSA and my current strategy is DCA putting $1,000 a month.

I have about another $500 a month to invest, but after last year's ROI, it's got me thinking if I should put it into my mortgage instead?

Any insight will be helpful. Thank you.
Double Up on Mortgage Payments or invest more in TFSA?

Mortgage
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Deal Fanatic
Dec 16, 2005
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ksgill wrote: I don't buy carrying a mortgage (even on a) rental just for a tax deduction. Basic math, what's paying a $1.00 to get back 35 cents on taxes and still exposing yourself to a risk that you'd default? There have been studies, a 100% of mortgages that default have outstanding loans against the property title. A paid-off rental will actually make money without the risk of foreclosure/power of sale. The concept of risk adjusted returns, people!
There are some logic issues with your argument. That's why you don't understand.

The way you have positioned your argument, you are either paying off enough of the mortgage to save $1 in interest or not paying anything and paying $1 in interest but saving $0.35 in taxes.

The problem is you have ignored the money required to pay off enough of the mortgage to save that $1 in interest. At 3.5% mortgage rate, you need to pay roughly $28.50 in order to save $1 in interest.

If you aren't paying the mortgage you could be earning 3% in a savings account which is $0.85 on the same $28.50.

Add the tax saving of $0.35 to the $0.85 you earned and you net $1.20. that's 20% more than just paying off the mortgage trying to save the $1.

And your second point about 100% of mortgage defaults have outstanding loans just doesn't make sense. Of course 100% of defaults have outstanding mortgages, if they didn't have an outstanding mortgage there would be no chance of default because there is no mortgage??

That's like saying 100% of people who died from skydiving were skydivers. Duh?
Last edited by mech9t5 on Jan 22nd, 2019 8:01 pm, edited 1 time in total.

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