Personal Finance

Pay down my mortgage: Yay or Nay?

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  • Jul 24th, 2020 1:16 am
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[OP]
Sr. Member
May 3, 2010
701 posts
357 upvotes

Pay down my mortgage: Yay or Nay?

Hey RFD fam!

* This is NOT a flex thread. Just looking for some sincere, honest advice *

I have an investment property that's rented out and pays for itself. Have about $275k left on the mortgage with 20 yrs amortization left. Monthly payment is about $1600. I have about $200k in cash savings that is not invested (personal choice). Was thinking perhaps I should pay down the mortgage since I have the cash on hand.

But..

1- Is it smart to block my liquid capital in a mortgage specially given the uncertainty and volatility of the market with covid?

2- I have always wanted to have cash on hand being been paranoid about the world going to s**t and cash coming in handy to get by.

3- or I could use the $200k towards a down payment into another investment property.

What do you suggest and what are your thoughts on the prospects of the real estate market?
14 replies
Deal Addict
Oct 16, 2013
2405 posts
762 upvotes
New Brunswick
If the "Collapse" happens, your dollars will be worthless....

Are there fees in paying the mortgage off quickly?

Do have have other debts?

Is your TFSA, RRSP, RESP max out?

Do you have an emergency fund plus precious metals?
Deal Addict
Dec 28, 2007
1122 posts
680 upvotes
To clarify, the mortgage is on the investment property? Do you have a mortgage on your primary residence?
Deal Expert
User avatar
Oct 26, 2003
37393 posts
5246 upvotes
Winnipeg
no one can tell you about the market condition these days, some crazy fluctuation going on, anything can happen. but if you feeling bold you could invest more into it.
generally buying more properties at this time is a bad idea, a lot of people having difficulty paying rent and causing a slump in rental revenue but you could view this to be a short term problem.
WTB amazon gc @90%
Deal Addict
Nov 13, 2013
3811 posts
2361 upvotes
Ottawa
JUnit wrote: To clarify, the mortgage is on the investment property? Do you have a mortgage on your primary residence?
Yes this is key question. For sure pay off primary residence first. This is essentially a tax free investment and while some will advise against it I tend to think it is a decent strategy. For an investment property I am less keen. It will generate cash but your taxable profit will become large and the interest was deductible from this. In this case I would diversify into something tax favorable like something paying eligible dividends. Granted those valuations seem inflated right now.
[OP]
Sr. Member
May 3, 2010
701 posts
357 upvotes
fogetmylogin wrote: Yes this is key question. For sure pay off primary residence first. This is essentially a tax free investment and while some will advise against it I tend to think it is a decent strategy. For an investment property I am less keen. It will generate cash but your taxable profit will become large and the interest was deductible from this. In this case I would diversify into something tax favorable like something paying eligible dividends. Granted those valuations seem inflated right now.
My primary residence has a mortgage remaining of about $850k. But the residence is co-owned between myself and my parents. I'm the minority shareholder in the property with a 20% stake. So even if I was to pay it down, it wouldn't increase my stake in it.

In case anyone's curious, I have a joint family system with my parents, siblings and myself all living together. Hence the big mortgage amount due to it being a big house.

You raise a good point, less interest payment on the investment property will increase my tax payment.. it will increase my taxable income by almost $9k a year.. which when added to my employment income will result in higher taxes..
Last edited by GameChannel on Jul 21st, 2020 9:47 am, edited 1 time in total.
Deal Fanatic
Dec 16, 2005
6383 posts
4576 upvotes
GameChannel wrote: My primary residence has a mortgage remaining of about $850k. But the residence is co-owned between myself and my parents. I'm the minority shareholder in the property with a 20% stake. So even if I was to pay it down, it wouldn't increase my stake in it.

In case anyone's curious, I have a joint family system with my parents, siblings and myself all living together. Hence the big mortgage amount due to it being a big house.
you would think paying $200k off the balance would put you at a higher stake. regardless of that situation, paying off the investment property is a bad idea.
interest is taxable and at historic lows. Better to max out TFSA and RRSP then dump it in investments or savings depending on your risk appetite right now
Deal Fanatic
Jan 15, 2017
5232 posts
5273 upvotes
Ottawa
You already know that the smart thing to do is to diversify your investments. And, you like to have cash on hand as an emergency fund. With the amount of uncertainty right now and in the foreseeable future until the pandemic is resolved, I would suggest that your best option is to just invest the cash in a safe investment like a GIC.
Sr. Member
User avatar
Sep 16, 2015
628 posts
1280 upvotes
Calgary, AB
GameChannel wrote: Hey RFD fam!

* This is NOT a flex thread. Just looking for some sincere, honest advice *

I have an investment property that's rented out and pays for itself. Have about $275k left on the mortgage with 20 yrs amortization left. Monthly payment is about $1600. I have about $200k in cash savings that is not invested (personal choice). Was thinking perhaps I should pay down the mortgage since I have the cash on hand.

But..

1- Is it smart to block my liquid capital in a mortgage specially given the uncertainty and volatility of the market with covid?

2- I have always wanted to have cash on hand being been paranoid about the world going to s**t and cash coming in handy to get by.

3- or I could use the $200k towards a down payment into another investment property.
You're holding $200K in cash for psychological reasons. It makes you feel warm and fuzzy, but isn't a smart investment decision.

Paying down the investment property mortgage isn't a great investment opportunity. At current mortgage rates, paying down your mortgage will only save you about 2%. You can do better than that simply by investing it in an ultra-conservative ETF.

So the best option becomes "Invest my $200K." You could buy another investment property, but the danger here is that your money is not diversified at all. You're sinking your life savings into a single asset. Worse, you're sinking your life savings into real estate in a single market.

Remember, just because real estate performed well over the past 2 decades doesn't mean it will continue to outperform. The primary reason for the spectacular increase in property valuation since 2001 has been a steady decline of interest rates.
Image
Because buyers are paying less in interest, they are able to qualify for significantly higher loans, which led to rapid inflation in the property market. The critical thing to realize is that interest rates can't get any lower, so property appreciation is going to slow dramatically over the next few years.

Two basic questions:

1. Have you maxed out your TFSA? If not, make sure that you've invested up to the full limit. This is tax-free income.
2. Have you maxed out your RRSP? If not, take a good look at your tax bracket because this gives you the power to defer 35%-ish percent tax.
Deal Addict
Jul 16, 2019
1540 posts
789 upvotes
Invest is the best strategy.
Mtg rates are low so I believe you will generate more by investments than the 2.5% or so compounded saving paying off your investment mtg.
Whether to invest in real estate, stocks or something else is the real question.
If you want your cash easily accessible then invest in a safe security
Deal Fanatic
User avatar
Dec 10, 2004
6972 posts
2615 upvotes
Vancouver
GameChannel wrote: Hey RFD fam!

* This is NOT a flex thread. Just looking for some sincere, honest advice *

I have an investment property that's rented out and pays for itself. Have about $275k left on the mortgage with 20 yrs amortization left. Monthly payment is about $1600. I have about $200k in cash savings that is not invested (personal choice). Was thinking perhaps I should pay down the mortgage since I have the cash on hand.

But..

1- Is it smart to block my liquid capital in a mortgage specially given the uncertainty and volatility of the market with covid?

2- I have always wanted to have cash on hand being been paranoid about the world going to s**t and cash coming in handy to get by.

3- or I could use the $200k towards a down payment into another investment property.

What do you suggest and what are your thoughts on the prospects of the real estate market?
I will say a different thing. 200K are sitting there. Pay off the mortgage and then instead of the rental property paying it off it will be making money which you can use in any way you like, including investing or putting it in the bank or mattress. Have money sitting while paying $1600/m is not a great investment. If economy collapses for real estate to go down, everything around the World will have the same effect so investing would not be ideal either. Unlike others, I am all about safety and don't do stocks and such.
Covid is ending yet property prices are only increasing and have been non stop. Some wait for some great depression of the 1920s no realizing World was very different back then so it can't happen. Even take a look at the market crash of 2008. Toronto wasn't hit that much. USA house prices went down for a bit only to jump back to much higher than ever. People need to live somewhere and unless your rental is 2 hours away from a city(eg toronto) it will always be in demand, especially if it's not ultra luxury. Typically during the tough times, it's the expensive luxury properties that sufferer as nobody wants to buy a $5mil house during bad times.
I use voice typing, expect mistakes...
Deal Addict
Nov 13, 2013
3811 posts
2361 upvotes
Ottawa
jaybeeg wrote: You're holding $200K in cash for psychological reasons. It makes you feel warm and fuzzy, but isn't a smart investment decision.

Paying down the investment property mortgage isn't a great investment opportunity. At current mortgage rates, paying down your mortgage will only save you about 2%. You can do better than that simply by investing it in an ultra-conservative ETF.

So the best option becomes "Invest my $200K." You could buy another investment property, but the danger here is that your money is not diversified at all. You're sinking your life savings into a single asset. Worse, you're sinking your life savings into real estate in a single market.

Remember, just because real estate performed well over the past 2 decades doesn't mean it will continue to outperform. The primary reason for the spectacular increase in property valuation since 2001 has been a steady decline of interest rates.
Image
Because buyers are paying less in interest, they are able to qualify for significantly higher loans, which led to rapid inflation in the property market. The critical thing to realize is that interest rates can't get any lower, so property appreciation is going to slow dramatically over the next few years.

Two basic questions:

1. Have you maxed out your TFSA? If not, make sure that you've invested up to the full limit. This is tax-free income.
2. Have you maxed out your RRSP? If not, take a good look at your tax bracket because this gives you the power to defer 35%-ish percent tax.
Agree and disagree. Yes interest rate drops have been a key factor. Also immigration many of whom pay cash. It is possible for prices to decouple from income and interest rates and continue to rise. Many world cities have seen this happen. It seems like vacancy, speculation and foreigner taxes will suppress that here if prices rise too much beyond these fundamentals.

2% is low but guaranteed. Though frankly a HISA can also pay 2%+ and keep your options open. Family dynamics aside maybe move into your own place. Any chance you move into your investment property? If so paying it off makes more sense.

With this much savings you certainly could be much better taking more risk than paying off your mortgage. Doesn't mean it's wrong to take the safe choice. I have done very well in the stock market over the past 10 years but it is been a very small percentage of my savings. I don't really regret much as the peace of mind and the who cares of the various crashes and dips since then is also worth something. In true RFD fashion keep a very high savings rate and it will overwhelm certainly any yield differences from 2 or 7%.
Banned
Nov 14, 2017
112 posts
74 upvotes
Planning to get married soon? If so, would your future wife be okay with a shared home? Probably not. Then start saving for your own place.
Deal Addict
User avatar
Jun 23, 2017
1453 posts
988 upvotes
Toronto, ON
option #3 ... rent it out and let the tenant pay off your next mortgage too ... screen your tenants properly to avoid any #RentStrike or #KeepYourRent nonsense!
Newbie
May 23, 2011
91 posts
110 upvotes
Don’t pay down the rental mortgage.
With tax returns, you’re getting like 30-40% of the interest back. So it’s like 1.6 or 2% return for your money.

Pretty much EVERY THING is better than that.

Is your family’s TFSAs all full? Did you know that arbitration rules don’t apply for tfsas? Which means if you parents or siblings have room, you can just give them money to fill it up. As long as you trust them of course.

If you believe the historical trend that the market will trend upwards over the long term, then the only sensible thing to do is to invest. Anything else you just should admit to yourself you’re not choosing the most optimal path due to personal reasons.

I keep 20k ish In cash. It’s probably better spent invested somewhere. I’ve never needed it. I’ve got maybe 120k In available credit that I could access in an emergency. But I just keep it around cause it feels better. I know it’s not the most optimum.

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