Real Estate

Using TFSA to pay down the mortgage?

  • Last Updated:
  • Aug 29th, 2019 6:34 pm
Tags:
[OP]
Deal Addict
Sep 10, 2010
2804 posts
1140 upvotes
Ottawa

Using TFSA to pay down the mortgage?

So I bought a house last year and I'm considering using my savings in from the TFSA to pay down a large chunk of my mortgage. I know I can make larger percentage gains from my investments in TFSA than the interest paid, but I just hate having debt. Also market gains aren't guaranteed especially with all the trade war stuff going on. Mortgage interests rates are guaranteed so I kind of would rather just plop down a chunk of money so I can be closer to finishing my mortgage by a couple of years.

I've done some reading on TFSA and from my understanding this is what I plan to do
1. clear out my TFSA this year (2019).
2. Then next year (2020) I would have the yearly contribution limit plus the cumulative contribution limits from all other years since TFSA began.

Is this correct?

Starting from 0 would also let me keep track of things easier. I haven't kept track of things at all and don't know what price I bought things and and how many shares I initially bought and its all just a mess.
21 replies
Deal Addict
Oct 4, 2009
2742 posts
1612 upvotes
Montreal
eugene188 wrote: I've done some reading on TFSA and from my understanding this is what I plan to do
1. clear out my TFSA this year (2019).
2. Then next year (2020) I would have the yearly contribution limit plus the cumulative contribution limits from all other years since TFSA began.

Is this correct?
No. Assuming you’ve maxed out your contribution room in 2019, you’d get your 2020 limit(6k) plus your 2019 withdrawals. TFSA room is created/lost with your investment results.

Accumulated contribution limit assuming residence and age requirements is 63.5k as of 2019. If investors A and B have both maxed their contributions, A has a TFSA balance of 127k and B’s balance is 31.75k, their contribution limits would be wildly different next year if emptying their accounts immediately(133k vs 37.75k).
Jr. Member
Aug 24, 2010
128 posts
124 upvotes
eugene188 wrote: So I bought a house last year and I'm considering using my savings in from the TFSA to pay down a large chunk of my mortgage. I know I can make larger percentage gains from my investments in TFSA than the interest paid, but I just hate having debt. Also market gains aren't guaranteed especially with all the trade war stuff going on. Mortgage interests rates are guaranteed so I kind of would rather just plop down a chunk of money so I can be closer to finishing my mortgage by a couple of years.

I've done some reading on TFSA and from my understanding this is what I plan to do
1. clear out my TFSA this year (2019).
2. Then next year (2020) I would have the yearly contribution limit plus the cumulative contribution limits from all other years since TFSA began.

Is this correct?

Starting from 0 would also let me keep track of things easier. I haven't kept track of things at all and don't know what price I bought things and and how many shares I initially bought and its all just a mess.
The mortgage rates are so low. What I am doing is keeping our TFSAs maxed out, not pulling that out. It’s solid cash savings.. and cash is king. So keep the TFSA.

Is it a real stretch to pay the mortgage without paying the principal down? If so you can pull it out. But because the interest rates are so low I would advise you against it.
Deal Addict
User avatar
Jan 2, 2012
4057 posts
1971 upvotes
Toronto
eugene188 wrote: So I bought a house last year and I'm considering using my savings in from the TFSA to pay down a large chunk of my mortgage. I know I can make larger percentage gains from my investments in TFSA than the interest paid, but I just hate having debt. Also market gains aren't guaranteed especially with all the trade war stuff going on. Mortgage interests rates are guaranteed so I kind of would rather just plop down a chunk of money so I can be closer to finishing my mortgage by a couple of years.
In general moving money from an investment to a debt costing less in interest than the investment is making for you, is a bad financial idea. Markets go up and down for various reasons but over the long term (like out to your retirement) an index fund should easily outperform a mortgage.

Also there are good debts and bad debts. A mortgage is a form of low-interest leveraged investing for an appreciating asset (your home) where gains are tax-free. This is a "good" debt, and shouldn't be looked at in the same way as a credit card debt or car loan.

But at the end of the day, you have to do what makes you comfortable.
Member
Aug 16, 2011
366 posts
234 upvotes
OTTAWA
Index Fund 8-9% over 25 years... mortgage rate.. currently 2.6% over the next 5 years... + the 8-9% is tax free increase in your TFSA.
Member
Jul 4, 2013
215 posts
189 upvotes
Toronto, ON
Delilah14 wrote: It’s solid cash savings.. and cash is king. So keep the TFSA.
Keeping a TFSA in cash might not be the best plan. Best to invest it in ETFs or other investment vehicles. More risk, yes, but also greater rewards than the pittance of interest gained by staying in cash. The "savings" in the name give the wrong impression -- this is definitely something that should be used to capitalize on a tax-free investment advantage.
[OP]
Deal Addict
Sep 10, 2010
2804 posts
1140 upvotes
Ottawa
S5 wrote:
No. Assuming you’ve maxed out your contribution room in 2019, you’d get your 2020 limit(6k) plus your 2019 withdrawals. TFSA room is created/lost with your investment results.

Accumulated contribution limit assuming residence and age requirements is 63.5k as of 2019. If investors A and B have both maxed their contributions, A has a TFSA balance of 127k and B’s balance is 31.75k, their contribution limits would be wildly different next year if emptying their accounts immediately(133k vs 37.75k).
I checked CRA and seems I have contribution room of 36k or so. And I currently have around 40k in the TFSA. So if I pull everything out, then that means next year I will have the 2020 contribution room plus what I withdraw making it over 76k of contribution room?
Delilah14 wrote:
The mortgage rates are so low. What I am doing is keeping our TFSAs maxed out, not pulling that out. It’s solid cash savings.. and cash is king. So keep the TFSA.

Is it a real stretch to pay the mortgage without paying the principal down? If so you can pull it out. But because the interest rates are so low I would advise you against it.
actually with what is happening with the lower interest rates in the US, I might hold out a little to see whats up with our Canadian rates.
rob444 wrote:
In general moving money from an investment to a debt costing less in interest than the investment is making for you, is a bad financial idea. Markets go up and down for various reasons but over the long term (like out to your retirement) an index fund should easily outperform a mortgage.

Also there are good debts and bad debts. A mortgage is a form of low-interest leveraged investing for an appreciating asset (your home) where gains are tax-free. This is a "good" debt, and shouldn't be looked at in the same way as a credit card debt or car loan.

But at the end of the day, you have to do what makes you comfortable.
I don't know what it is with this mortgage. I have no problems making the payments, and I even went bi-weekly instead of semi-month. I think it is the old school Chinese in me that hates having debt. I should be ok with investment and risks because I'm quite far away from retirement, but i'm a cheapass at heart and hate risking the $$.
Jeremyl007 wrote: Index Fund 8-9% over 25 years... mortgage rate.. currently 2.6% over the next 5 years... + the 8-9% is tax free increase in your TFSA.
How are you getting 8-9% per year? I have a couple of TD e-series that have gone up since I bought them a couple of years ago, as well as FIE which pays around 7% annually which I have DRIP.

But I was thinking about making it simple and going for 1 single fund like VGRO/XGRO or even the XEQT.
Deal Addict
Nov 13, 2013
2871 posts
1553 upvotes
Ottawa
Jeremyl007 wrote: Index Fund 8-9% over 25 years... mortgage rate.. currently 2.6% over the next 5 years... + the 8-9% is tax free increase in your TFSA.
8-9% is really optimistic as a long term average. If you cherry pick yes there are 25 year periods where this is the case but I can choose periods where you make almost nothing. 1969- 1991 for example. (Granted doesn't include dividends but also you need to factor in fees).

A risk free 3% is not bad right now. Especially as it is tax free. TFSA is already tax free so the comparison is tougher. Keep in mind if you buy non-Canadian ETFs you generally still paying withholding taxes on the dividends via the underlying usually US ETF it owns.

Also when the next downturn hits will you resist the urge to sell. 2000-2009 saw a 50% drop in the market. How many bought it an the peak and sold at least some of their portfolio for safer assets in 2009 -2010. This lowers the real life return of most investors.
Sr. Member
Aug 20, 2015
515 posts
307 upvotes
Toronto
Yes as others mentioned your current year withdrawals add to your following years contribution room.

I would highly recommend you create an excel sheet of all of your contributions and withdrawals so that you can keep track of it. CRA can tell you what it is but the data can lag since FI don't need to report contributions until after the year is done.
[OP]
Deal Addict
Sep 10, 2010
2804 posts
1140 upvotes
Ottawa
fogetmylogin wrote: 8-9% is really optimistic as a long term average. If you cherry pick yes there are 25 year periods where this is the case but I can choose periods where you make almost nothing. 1969- 1991 for example. (Granted doesn't include dividends but also you need to factor in fees).

A risk free 3% is not bad right now. Especially as it is tax free. TFSA is already tax free so the comparison is tougher. Keep in mind if you buy non-Canadian ETFs you generally still paying withholding taxes on the dividends via the underlying usually US ETF it owns.

Also when the next downturn hits will you resist the urge to sell. 2000-2009 saw a 50% drop in the market. How many bought it an the peak and sold at least some of their portfolio for safer assets in 2009 -2010. This lowers the real life return of most investors.
What do you mean risk free 3%?
I think I'll be OK during downturns. I usually look at my holdings like once a year during tax times when I need to make contributions. I'm not doing the average cost thing very well. I think it is kind of part of why I was thinking of emptying my TFSA so that I could get everything in order and start fresh and not need to make decisions on a tight timeline during tax season. I could figure out how much I can contribute each month.
tsingoo wrote: Yes as others mentioned your current year withdrawals add to your following years contribution room.

I would highly recommend you create an excel sheet of all of your contributions and withdrawals so that you can keep track of it. CRA can tell you what it is but the data can lag since FI don't need to report contributions until after the year is done.
I think that withdrawal amount adding to the following years was a misunderstanding on my part. This means somebody could potentially have contribution room that is way above the 63k available to somebody that did not contribute at all since 2009. I thought it just reset to the maximum cumulative amount since 2009.

This seems like it benefits more wealthy people who actually use the account versus somebody with no extra money that does not use it at all as the max contribution could be vastly different.
Deal Addict
Nov 13, 2013
2871 posts
1553 upvotes
Ottawa
eugene188 wrote: What do you mean risk free 3%?
I think I'll be OK during downturns. I usually look at my holdings like once a year during tax times when I need to make contributions. I'm not doing the average cost thing very well. I think it is kind of part of why I was thinking of emptying my TFSA so that I could get everything in order and start fresh and not need to make decisions on a tight timeline during tax season. I could figure out how much I can contribute each month.



I think that withdrawal amount adding to the following years was a misunderstanding on my part. This means somebody could potentially have contribution room that is way above the 63k available to somebody that did not contribute at all since 2009. I thought it just reset to the maximum cumulative amount since 2009.

This seems like it benefits more wealthy people who actually use the account versus somebody with no extra money that does not use it at all as the max contribution could be vastly different.

I was assuming your mortgage was around 3% so you are guaranteed to earn this much if you pay off early.

Yes any idiot should have averaged 1-% or more over past 10 years. The next 10 will almost certainly be harder even if not as bad as 1999 to 2009.
Sr. Member
Aug 20, 2015
515 posts
307 upvotes
Toronto
eugene188 wrote: This seems like it benefits more wealthy people who actually use the account versus somebody with no extra money that does not use it at all as the max contribution could be vastly different.
For sure those that use it will benefit from it. However 6k IMO isn't a big ask to save per year for middle income folks.
[OP]
Deal Addict
Sep 10, 2010
2804 posts
1140 upvotes
Ottawa
fogetmylogin wrote: I was assuming your mortgage was around 3% so you are guaranteed to earn this much if you pay off early.

Yes any idiot should have averaged 1-% or more over past 10 years. The next 10 will almost certainly be harder even if not as bad as 1999 to 2009.
Right, I guess you can count it as 3% earned. I guess this is the thought train making me want to pay down the mortgage.
Deal Addict
Jan 26, 2016
1810 posts
1731 upvotes
Toronto, ON
fogetmylogin wrote: I was assuming your mortgage was around 3% so you are guaranteed to earn this much if you pay off early.

Yes any idiot should have averaged 1-% or more over past 10 years. The next 10 will almost certainly be harder even if not as bad as 1999 to 2009.
With interest rates going down, and Trump hell-bent on creating a strong economy before election, isn't it fair to assume stock market will perform well in the next year or so?
Deal Addict
Jan 26, 2016
1810 posts
1731 upvotes
Toronto, ON
eugene188 wrote: Right, I guess you can count it as 3% earned. I guess this is the thought train making me want to pay down the mortgage.
If we agree that on average market perform better than mortgage market, then you are relying on market timing to come out ahead. I suppose if you will stop working once your mortgage is paid off, this would be wise. But if you continue to invest for many years to come, doesn't it make sense to stay invested?

I agree I see the temptation to pay down debt. But with rates collapsing and money losing its value, is it now the right time to make the move?
Sr. Member
Dec 19, 2009
988 posts
689 upvotes
Ottawa
I have gone through the same thought process OP. Really struggle to know whether investing or paying down the mortgage is the best approach in this current interest rate environment.

It depends on your situation but I’ve decided to hold off investing and paying down mortgage in favour of maxing out my RRSP contribution room for 2019. I will then take my tax refund cheque for 2019 (because my taxable income will be so low due to RRSP contributions) to pay down our mortgage in a lump sum payment.

My situation is also a bit unique in that I will be taking unpaid parental leave for at least half of 2020. I will withdraw from the RRSP in 2020 and pay less tax on it because I’ll be in a much lower tax bracket due to the unpaid leave.

Again, may not make sense for you but figured I’d chime in to give you an alternative approach you may not have considered.
Deal Addict
Jun 7, 2017
1004 posts
784 upvotes
BC
eugene188 wrote: I know I can make larger percentage gains from my investments in TFSA than the interest paid.
What?!? Please share your secret with the public. You will earn billions of dollars with this strategy.
Newbie
Jul 10, 2007
31 posts
16 upvotes
toronto
Furcorn wrote: What?!? Please share your secret with the public. You will earn billions of dollars with this strategy.
You can easily fill a portfolio with blue chip stocks that pay 5%+ in dividends, which is virtually guaranteed. Keeping money in your TFSA is a no-brainer compared to paying down a loan with <3% interest.
[OP]
Deal Addict
Sep 10, 2010
2804 posts
1140 upvotes
Ottawa
WinterSleep wrote:
If we agree that on average market perform better than mortgage market, then you are relying on market timing to come out ahead. I suppose if you will stop working once your mortgage is paid off, this would be wise. But if you continue to invest for many years to come, doesn't it make sense to stay invested?

I agree I see the temptation to pay down debt. But with rates collapsing and money losing its value, is it now the right time to make the move?
krayzah1 wrote: You can easily fill a portfolio with blue chip stocks that pay 5%+ in dividends, which is virtually guaranteed. Keeping money in your TFSA is a no-brainer compared to paying down a loan with <3% interest.
Yea, I think you guys are right. I think with the interest rates in the US going low, and maybe even lower, the same thing might happen in Canada. And if this recession actually hits, lowering rates is probably something that could happen. I'm thinking I just might hold off. I would be pouring more money in if the market drops too. That's still something I regret from 2008-2009, not going all in when things were cheap.
mikek33 wrote: I have gone through the same thought process OP. Really struggle to know whether investing or paying down the mortgage is the best approach in this current interest rate environment.

It depends on your situation but I’ve decided to hold off investing and paying down mortgage in favour of maxing out my RRSP contribution room for 2019. I will then take my tax refund cheque for 2019 (because my taxable income will be so low due to RRSP contributions) to pay down our mortgage in a lump sum payment.

My situation is also a bit unique in that I will be taking unpaid parental leave for at least half of 2020. I will withdraw from the RRSP in 2020 and pay less tax on it because I’ll be in a much lower tax bracket due to the unpaid leave.

Again, may not make sense for you but figured I’d chime in to give you an alternative approach you may not have considered.


I guess that works for you. glad you have it figured out and don't have to think about it anymore!

Top