Do You Want To Pay Off Your Mortgage?

Mortgage

8 minute read

February 24, 2021

I meant what I said in today’s excerpt; this isn’t a rhetorical question.

The entire world consists of people who want to pay off their mortgage, either those who work every day with the goal in mind, or those who dream of doing so in that hypothetical, ‘what would you do if you won the lottery’ type of way.

We mere mortals have grown accustomed to not owning our own homes.  We partner with the lenders who allow us to live where we do.  And in Toronto, we don’t really buy a house, but rather we purchase a five-year payment plan.

Those real estate bears out there will suggest that buying a payment plan is recipe for disaster and that when rates increase, we’re all doomed.  They’ll suggest that debt-loads are too high and that incomes aren’t rising fast enough.

But what about a contrarian viewpoint?  What about something so far in the other direction that the pendulum feels like it might swing upside-down and back again?  What about the idea that a person should take out the largest mortgage possible, and never try to pay it off?

Crazy!  Right?

But consider the buyer of a $1,500,000 house with a 20% down payment.  That person has accumulated $300,000 in cash to put down, as well as the associated land transfer tax and legal fees to close.  Now, has that person “bought a house?”  Or has that person bought a payment plan for five years at $4,190.42 per month?

More to the point is that this payment plan has two payees:

1) The lender, to the tune of about $1,570 per month
2) The borrower himself, to the tune of about $2,620 per month

So while the buyer of a house must consider more than just the “sunk cost,” and understand his or her ability to service the mortgage liability each and every month, there’s more than simply cash-flow at play.  There’s the “big picture,” and it starts with the division of a mortgage payment into principal and interest, and ends with the fact that most buyers can’t afford to live where they want to without taking on debt.

In fact, it would be irresponsible to buy a house without debt, wouldn’t it?

Yes, you read that correctly.

The old-fashioned folks who want to work their whole lives to pay off their mortgages might not understand that, but consider the person who has $1,000,000 in cash and buys a $1,000,000 house.  Is that “responsible?”  It’s risk-averse.  It’s conservative.  It’s providing for a care-free lifestyle.  But when a five-year, fixed rate mortgage could be had for 1.59%, many people would suggest that it’s downright moronic.

We all have different risk tolerances.

We all have different portfolio mixes.

And depending on our demographic, we all have different investment horizons and goals.

So, since I’m in the mood for sharing, I’ll give you this…

I bought my house in the summer of 2018 and I will admit that it was not a cheap home.  When it came to financing, I had one objective: to purchase with the lowest down payment possible.

I could have made a substantial down payment, had I pooled all of my resources.  But I didn’t want to.

Why?

Because I was buying a 5-year payment plan, and the monthly liability was easy to service.

With a 2.59% mortgage rate, at the time, I really only needed to make a return of 4-5% on my money to justify not putting that money into the house (ie. returns are taxed).

I’m not a “shoot for the stars” investor.  I actually have a relatively conservative portfolio mix.  I’ll freely admit that my portfolio has not risen with the DOW Jones.  But so be it.  It’s still more than the 4-5% necessary to justify not putting that money into my mortgage.

Many of you understand this line of thinking.  Many of you will point out the pitfalls, risks, and epic downsides, and that’s all fair.

But I’ll tell you a second story: one that had me paying off the mortgage on my first condo, and actually experiencing the opposite of what I had expected.

When I purchased my first condo, I was 25-years-old and the thought of “debt” was painful, as was the monthly amount being withdrawn from my bank account.

I had a rate of 4.99%, which many of you today can’t fathom, but at the time, this was quite competitive!  The value of the condo, and thus the mortgage amount, was much lower than you’d find out there today, but the higher interest rate increased the payment substantially.

My first mortgage came with a 20% pre-payment privilege.  That word – privilege, made me think this was something I should be happy have.  After all, “pre-payment privilege” isn’t just a fancy name!

I made a lump-sum payment of 5% on my condo about eighteen months after I purchased, and then following year, I made a 20% payment.

I was so proud of myself.

I updated my spreadsheet with glee!

One year later, I made another payment of 20%.  I waited until I could pay this amount down without a penalty, which, of course, may or may not make sense based on a detailed financial analysis!

Within three years of living there, I had paid off my entire mortgage.

But I didn’t actually feel any sense of relief.  Maybe that’s just me.  My friends often tell me I don’t “stop to smell the roses,” but I digress…

After paying off the mortgage, I’m tempted to say that for a short period, I may not have had the same enthusiasm for working 80+ hour weeks as I did before.  I was quite young and I was accustomed to working all-day both Saturday and Sunday, but after paying off my mortgage, I might have slacked off for a time.  It was just this subconscious action that I might only see now, looking back on it.

Within a month or two, I started to feel anxious.  I felt as though having no mortgage wasn’t really the goal I should have aspired to.  In fact, it merely made me realize that I was living too far within my means, and that I had the ability to put my equity out there in search of a better return.

It wasn’t long before I purchased a new primary residence which was roughly three times the cost of my first home.  This time, I made a 50% down payment.  And to this day, I wish I hadn’t done so.   I was so proud of myself for being able to buy with such as substantial down payment, and in the end, it merely cost me the opportunity to put that money to work elsewhere.

Today, I enjoy being leveraged as much as the law will permit.

I can afford the monthly payments, but more importantly, having that massive debt hanging over my head serves as motivation.  I don’t want a safety blanket.  I want to stand at the edge of a cliff and push backwards with all my might.

To each, their own.  And I know I could be in the minority here.

But a client recently forwarded me a great article, and I want to share it with you now:

 


 

“Millionaire Who Bought A Home At 26 Regrets Paying Off His Mortgage Early: “This Is The Biggest Downside No One Tells You”
February 11th, 2021
Sam Dogen, Contributor
@ Financialsamura

In 2003, I purchased a 1,000 square-foot, two-bedroom, two-bathroom condo in San Francisco for $580,000, with a 30-year fixed-rate mortgage of 4.25%. At 26 years old, I had put almost all my savings into the 20% down payment.

Over the next few years, I became obsessed with trying to pay off my mortgage early.

In 2015, my wife and I finally did it. Eliminating one of our largest reoccurring expenses felt so satisfying. With one less burden, we could live life more freely.

But just a year later, that feeling went away — along with the fire to improve my finances.

There are several studies citing the psychological benefits of paying off debt early, such as emotional relief and the strength to avoid slipping back into debt.

All of that is true. But the biggest downside that no one talks about is the complete loss of motivation to take on calculated risks and to work as hard as you can to grow your wealth.

After being mortgage-free, my and wife and I lived comfortably off the severance checks that we negotiated when we quit our six-figure jobs in finance (by that time, we had amassed a net worth of $3 million), and the $150,000 in annual passive income — mostly from real estate, dividend stocks and bonds.

But my entire attitude slowly changed once I sent that final mortgage check. I stopped aggressively looking for new freelance consulting work. I went from taking on three contracts per month to just one. So instead of working 60 hours, I was only working 20 hours. At around $10,000 per contract, I was losing out on $20,000 of monthly income.

To reward ourselves for paying off the mortgage, my wife and I also took a month-long trip to Asia. We visited friends overseas and saw the Ruins of Angkor in Cambodia, then spent weeks camping in Yosemite. After that, we flew to New York for two weeks to watch the U.S. Open. We spent more than $10,000 on the entire trip.

It was a lot of time off — so much, in fact, that I was behind by $50,000 on my goal to reach $200,000 in annual passive income. The plan was to grow our money so we could feel financially secure by the time we had a baby.

If I could go back, I would have spent less time vacationing, and more time buying rental properties and investing in dividend stocks.

I’ve talked to several people, including readers of my personal finance blog, Financial Samurai, who had similar experiences after paying off large amounts of debt early.

“I’ve definitely noticed that the closer I get to financial freedom, the less motivation I have to go above and beyond at my job,” one person told me. “It’s almost as if we need that monkey on our backs to keep us moving forward.”

And then there are some who feel the opposite.

A reader on Financial Samurai commented: “I just paid off my house after eight years and four months. Now I’m extremely motivated to put as much [money] as possible into other investments, such as the stock market, my own business and rental property. I’m 35 and self-employed, so I don’t have a pension or company 401(k) to rely on.”

Of course, everyone is different. For me, a mortgage fueled my hunger. Without it, our monthly cash flow increased by $2,500 per month, and we saw it as extra spending money.

The most important lesson I learned from paying off my mortgage early is that you should always have something that keeps you motivated and financially driven. When you’ve got your living costs covered and things are easy, it’s tempting to get soft and ignore your finances.

Only the most “gung-ho” people will bother to take risks or put in the extra hours to get that raise. If you have no financial burden and no one is depending on you to provide, it doesn’t make sense to work twice as hard.

If you’re focused on paying off your mortgage, good for you. It’s generally always good to get rid of debt. Plus, with no mortgage, you get a guaranteed, risk-free return.

Just make sure you consider the downsides.

Aside from losing motivation, you also tie up capital in an illiquid asset when you pay your mortgage off early. Unless you have a very diversified net worth, having a lot of capital in the form of home equity can be a bad thing. Your home could collapse in the next storm or burn down in a fire.

And with interest rates at all-time lows, it might make more sense to refinance your mortgage into a low fixed-rate term for as long as you plan to own the property — and then invest the rest.

The right answer depends on your current situation, tolerance for risk and long-term goals.

My best advice is to pay off your mortgage by the time you no longer want to work. Figure out when you plan to retire and divide your debt amount by the number of working years you have left.

There are free retirement planning calculators to help give you a realistic picture of your financial future. After all, there’s no rewind button in life. It’s always better to over-plan than it is to under-plan.

Sam Dogen worked in investment banking for 13 years before starting Financial Samurai, a personal finance website. He has been featured in Forbes, The Wall Street Journal, The Chicago Tribune and The L.A.Times. Sign up for his free weekly newsletter here.

 


 

So?

Agree or disagree?

Those who work in financial services and wealth management, I would love to hear from you.

For those who have paid off their mortgages, I’d love to hear from you as well.

And for those who are in the process of purchasing a house or condo, I want to know what your down payment plans are, and what you would do with any excess over the minimum down payment requirement.

Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

Find Out More About David Read More Posts

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43 Comments

  1. Christopher

    at 7:00 am

    We’re in a global asset bubble so maximum leverage has worked out great to date and could continue to do so for a long time. I would also borrow the maximum with a < 2% mortgage.

    One thing you might be overlooking is not everyone loves their jobs and makes as much money as you do. Some people need to make the 500k Downpayment on a 1 million dollar home just to afford the mortgage payments.

    1. Marty

      at 8:05 am

      YUP. Some of us forget there are LOTS of people out there that dislike their jobs.

      Which to some of us, seems crazy, right? But there are lots of those.

  2. Marty

    at 8:02 am

    I can see both sides. That’s a great article you linked.

    I think if you really enjoy what you do for a living – as David does – then David’s new approach is correct.

    I think if you were making a career switch, it would be quite useful to have the financial security of no or limited mortgage payments for a while. Or if you were slipping into semi-retirement or a hobby that was not going to bring you income.

    I think some/lots of people buy more house than they probably realistically need. And that’s probably not the best place to “store value”. But that’s also a very personal decision, and me as a single, 50+ guy with no kids, who am I to know what a family needs?

    Now that I put it that way, I should be concentrating on who might take care of me when I get old.

    But back on topic, I can see quite easily how one might lose some fire for money-earning as the author of the linked article did. On the other hand, some would not like the stress of making the mortgage, and “having that massive debt hanging over my head serves as motivation” won’t suit all. In fact I think even within a married or living-together couple, one might enjoy that while the other doesn’t.

    Now, if you have family/dependents, you might consider also what might happen if your money-earning ability was to end tomorrow in a tragic accident, but if you have that covered off then if you have the stomach for debt then go ahead.

    Anyway, I’m not sure I added much here with my 7 paragraphs, I promise to do better next time.

    1. Krupo

      at 6:15 pm

      In some occupations where you need to toe a strong ethical line, like an auditor, you have to be ready to resign if the auditees are not going to comply with certain findings. That’s where having a safe fallback actually makes you even more effective at your job, since you’re not scared of being fired.

  3. hoob

    at 8:26 am

    For me paying down mortgage (15 months left) is not about ROI or tieing up capital. It’s about removing the major logistical *shackle* that exists that could prevent me from doing whatever the fork I want, in an instant, whenever I want, for whatever reason I want.

    8 years ago I crossed the earning threshold where someone who is already established in the Toronto RE market, can live a comfortable living. My SINK earnings have doubled since then, but fundamentally I don’t really care — it’s just gone to paying off the mortgage, making large purchases (vehicles) in cash, and other debt.

    My SINK lifestyle hasn’t inflated in the interim. But without the shackles of a rent, mortgage, or vehicle payment, I am able to do whatever I want. Take a year or two off? Sure, easily doable, the carrying cost of my lifestyle is low.

    “Make my money work for me?” I don’t care. It’s working for me enough that I don’t feel the need to chase leveraged opportunities. Growing money, ROI, RIFE, are of no particular interest or motivation to me.

    David’s comments clearly place him in the “I can haz always teh moar monies!” camp, and seem incredulous that allowing yourself to have less “fire” to pursue that is bad mmmkay? Whereas vast swaths of the world don’t really think that way.

    1. hoob

      at 8:32 am

      That last paragraph is badly written. I guess I mean that the world is divided into two camps (at least, that part of the world that lives in relative affluence).

      People like David, who think the solution to their problems is rabid goals like “must have passive income to sustain my expenses”, and those like myself whose approach is more “limit my active expenses in order to derive more value and opportunity from my income.”

      Yes, passive income is grandiose, in a childish “I would like to win the lottery” world view, but like lotteries, it’s as much a question of luck than anything else (if you carefully account for the Survivor Bias of those who’ve “worked” to achieve it.)

      1. Condodweller

        at 2:23 am

        If you limit your expenses passive income does not have to be grandiose at all.

  4. Joel

    at 8:50 am

    I am a mortgage broker and would say most people that have the means to put down more than 20%, only put down 20% and keep the rest in their portfolios.

    With the equity market doing so well and rates so cheap, it only makes sense.

    Maxing out TFSA should definitely be done as it is tax free.

  5. Appraiser

    at 9:07 am

    Great article David. Motivation to pay off debt is a powerful factor for many people, self-included.

    When we paid off our first home over twenty years ago, instead of joy, I was perplexed by an almost imperceptible sense of emotional let-down; kind of like “what now” big boy?

    Almost immediately after burning the first mortgage (figuratively) we started looking for a bigger home in a better neighbourhood, with another mortgage to pay off! Why? To give ourselves motivation – real motivation. It worked and we paid off the second house.

    Which led to – you guessed it – another bigger house and yet another mortgage to retire.

    For some people, there is nothing that can replace the fire in the belly to achieve – nothing. I’ll admit that perhaps paying down debt doesn’t motivate everyone, but it obviously motivates quite a few.

    1. Appraiser

      at 11:14 am

      P.S. Capital gains from a principal residence are tax exempt. Another motivating factor.

  6. Sirgruper

    at 9:13 am

    Disagree. If you pay off your mortgage that you needed to buy, take a line of credit to use when good opportunities arise. That way your leverage is an investment choice. I do the same with my brokerage account; borrow when a great opportunity arises. And regret a amazing vacation like that? When you get a bit older 100% you won’t regret that extra money you could have made. You’ll regret the time you missed in the non work world far more.

    1. Professional Shanker

      at 12:04 pm

      HELOC is more expensive than a mortgage, why not just refinance with a variable rate?

  7. Sirgruper

    at 9:19 am

    David

    One day late on the bully offer topic but love to hear your comments on 78 Carlaw. Is this the craziness of which you speak? In September the identical row house with somewhat lesser finishes went $350,000 less. ??? Love to hear your thoughts.

  8. Kyle

    at 9:44 am

    Ultimately i think each individual will have their own risk tolerances and objectives and the best course of action is to make *informed* decisions that suit that individual.

    One reality is that the more wealthy you are the easier it is to further increase your wealth, which is why David, yours and Sam Dogen’s situations probably can’t be applied to > 99% out there. Fortunately there are infinite ways to incrementally increase your wealth, assuming one has excess cash flow at the end of each month. Some are quicker than other and some require more risk tolerance than others. But it comes down to understanding what those risks actually are and how to select a course that achieves one’s objectives at the right level of risk. David your description indicates you have a great deal tolerance for leverage (i.e. you feel secure and stable and aren’t worried about running into a liquidity issue), but you have less of a tolerance for return volatility and the risk of opportunity costs. Both are risks, but you just have different tolerances for each. One question i would ask, is have you considered the Smith Maneuver?

    As for the article there are things i don’t agree with. A) Having a paid off mortgage snuffing out the fire in your belly, doesn’t resonate with me, If you want to increase your actual wealth, at least from an accounting stand point reducing/eliminating your liabilities vs increasing your assets has the same effect on actual wealth. Any difference to one’s “fire in their belly” is purely psychological or perceived.

    B) IMO it is actually really really dumb to keep a mortgage on as motivation to increase your income. These two things aren’t connected. Assuming the objective is to increase his wealth. Then the only reason to keep unnecessary debt, is to increase his leverage, not as some kind of cattle prod to increase his income. Otherwise if he’s not actually increasing his leverage, he should be paying down his debt AND increasing his income. These things aren’t mutually exclusive.

    1. Cool Koshur

      at 4:16 pm

      Very thoughtful comments.

  9. Mike

    at 9:44 am

    Depressing. What’s the point in being wealthy if time off work spent with your loved one is considered a waste?

    That’s the exact the thing you should be working towards. There’s no measurable difference in happiness between the well-off and the uber-wealthy. I doubt the author of that article would be satisfied with ten times the passive income.

    1. Libertarian

      at 10:47 am

      I agree.

      David, no mention of your kids anywhere in the post. You’ve already taken one to Atlantis. Now that you have two, don’t you want to go to Canada’s Wonderland, Lego Land, Disney Land, Disney World, etc.? So I’m glad that you’re not putting all your income into your house.

      1. David Fleming

        at 12:46 pm

        @ Libertarian

        Is this it?

        Is today the intervention? 🙂

        1. Libertarian

          at 10:32 pm

          Intervention? About your kids? Nooooo.

          Just agreeing with you and Mike that there’s more to life than paying off your mortgage.

  10. Pragma

    at 9:57 am

    It makes complete sense to borrow at 2%. That calculation changes if interest rates are at 5%, but they are not for now. The obvious risk is that you borrow a tremendous amount of money at a floating rate, at a time when the trend might be reversing. You’re selling the low!

    The other thing you need to think about is that you are taking an incredible amount of concentration risk. If your earnings are directly connected to the fortunes of GTA RE, then maybe your asset allocation should diversify away from that. But instead you’ve tripled down. I’m not saying anything will happen, but in an era where inflation finally seems a likely outcome, as do higher rates, the probability of something happening has increased.

  11. David

    at 10:15 am

    David,

    One angle you missed is put to the maximum down on your mortgage, then use the collateral of the house to fund your investments. As long as you can show that the money borrowed on your house is directly tied to the income of the investments, you can now deduct the interest cost off of the investment returns.

    Then, as your investments generate returns, you can use the proceeds to pay off your mortgage, while still keeping the loan on the investments accruing tax deductible interest.

    Google Smith Maneuver if you want more details. The amount of mortgage that you borrow against depends on your risk tolerance, but it is a way to make mortgage interest tax-deductible in Canada.

    1. David Fleming

      at 12:46 pm

      @ David

      I don’t think I’ve heard the term “Smith Maneuver” in over a decade. Maybe 2006 or 2007?

  12. David (Not the David who runs this website)

    at 11:23 am

    Not paying off your mortgage makes sense when interest rates are so low that the mortgage is almost interest free. However, I recall back in the early ’80’s when interest rates were 20%. Back then, paying off your mortgage would have made a lot of sense. I remember family friends who were sweating bricks because they had to get a 2nd mortgage at 22%, fun times for sure.

    The thing is, even if you’ve paid off your mortgage, you’re never 100% payment free, property taxes, insurance, utilities, maintenance/repairs etc… never, ever stop. You’ve always got your wallet open…

    So David is quite correct in that you’re buying a payment plan. You buy your plan, make the payments and then sell for much higher a few years down the road … lather-rinse-repeat until you’ve made your ton of $$$, cash out and then, whatever… that is as long as the real estate train keeps barreling along, now just what if it flies off the tracks one day? It can’t just keep going up and up infinitely.. or can it?

  13. Julia

    at 11:38 am

    We go through this debate every time we have some extra money – and not just towards investments vs. the mortgage, but also whether to use it for some extra fun spending. You could do the math a million different ways, and we’ve made different decisions over the years and never regretted any of them! We’re fortunate enough that we will likely be in a very good financial position no matter which option we pick, so that helps too.

    I think you have to be really careful in looking back and the financial decisions you made years ago and evaluating them based on what you know now because you’re eliminating the risk from the equation. When we got rid of our car after 12 years, I joked that getting the upgrade to side airbags when we originally bought it had been a waste of money since we never needed them. In retrospect it’s easy to overlook the downsides that never materialized.

    1. David (Not the David who runs this website)

      at 12:07 pm

      Good point, because looking back, you didn’t know then what you know now. You just gotta do the math, figure out what works for you at that moment in time, plus a bit into the future and hope for the best.

      Back in 2018, the COVID crap/non-sense that we’re dealing with would seem like a bad sci-fi novel, not believable. Predicting out past 6 months is guess work at best.

  14. Craig H.

    at 12:12 pm

    I work in finance and have no mortgage. Could I have stayed levered and made more than I did by paying off the house? Sure. Is it possible the equity markets (and housing markets) could have actually gone down and the leverage could have hurt me? Sure. Just because it didn’t happen, doesn’t mean it can’t.

    I preferred to pay down the obligation, use leverage when I chose to, plowed every extra dollar post the mortgage into my investments and feel comfortable about the risk profile. As many people have said – this is about risk tolerance and objectives. If you will stay up at night worried about the markets because you are levered…bad choice. If you are being too conservative because you don’t understand the risks and decisions you are making, this is also sub-optimal. In my case, because my income is already tightly correlated to the markets, I didn’t want to maximize my balance sheet exposure as well, until I had a buffer built up, especially after having kids. I had a detailed spreadsheet with scenario analysis, so I knew what I was potentially giving up and what the downside risks could be. Not with certainty, because nobody can tell you exactly what the markets are going to do, but enough to understand the parameters.

    Figure it out for yourself or get help to do so if you aren’t comfortable with that. I think the vast majority of the benefit of having a financial planner is getting you to have a plan and stick to it. If you can do it yourself – do so and save the fees. I don’t use one myself, but recommend them to friends that ask and aren’t inclined to put in the work. Too many people think they can do it themselves and just stay under invested (or invest in the wrong products or asset classes). The number of people I know, even in my industry, that don’t have an actual financial plan is shocking to me.

    1. Professional Shanker

      at 12:15 pm

      Having no mortgage with rates this low is too conservative in every risk analysis scenario. It is interesting because you know that any financial astute person looking at your financial situation would tell you to re finance and take on some level of mortgage debt yet you have not?

  15. Jimbo

    at 1:15 pm

    I’m fairly certain that was republished from a couple years ago.

    I think the most important thing in life is lowering liabilities for retirement. So, it doesn’t matter when you pay off your mortgage, but it should be before you retire.

    My thought process is, have liquid assets that can be converted to cash should rates go up. That way you protect yourself, in the event the bank gets $3k a month and you get $1k during each payment. If that isn’t going to happen then why not have your extra cash in a portfolio.

    For myself personally my goal is to put as much money into our non-registered portfolio and dual TFSA each month. I’m not paying off my $200k mortgage early. We live off of my pay cheque and my spouse’s pay cheque goes into investment and we keep $5k a year for vacation.

    With interest rates so low, it is our goal to have $4M to live off of when we are 65 to offset the $70k a year pension I will recieve. What ever is left over 5-7 years before death will start to be gifted to our kids I think. For the last 5 years we have put $3k a month into our portfolio and the return has averaged 4.5%. We can lower this amount to $2k to meet our goal and use the other $1k a month for a better vehicle, vacation or doing small trips.

    If we lived in Toronto her monthly would be going into a house payment instead of a portfolio.

  16. JL

    at 3:44 pm

    Fundamentally to me it largely depends on the spread between mortgage rate and expected rate of return on the investment. Mortgage at 5% and market at 7%…? I’d just take the guaranteed 5% savings by avoiding the interest (the chance at an extra few % is just not worth the headache or risk). Mortgage at 2% and market at 9%…? Well, then it certainly gets more interesting/tempting, doesn’t it?

    As for mortgage as a source of “motivation”, I agree with some earlier posters that its just psychological; you set a goal and achieved it, so some want another financial goal (but there really is no real reason it has to be another mortgage – can be savings investment goals, for example). As some others alluded to as well, for those that want that perpetual mortgage as a motivation in life, to what ultimate end would you want it? Your first mortgage you pay to have a home. Once you have that home (and its big enough for you), what’s motivating to drive for that even larger home? All differing life goals/perspectives for different people and different personalities, I suppose.

    PS: In concept, no real difference between keeping a mortgage vs paying it down fully and drawing on an LOC for investment funding. Its just an allocation of your equity.

    1. Kyle

      at 4:14 pm

      Very well said.

      I would add, that In many ways a paid off mortgage is like having “dry powder”, for when you see an opportunity and want to invest. Yes, there are some appraisal and legal costs to tap it, but unlike other instruments, you don’t have to sell the actual asset (which could trigger tax) in order to tap into your equity.

    2. hoob

      at 4:18 pm

      There are tax advantages to paying it all off and then drawing it down for investment (ie, the Smith Manoeuvre.)

      1. R

        at 6:39 pm

        It’s all about balance.

        …the real question is what you do with your home or money or time?

        You can buy more home, but more isn’t better if you are in some crappy subdivision out of town and spend hours commuting.

        You can make more money investing but waste it on hockey cards and furniture at Leon’s.

        You can work to pay off a mortgage or invest but if you don’t have free time to spend your money or time be with family, what’s the point?

        And no matter what, you can’t take it with you, so do you spend time doing what you love or are you doing it for money?

        I sleep fine with a $1M mortgage but I work doing something I’d do for free. I spend 100% of nights and evenings for myself and my family. Balance took a long time but it’s worth more than money.

        1. Jenn

          at 6:57 pm

          I think David considers his hockey cards to be an investment (??)

          1. R

            at 7:14 pm

            Jokes 😉

  17. Francesca

    at 6:09 pm

    We paid off our mortgage at age 40 and invested money into retirement funds afterwards that would have gone towards mortgage payments. We sold our house recently downsized into a cheaper condo, put more money away and now my husband who is only 47 is leaving his highly stressful construction job to work part time somewhere less stressful. For us paying off our mortgage ASAP was a huge motivation to save and to work hard and now we can relax and enjoy life younger than we originally planned to.

  18. A S

    at 8:14 pm

    Realistically, for many young buyers today, the value of their first home will be greater than 100% of their net worth. In order to properly diversify, it does make sense to limit the downpayment i.e. your home equity to only a % of your net worth. I’m in my mid-30s and have only recently gotten my home equity value below 50%. I still tend to put approx the same amount into my investment portfolio as mortgage prepayments every day. From a pure probabilistic NPV perspective, it makes sense to borrow as much as possible at today’s low rates to invest which supports the minimum down payment strategy.
    There is the concept of Lifestyle Investing that involves borrowing when young to invest and, with the benefit of the decade-long bull market, would have worked out very well for many. However, let’s not conflate this strategy with buying too much of a home, irresponsibly overextending yourself, and being lucky

  19. Condodweller

    at 2:09 am

    Even if you buy your home you are investing in RE. Investing in RE comes with risk(s). When you take out the largest mortgage possible (maximum leverage), you are multiplying that(those) risk(s). As long as you are aware of all the risks, how much risk you take on is up to you. If you have the money to pay cash and chose to invest it elsewhere, it just means you have security and therefore less risk. The question you might want to ask yourself is how much risk you need to take on? It’s that simple really. The best place to put your money is just a math problem. If you don’t know how to do it, hire someone who does.

    At the end of the day, it all depends on your outlook on life and what’s important to you. Remember, just as there is an opportunity cost for your money, there is also an opportunity cost for your time. Some people are content with having enough to be happy and live comfortably, while others want to have more things/money than the next guy who has more than they do (what they might not realise is that there will always be someone with more). A survey found that the more money you have above basic needs, the more unhappy you will be.

    If you need to motivate yourself with having a huge debt hang over you, you are essentially your own slave driver. I think someone with a 3 million net worth and US$150k passive income can be perfectly happy and retire. If he wants to keep working why not become a philanthropist and put the extra cash to do some good?

  20. Appraiser

    at 12:17 pm

    “Canada’s big banks all beat expectations in quarterly results”

    “Canadian housing activity also remains elevated,” said McKay, pointing to an increase in construction permits. “We expect a lack of supply, low interest rates, elevated savings rates, continuing work from home arrangements, and a potential resumption of immigration to underpin continued demand.” ~RBC CEO David McKay

    https://www.cbc.ca/news/business/major-banks-results-1.5927537

  21. Tak Loo

    at 10:40 am

    I agree with you. I have been in wealth mgmt technology for 15 years.
    I am at a stage where I’m not learning much in my job and stagnating. My mortgage on principal residence is almost paid off. In 2019, I bought a semi in Toronto, converted to triplex which increased my debt significantly! Then this year I discovered the magic of refinancing and pulling out equity so now I’m considering increasing my debt even more and repeating the process i.e. get another property… but to keep doing so consistently and continue to qualify/refinance/renew, I will have to keep a full-time job/steady salary stream.

  22. Geoff

    at 11:30 am

    This type of decision depends on so many factors, including personal. We paid off the mortgage on our Toronto home when I was 44 last year. Mathematically, I knew that we’d be better off not paying it off and investing (our RSPs are already maxed out, still room in tfsa’s) but that’s part of the equation, not the only equation. My wife and I got a great deal of personal satisfaction at knowing that no matter what happens in both our private sector jobs (and 2020 is a banner year for wtf can happen in the private sector) that our son gets a nice place to live. Even so I think it costs us about $1000/month to run our home so it’s not like it’s free. There’s a lot that goes into this, including ones sense of security and where you think the future is going to be.

    1. jeanmarc

      at 12:36 pm

      A house is a liability until you sell it.

      1. Paul

        at 7:36 pm

        Leverage magnifies the ups and downs. The risk with too much leverage is if we ever get a big down. I mean a really big down. What can cause a really big down? A financial system awash in debt.

        Life’s a marathon and not a sprint. Over a lifetime, the chances of a big down is not insignificant.

        Be aware of the potential risks then make your decision. But I would say that 99% of the people out there have no idea about the risks. And that is dangerous.

        Yes, as you might guess I am extremely risk adverse. I’m risk adverse yet my net worth is compounding at a very good rate. I have more than what I need. And I’m in a position to weather absolutely anything that will come my way.

        Why risk something that you need to get something that you don’t?

        Warren Buffett: “If you’re smart you don’t need leverage. If your dumb, it will kill you.”

  23. Cool Koshur

    at 4:08 pm

    Amazing blog with very insightful comments

    There is no one size fits all. Everyone’s situation is different with individual priorities. . Imagine primary income earner looses a job or unable to work due to sickness. It is all hypothetical that one can earn more money investing. Both stock & housing can go down as it has happened at regular intervals in past. So getting mortgage out of the way is winner on any day.

    I am 46 and live in GTA. Personally, I paid off rest of my mortgage last month. It is empowering feeling. Yet I am still motivated to go on. I have Zilch debt. My next priority is to use freed-up money from monthly mortgage payments to top off my & my wife’s TFSA and invest it accordingly.

    Next I would like to completely pay off my kids tuition when they get to university so they have debt free head start.

    As far as buying an investment property in GTA. House prices have skyrocketed whereas incomes levels have been stagnant and even shrinking for a decade now. It is all fueled by speculation, low interest rates & immigration. You need at least 25% down with at least 150K cash to get in. ROI doesn’t make sense. It has worked for many in past, don’t mean it will continue to do so in future.

Pick5 is a weekly series comparing and analyzing five residential properties based on price, style, location, and neighbourhood.

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