Latest / The Chiro Money Show / 026 | Pay Off Your Mortgage or Invest — Which One Wins?
Transcript
- Chris: Welcome back to the Chiro Money Show where we're helping chiropractors better financial decisions so they build stability in their finances and a lifestyle that they love. We're your hosts, Chris Heal and Scott Campbell, financial planners for the Align Wealth. ⁓ Scott: Welcome in. Got the Easter long weekend coming up. You know what that means. Chris: Yes, sir. Scott: more mini eggs than usual. Chris: Mormon hips. Scott: There's never a bad time for mini eggs, but the intake increases a little bit over Easter long weekend. Of course. Is that the same in your household? Chris: Just gonna wrap it up a little bit. Yeah. Yeah, we don't have too many mini eggs most days. Easter weekend, sure. Yeah. Yeah. Yeah. Scott: Okay, I'll drop some by if you need it. All right, well happy Easter to everyone. Got a fun, fun topic lined up What are we chatting about today, Chris? Chris: Yeah, one of our favorites. Probably like this should be on the FAQs, like most frequently asked questions on the website. Should I pay off my mortgage or invest? Scott: Yeah. Yep, we get that question a lot. It's gotta be up there in the top handful of personal finance questions asked to ⁓ Google or maybe nowadays into chat GPT or what have you. Chris: Yeah. Yep, for sure. Scott: So we gotta go through both sides of this right? Because ⁓ favorite answer to really oversimplify is it depends. Depends on your situation. And we wanna dive into today ⁓ is ⁓ different of that. Chris: Yeah. percent. Scott: Response like there's the there's a there's the the math the spreadsheet side like if we want to optimize Here's the answer that we'd want to give you but there's also the human behavior side and the emotional decisions around Making such a big decision I'm always a big fan what Morgan Housel said Chris: You know. Yep. Scott: I feel like we bring up Morgan in way too many episodes, but good friend of the show. ⁓ He says paying off his mortgage was the worst financial decision he's ever made, but the best money decision he's ever made, which I think is interesting. Chris: Yep. Yeah. Very interesting. Yeah, he's a smart dude and also not just like a book smart guy and like a number smart. He's intuitive and emotionally intelligent. And I think a lot of, you know, he has a very high IQ and, and many different facets of life. for him to say that ⁓ off his mortgage was the worst financial decision he ever made yet. He's almost ⁓ like he would do it again if he could. It's like. Scott: Yep. Yeah. It was the best money decision he ever made. Right. Made him feel good. Yeah. Chris: Yeah, made him feel good. Yeah, so interesting. Can we, can I have a daily rant here? I feel like every, every time, ⁓ every time real estate gets brought up, I have to do my, my real estate rant. So this is kind of unrelated, but it kind of. Scott: Yeah, of course. This is the stage for it. Okay, please do. Chris: is not because real estate is so emotional in nature. We get so emotionally attached to our houses. They become part of our identity, our family values and dynamic and the memories we make. of that is all good, all well and good. But daily rant, I just want to remind our listeners that buying ⁓ a residence ⁓ is an investment. You're buying place to live. and it should not be looked at as an investment first. If you're buying it for that reason, I think you're missing the mark. If you're talking about secondary or ⁓ third properties that you're buying for the purpose of Scott: Mm-hmm. Chris: you know, real estate investing and you've done the analysis and have a case study of like, here's the rents, here's the, you know, all of the stuff and you, you think you want to be a landlord and run some rental properties and that can be beneficial, sure. But when we're talking about primary residence, it's a place to live first. It's an investment later down the road if markets go up. But I don't know. I just had to get that off my chest. Scott: I think it's a good reminder, Chris. I think it is. I think two of us make a decision on where we're going to live with that thing in the back of our mind thinking that is going to be this amazing investment for us, which in reality, the rates of return historically on real estate in Canada, obviously without... You know, I have to take into consideration that the numbers are very skewed in Toronto and Vancouver and markets like that, but generally across the country as a whole, it hasn't been the best investment in relation to other, other asset classes you consider, but not that we're going to dive into that today, but. Chris: Right. But, but I think that's often so skewed because of that emotional connection and because we're not, we don't actually calculate the true rate of return when we look at real estate. We often forget all the maintenance and repairs and costs that we put into it along that, that way of the ownership. we're also ⁓ discounting the fact that we are ⁓ like taking a lot of risk by leveraging when we own real estate via a mortgage. Scott: Yep, yep, I was thinking that same thing as well. Yeah, people discount the fact that you're leveraging, in some cases, five to one or more, Chris: Yeah. So yeah, it can be good. It can turn out to be a good investment, but let's just say for the purpose of this conversation, we're talking about, we pay off our primary residence mortgage or invest? Scott: Yeah. So I have to probably say this age first of like you're in a financial position where you have, let's assume excess cashflow. from your income or you have the ability to maybe if you're a professional incorporating in a corp and you have the option to maybe pay yourself more from your corporation and you have the luxury of making a decision. Should I be taking my excess cashflow and diverting that towards paying down my mortgage more aggressively or should I be turning those dollars into more contributions into my investment accounts? Chris: Yeah. Can I jump right to the punchline? On pure math, investing wins looking at the last 20 years. Okay. So last 20 years, ⁓ assume you were able to achieve a 7 % investment return, which was highly likely over the last 20 years, highly achievable versus Scott: Yep. Chris: mortgage, I think we had it at 5 % for the math, which is about the historical average over last 20 years. In that scenario, investing your extra $500 per month wins out by about almost $80,000 over that 20 year period. But there's some very significant assumptions we have to acknowledge here. Scott: Yep, that's right. Yeah. Chris: I the biggest assumptions on each side, so on the investing side, we're assuming that you're never panicking, never selling when markets go down, when headlines get scary, when Trump does whatever Trump does, et cetera. We're not trying to time the market. We're just owning the market and achieving our 7 % return. That's probably the biggest risk and assumption on ⁓ the invest side. And then the other thing we have to acknowledge is that paying down the mortgage is a guaranteed risk, risk free return. That 7 % investment return is not a risk free return that there's significant. Yeah, that's a longterm, the longterm average, but there's significant risks being ⁓ in order to achieve that longterm average. So. Scott: This is a long average Chris: For that reason in particular, mortgage, paying off the mortgage, the guarantee can often feel like a much safer thing to do. Scott: Mm-hmm especially remind where I think right away too is it also may have a factor on how how much you're leveraged on your Primary residence like if you put five percent down on your property and you have you know with CMHC insurance and whatnot like You might have very little equity in your in your property know, do you think there's a difference for people to make that decision where they're in that situation where they have call it little to no equity, but they have the cash flow to maybe pay that down more aggressively than their amortized schedule or invest versus someone who says, you know what, I have paid my mortgage down for a period of time or I was able to put down 20 or 30 % or whatever the situation is, but I have more equity. Do you think that decision's different? Yeah. Chris: I do. think that with a low... without thinking of the math just intuitively and I... you didn't prep me for this so kind of catching me off guard here but I'll take it. I would think if you have 5 % down and you're paying CMHC fees and know you've amortized you you've you've financed 95 % of the house so much your regular monthly mortgage payment is going to be going towards interest and CMHC fees. Scott: Yep. Chris: but when you an extra payment, that does go directly to principal. So I think that it would intuitively feel more impactful at that for a mortgage of type because you're actually making progress. Whereas when you have, when you start out in a 25 year mortgage with 5 % down, you know, there's so little of your payment that's actually going towards equity. Scott: Yeah, sure. Yep, I I feel different about the idea of paying down, thinking myself personally. I have a decent amount of equity in my house. I'm not, I'm personally not in a rush to pay down my mortgage more aggressively than the amortized schedule, but it's because I've built up some decent equity. I've been living in this house for over a decade now and the equity has built, the value has increased. So I feel more comfortable not rushing the idea of paying down my mortgage, but. If I was on the flip side of that where I was in a situation where I'd only put down 5 % but then I had this really large increase in income and I have the surplus cash flow to now make a decision, I probably would feel differently. I'd want to maybe get a little bit more equity buildup in my home, my principal residence, before allocating those dollars towards further investing. That's just me though. And again, it comes down to personal preference. Chris: Yeah, personal preference for sure. That's interesting you say that because I feel I feel a similar way, but I think it's for different reasons. I feel I feel good about not paying off my mortgage on my principal residence because I have built significant investment assets and watching those grow has given me more confidence and What love to say lately, I've been noticing, you always say this phrase, we want flexibility and options. What we do to ⁓ increase flexibility and options? And in my mind, having a pile of cash invested in various investment accounts gives me a lot more flexibility in options than having no mortgage. Scott: That's right. Yep. Because theoretically, like, yeah, you could take out a heat lock on your house and, and like take on more debt if you need it as you pay down your debt. But as you build up your investments, you know, maybe it's a bit different if it's locked into RSPs, but if it's in a tax free savings account or non registered or sitting inside a corporate account in your building, you have that option really at any time to make a decision to take a chunk of that and pay down some or all of your debt if need be. Right. Chris: Right, yeah, exactly. Especially when we get to like lump sum options of like, hey, say you, you know, we had a good year, we took a bonus out of the, out of the core extra 20K net after we set aside our tax money from that dividend draw or salary draw, whatever we classified it as the impact of putting that in say a TFSA. Scott: Mm-hmm. Chris: or even a non-reg for that matter, versus paying down the mortgage. It's like, you have options when you invest in the TFSA or non-reg. You can at any time take that out and put it on the mortgage. But once it's on the mortgage, your options are limited. The only way to access that money again is to go through a refinance or if you have a HELOC attached to your mortgage, like a all-in-one. Scott: Yep, for sure. For sure. Chris: So flexibility and options. Scott: Flexibility and options. Yeah. And the other I think the other thing that comes to mind when it comes to paying down your debt versus investing, when it comes to the emotional side of it is ⁓ of referred to as like loss aversion. I think for some, ⁓ ⁓ of say a significant decrease of say 30 or 40 % in their portfolio is gonna hurt what the statistics say about two times worse than equivalent gains that feel when the market goes up, right? So for some, depending on how they emotionally and behaviorally react when markets go down or up, could play a factor of whether or not they should make that decision to throw some more money at paying down their mortgage. Chris: Yeah, for sure. It's a great point. And that's why we started with, depends. It's like, you have to know yourself. You have to know like behaviorally, how am I going to respond? What makes me feel better? that's, think, direct example of ⁓ Morgan Housel situation, why he chose to make a bad financial decision, which he calls a great money and probably life decision. Scott: Mm-hmm. Yep. For sure. Chris: Yeah. Yeah. Can we, can we dive into some numbers here? You did some great research here on like looking at some mortgage trends and investment return trends and stuff like that. And I think, I think that's some important context to share and we should probably back up that, that like figure we, we spout it off of like, you'd be $78,000 or almost $80,000 ahead if you invested versus pay down the mortgage. Scott: Yep. Yeah, why don't you hit on kind of historically what maybe the spread or the differences have been over the decades because the time, the timeframe that you grow up and are an investor, like your journey is going to be different than your parents, right? So that plays a factor in your decisions on how you feel about investing versus paying down your debt aggressively, Chris: Yeah. Right. Yeah. And I think that's a great example. if we look back at, at like the 1980s and nineties, when our parents were buying houses, there were mortgage rates in the 20 % range at that point in Alberta. I'm sure it was similar across Canada, but 20 % mortgage rate or 18, 19, whatever, like that was. That was part of the range. in the eighties, mortgages ranged anywhere from 10 % to 21.75%. That's crazy, right? So if you exactly, so at the same time, if we, so if we look at the average mortgage rate, it was maybe 13 and a half percent while the average return of the Toronto stock exchange at that time was 12%. So mortgage one by about 1.6 % spread. Scott: Yeah, that's pretty wild. And one thing to add to that too, in terms of what was going on in the eighties that maybe is left out of the conversation about like high mortgage would be that it also different if you walked in the bank and got what's referred to as a GIC or a guaranteed investment certificate, the rates on those were significantly higher as well. So was also easier to park your money and get a guaranteed maybe, I don't even know what GIC is paid in the eighties, probably maybe not as high as a mortgage rate, but fairly high as well, Yeah. Chris: to mortgage rates. Pretty close, yeah. Yeah, I don't know about you, but I have some family members that are big advocates of GICs and paying off mortgages. And I think it's, you know, it's recency bias. It's what ⁓ for them. And I often hear what I'll blatantly call bad advice ⁓ boomer parents. Let's pick on our boomer parents for a minute. because that's what they grew up with and that's what they knew and what worked for them. But let's fast forward to the 2010s and 2020s. Well, the average five year fixed is now around that 5 % rate, you know, so well under half of what it was in the eighties at 13 and a half percent. Um, just for some context here, if we look at the last 50 years, the average mortgage rate is around that eight to 9 % range. So I, again, another little mini rant here, I hate when people say mortgage rates are high, mortgage rates are high, they're 5%, they're 4.5%. That's not high. Like, perspective, that's actually quite reasonable. But if we're just... Scott: Yep, which makes me really think these rates that we saw in 2020, 2021. apparently 2026 is the, is going to be the year of the most mortgage renewals in history across Canada. lot of people renewing from 1.79 or 89 into now close to 5%, Chris: Interesting. Yeah. Okay. So through the 2010s, 2020s, let's just say average mortgage rate is in that five to 5.5 % rate. we look at investment returns over that time, very similar. We're looking at actually seven and a half to 8 % return over the 2010s and 2020s. So investing is going to win here by two and a half percent in both of those decades, basically. Scott: Very interesting. Yep. Yeah. You know what's interesting about that? Like the spread there is about two, two and a half percent, like you say, but another interesting statistics that you can't... Chris: So. Scott: ignore is that there was a study done by Dalbar who says there's what's referred to as the behavior gap, which we've discussed on previous episodes is that the TSX, for example, over this timeframe between 2010s and 2020 or 2020s has been somewhere between maybe seven and a half, 8 % in that range. But that doesn't mean that's what the actual investor gets. Like the average investor is getting somewhere between one, two, maybe even 3 % less than that on average because of what Chris? Chris: behavior. Scott: the poor behavior, right? So now that spread becomes, know, ⁓ very close in terms of the averages. Like that might be what the average TSX return has been, but the average across all investors is probably actually a lot closer to the average mortgage interest rate over this period of time as well. Chris: Mm-hmm. Yeah. Yep. Yep. Yep. That's a very fair point. But our clients aren't average, They're above average. Scott: So. I would agree in the sense that when it comes to Chris: You should agree Scott, you should agree. They could be listening. Scott: it comes to yeah, shout out to clients you guys are all above average When it comes to working with a good financial planner, but I'll just say someone who's in your corner that's kind of between you and making a poor investment decision, ideally that lowers the probability of you having that average investor return of 2 % less than what the markets were returning. So if we can coach our clients and those who are listening to say like, if you have someone in your corner that can help you avoid those cost of behavioral mistakes, then maybe it does make sense to say, I can handle a 30 % downturn know it's going to come it's not a matter of if but when and when that time comes I'm going to see that as an opportunity I'm going to continue to stay invested and receive that long-term average of seven or eight percent that's going to be higher than my average mortgage interest rate and That's where you get that $80,000 gap that you're referring to earlier over a 20 year period ⁓ Chris: Thank Yeah, for sure. Yeah. I love how you point out the 30 % declines because we did see that in the 2010s and 2020s. Scott: Yep. Chris: And so if you stayed invested, stayed committed to the portfolio that you had constructed because it was well suited to withstand those declines, you would have seen those seven and a half, 8 % returns. But if you reacted, got nervous, change your portfolio, sold when things were scary, you obviously would not have seen that. And that's exactly that behavior gap that you're talking about, right? Yep. Scott: Mm-hmm. Yep. Chris: Yeah, so let's finish the train of thought here in the math. Okay, so we got 500 extra dollars per month. If we in either case, this is going to equate to $120,000 over a 20 year period of time. Okay. If we put that on the mortgage at 5 % interest rate, you're going to save about $62,000 in, in mortgage interest. If we put that $120,000 into the market at 7%, you're going to gain $140,000. The mortgage, it's a lot more volatile. Yeah. The mortgage free date, obviously we're not getting any further ahead if we don't prepay them or pay down the mortgage. Additionally, um, if we did the extra $500 a month, that might make us about five years, roughly sooner. Scott: A lot more ⁓ Yeah. Chris: So yeah, back to what we said earlier, that paying down the mortgage, it's a guaranteed outcome. It's a risk-free return to pay off that debt. Investing, no guarantees. Market dependent, markets will fluctuate, they will get scary, but you can do it with our help. ⁓ Scott: Yeah. What Chris, when, when do you encourage clients or when do you encourage people to say, yep, you should be paying off your mortgage more aggressively than the amortized schedule and we'll do a little bit less to investing. And we're just going to smash down that mortgage as fast as possible. When do you, when do you give the thumbs up on that idea? Chris: Okay. Yeah, well first I'd say if it's a very risk-averse client then we should we should you know meet them where they're where they're at that's that's the first one so yeah secondary Scott: Yeah, that's number one. Thank Chris: If they have significant financial assets are tracking for ⁓ their goals, then, and could back without impacting those achieving those goals, then yeah, that's a great time to pay down the mortgage. Yeah. Scott: That's what was hoping you'd say. If they're on track to reach their goals long-term, they're going to have the retirement they're looking to have and they're trending in the right direction, even if they don't optimize mathematically towards investing and they defer to paying off their mortgage more aggressively and they're going to reach their goals, then yeah, great. No problem. Let's support you. But there needs to be a discussion where it's like, if you just focus on paying down your mortgage, you don't have any other liquidity or cash or other financial assets to access it need be. you won't reach your financial goals, then that's where it's like this decision may not be optimal because it's not going to lead you to where you ultimately want to go long term. No flexibility in options. ⁓ Chris: Yeah, exactly. Flexibility and options. We keep coming back to it. Scott: so where would you leave listeners in terms of like maybe if we were to oversimplify, what should they consider from a few different perspectives before making an ultimate decision on do you pay down your mortgage or do you invest? Chris: Yeah, I think we have to acknowledge the best in this case is not, and in a lot of cases, is not always the one that's optimal from a standpoint. So we have to acknowledge and accept that it's okay if you want to do something that's suboptimal from a numbers standpoint, if it makes you feel a certain way and allows you to live a better life. I think that's probably huge one. And then acknowledge our normal human biases and behaviors. And try to ⁓ and understand them and use them to help us make a better decision. If we know we're gonna be able to stick to that investing plan or it's something we can deviate from too easily, maybe it does make more sense to pay down the mortgage. do an extra payment. Yeah, I think ultimately it just comes down to taking the time it deserves ⁓ clearly think it through, reflect on it. Like it's not a decision that I think we ever encourage anyone to make in ⁓ quick manner. You can always change and adjust your additional mortgage payments or if you increase your payment, there's like all of these mortgage, most mortgage companies have very, know, plethora of options that you can consider and you can activate those anytime. So take the time, think it through, talk it through with multiple people, with your partner obviously, with your financial planners ⁓ with your mortgage broker, you know. Scott: Mm-hmm. Chris: Take your time. Scott: So we haven't, another thing that we haven't really touched on too, when you say, you know, discuss this and like analyze this in particular with your planner is like, there's also some tax implications that we're not considering too, or that we should consider when making this decision in terms of, you into tax deferred accounts like your RSP? Does it make more sense to invest that money and fully maximize your TFSA? because of its upsides of growing your investments tax free, right? One thing to mention too that individuals, listeners out there might be seeing content on social media and it might be from the states where in the United States the interest that you pay on your mortgage is tax deductible, where that's not the case here in Canada. So a different consideration there as well. Chris: Yeah, for sure. Yeah, you're 100 % right on the tax advantage accounts. that's a whole different analysis if we're, you if your TFSA RSPs for both you and your partner are fully maximized ⁓ your ⁓ investing dollars would be going into a non-registered or taxable investment account, that certainly adds a different component to the consideration, analysis. ⁓ Scott: Yep. sure. ⁓ I would say for most people, they're... tax advantage accounts, their tax-free savings account, their RRSP, if those are both fully maxed out for both partners, they're probably on a good path towards reaching their long-term financial goals. So at that point, if it just feels good to get that debt pay down more aggressively so they can say, debt-free, like we own our house free and clear, that feels good, all the power to you, that's great. Chris: Yep, for sure. Yep. Scott: Cool. Any closing thoughts here, Chris, before we wrap it up? Chris: Yeah, last only other thing I would add is like, you can do both too. Like it doesn't have to be one or the other. you could a hybrid approach, you know, increase your, what if you increase your mortgage payment by 200 bucks a month and put an extra 300 into investing? Like you can do both. Scott: Yeah. Or you make steady RSP contributions throughout the year and you make decision to say, when I get my refund each year, I'm gonna take that lump sum refund and I'm gonna apply that towards ⁓ mortgage. Right, lots of different ways you can approach it. Chris: One time. Totally, much we could say, but I think we ⁓ a good job for... I we did good job ⁓ going it at a high level. Yeah. Give us, judge us listeners, judge us. Scott: Our listeners can be the judge of that, Chris. Speaking of judging us, if you've been a listener and you've been enjoying the show, thank you for listening along. We could certainly appreciate a rating or review on Spotify, Apple, as well as YouTube. ⁓ support the show, get out to more listeners. Chris: Sounds good, Scott. Scott: All right, well thanks for the chat, Chris. We'll leave it there. We'll see you guys again next week.