The Case For Never Paying Off Your Mortgage

Thousands of Canadians have one financial dream that trumps all others. It’s right up there with retiring early and being able to travel whenever you want as goals.

Yes, I’m talking about paying off the mortgage.

I don’t want to scoff at this dream, because it’s a good one. In today’s real estate market, you’re looking at a mortgage of $300,000, $400,000 or even more to get a decent house in a good neighborhood, especially if you live close to Toronto or Vancouver. Other cities are more reasonable, but only barely. Unlike in the United States, there’s a real absence of reasonably priced real estate markets in Canada, unless you’re willing to live in the middle of nowhere.

But in today’s zero interest rate world, is paying off your mortgage really a good idea?

The alternatives

Let’s look at a very simple scenario. Say you bought a $400,000 house on January 1st, 2010. That’s an odd closing date, but let’s go with it.

Each year, you could either put $20,000 down on your mortgage or $20,000 into a TSX Composite index fund, ticker symbol TSX:XIC. Which would end up with the better return?

We know the return of the mortgage prepayment. It’s whatever your mortgage rate is. Let’s assume a 3% mortgage, which works out to a 3% guaranteed return. That’s not bad, especially when you compare it to other guaranteed forms of investment, like a GIC (a CD for you ‘Muricans) or government bonds.

Let’s look at how well it would have done in the TSX Composite ETF, with dividends reinvested. These are annual returns over the life of the investment

January 1st, 2011: 2.83%
January 1st, 2012: 5.43%
January 1st, 2013: 5.36%
January 1st, 2014: 2.24%
January 1st, 2015: -6.68%

*These returns are as of the closing price on Friday, November 20th.

The strategy worked relatively well, at least until this year. But it’s not a clear winner compared to just paying down the mortgage. In fact, once you factor in the appreciation seen from the house during that time, there’s a very legitimate argument to be made that paying down the mortgage was the better choice, at least over the last five years.

How about the long term?

This is when the argument starts to favor investing over paying down the mortgage.

Typically, over a 20 or a 25-year life of a mortgage, investing in stocks beats paying down the mortgage. This happens almost every time.

There have been exceptions throughout history, like in the early 1980s when interest rates were sky high, and in the late 1990s when the market was riding the last waves of the tech boom. And with today’s interest rates as low as what they are, it’s not hard to create an argument that equities almost have to perform better. After all, there are many stocks that yield more than 3%, while the going rate for a five-year fixed mortgage is around 2.5%. Even the dividends alone should beat paying down the mortgage.

But that doesn’t mean investing is the better move all the time, because psychology matters. I know certain people who simply don’t trust the stock market, especially after 2008-09. Others very badly want the mortgage gone, because that debt represents a huge burden on their shoulder. And others still want the security of knowing nobody can kick them out of their house. These desires might not be the most logical, but if they’re important to you, I guarantee you don’t care about logic. You’re chasing the high that only paying off your mortgage can bring.

How about a hybrid approach?

Maybe a hybrid approach is best, like putting half the extra cash on the mortgage and then using the other half to fully fund your RRSP or TFSA.

Many investors have zero (or close to zero) exposure to fixed income in their portfolio. Putting down money onto the mortgage is a pretty good alternative to having bonds. The return on fixed income is typically right around where mortgage rates sit, and getting a guaranteed return on paying down a mortgage will help smooth out negative returns in the stock market.

And if you’re feeling really frisky, paying down the mortgage will create equity you can borrow against later if stocks look particularly attractive.

There’s no easy answer about whether you should delay paying off the mortgage or get it taken care of as soon as possible. I would delay it as long as possible, but that’s because I’m confident I can earn more than 2.5% annually on my investments. Your confidence level may differ. Which is why perhaps the hybrid approach is best.

5 Side Hustles You Can do to Keep your Artistic Fire Burning

The rain was ceaseless and the days were dreary, yet I missed it when it had goneWe were raised and bred to work. Even if you despise working, you have to get your butt off the couch and do it anyway or you’ll starve to death. You either get a job and work for someone else, or be an entrepreneur and work for yourself. Either way, you have to do something to earn the right to keep a dollar. It is what it is.

What If…

…you hated your job or didn’t like the business you got yourself into? What if deep down, you really want to do something else? There are many stories of old timers who regret not having the courage to take a leap of faith and follow their dreams, for fear of not providing enough for their families.

If just dropping everything and moving to Tibet to become a Monk is out of the question, you can still pursue your passions and dreams as a side hustle. You don’t need to leave your crummy job and the boss you hate just yet. All you need to do is carve out some time to do the things that really engage your spirit.

If you’ve got the passion and the skills, here are a few side hustles you can do to stay in touch with your artistic side.

Share Your Thoughts as a Writer

If you know the secret to brushing your teeth with a carrot, share it with the world! Seriously, the world needs quality content and valuable advice from experts. If you’ve become an expert in your field, start a blog and share your thoughts. Don’t worry about money when starting out because it may derail you from writing articles that readers will appreciate. Focus on your writing, and opportunities to monetize your blog will follow. You can also write for a number of other blogs and online publications.

Become a Copywriter

If you don’t like writing articles, but have a knack for writing short one liners that make great copy, you can become a part-time copywriter. There are many copywriting jobs available online and most of them are home based, so you can do it after work or on the weekends. Sites like UpWork and Freelancer are good jump off points to land projects.

Form a Band

If you’re passionate about music, can sing like Jagger or play an instrument at a professional level, you should consider either forming your own band or joining one. But this is way different from the band you formed in high school, because at the end of the day, you need to get paid for your efforts. Musicians get paid well, plus they get free booze, food and loads of attention. As a side hustle, you can have gigs every other night or strictly on weekends. As long as band duties don’t interfere with your work and family life, go live your dream as a rock star.

Become a Sound Engineer

If you can’t carry a tune to save your life and have no business behind any musical instrument, you can still have a side hustle that’s music related. You can try your luck as a Sound Engineer. What does a sound engineer do, exactly? According to retired Canadian Broadcasting Corp. sound engineer Joe Dudych, “SE’s are responsible for achieving artistic content in a recording or via a sound system in a live concert.” In short, music will be crap without a sound engineer behind the mixer. This side gig can actually turn out to be a more stable money maker that can replace your current job, so weigh your options.

Capture Moments as a Photographer

If photography is your hobby and you already have the hardware for it, try turning your hobby into a lucrative side hustle. Offer friends and family members to cover events for free to build up your portfolio. Once you have enough, you can market your services. The only issue here is events are fluid and don’t always happen after work or on the weekends. You can try to focus more on events that happen at night such as concerts or parties and if you become big enough, quit your job and do photography full time.

There are many artistic avenues you can explore if you know what you’re passionate about and are willing to do something about it. You need to have the courage to dive in when no one else is doing it and have the drive to keep your current job until your side hustle proves to be more lucrative. How about you? What would you rather be doing?

photo by: