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help please
November 9, 2017
8:55 pm
ssoudd
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hello.
my mortgage renew coming nov.25/2017 . is it a good idea to pay it off, or renew it 3.04% close for 5 year and invest the $68000 in Market GIC at BMO 25% with Granty of 2.5% annually,?
thank you for the help, your idea is very important to me

November 10, 2017
9:41 am
JenE
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I’d pay it off. You'd immediately NOT be paying 3.04% interest with after tax dollars. By keeping the mortgage and investing the $68,000 you’re only guaranteed 2.5% and unless it’s in a TFSA, you’ll pay tax on the interest earned. I’m a “bird in hand” investor. Some financial advisors counsel against using your home as a source of investment funds.

Of course, if your investment is in a TFSA and you have more of a taste for gambling than I, you might hit it lucky. It all comes down to how you can handle risk and how long of an investment period you are looking at. Good luck!

November 10, 2017
1:20 pm
Loonie
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Pay it off!
When it comes to your principal residence, debt-free is the only way to safely go.
Since you're obviously doing well at saving money, then save up some more and do your investing later.

If you really think you prefer the GIC, then please give us the specific name of it and a link, so that we can take a look. It sounds like you are maybe referring to a "Market-linked" GIC. With those, the guarantee is rarely, if ever, an annual rate. It is normally a rate for the entire term, which would be .5% annually.

November 10, 2017
6:24 pm
Norman1
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The BMO Growth GIC resembles the description.

It is a market-linked GIC. Term of Series 127 is 4½ years. Return is capped at 25% per term (not per annum). Minimum return is actually 0% per term.

I don't think the guaranteed return would be 2½% per annum either. Currently, the posted rate for 5-year Bank of Montreal GIC's is only 1½% per annum.

November 10, 2017
7:16 pm
Loonie
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Yes, I looked at the BMO GICs too (briefly) and didn't spot anything that looked like it would pay 2.5% annually guaranteed.

November 11, 2017
8:11 am
Norman1
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It is better to pay it off first.

Afterwards, if one wishes to remortgage and use the money for investments, then the mortgage interest could be deductible.

Right now, the mortgage money was used to by a principal residence. That's not one of the uses that allows the mortgage interest to be deductible in Canada.

November 11, 2017
8:26 am
Loonie
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Yes, you could borrow against the house later, although I wouldn't recommend it. The borrowing costs , including fees to set up the mortgage , would be far more than the return , if indeed the return was 2.5% annually. I wouldn't bet my house against any investment that was not secure, and the cost of that security would outweigh the benefits.

November 11, 2017
11:28 am
Rick
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Pay it off. No contest.

November 11, 2017
2:14 pm
Doug
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Rick said
Pay it off. No contest.  

Compared to a stock-indexed or their newer-flavoured "sibling" GICs, I would agree completely with that statement. However, if one were simply trying to aggressively pay down their mortgage exclusively without investing for retirement and/or for their children's post-secondary education, I would disagree. Over time, with the right asset allocation and typically in passive investments that track stock market indices, you would be wise to probably put 20-30% of your gross, pre-tax income towards the principal+interest of your mortgage and 10-18% of the same towards either (or both) your future retirement and children's post-secondary education future. 🙂

Cheers,
Doug

November 11, 2017
3:23 pm
Loonie
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He wasn't asking about whether he should invest in the stock market, he didn't tell us how old or healthy he is, he didn't tell us if he has young children, and he didn't tell us whether he has made other investments for retirement or education.
He only asked about using his cash to pay off the mortgage. He can't go wrong with paying it off.

November 11, 2017
5:40 pm
Norman1
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Long term money should go into equities. But, unfortunately, not everyone has the emotional fortitude to stay invested and be successful in equities.

A while back, one poster wrote that their first investment of $100,000 dropped $500 or ½% after just one week and now wanted out! sf-frown

I think such people would better off putting money towards their mortgage. They will end up with a higher return than buying equities high and selling them low.

November 11, 2017
7:01 pm
Loonie
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Perhaps long term money should go into equities, if you have the money to invest and know you have a long term ahead of you.
But, for most people, long term debt should be paid off asap.

November 11, 2017
8:06 pm
Bill
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I agree, Norman1, if taking the money and putting it against the mortgage saves you 3% in interest when you could have made 4% in after-tax return in the markets with that money then obviously the latter would have been the better option. And vice-versa. So it all depends, and you can't predict the future, so just make the decision that suits you. And obviously the security or lack thereof of your employment situation plays a role in this, e.g. civil servants (stable, predictable) vs auto-workers (uncertain).

I paid off my mortgage by age 30 just because it was a goal of mine and, in retrospect, I would have more money today if I had extended that by 20 years or so and put that money into the market during that time, assuming I would have matched the general market index. Hindsight.......

I think that for some people paying off the mortgage asap is always the best way because they are very risk averse and they derive additional security and peace of mind by being out of debt. Fair enough, but that's not the same as saying it makes sense financially in every, single case.

November 11, 2017
10:25 pm
Rick
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Loonie said
He wasn't asking about whether he should invest in the stock market, he didn't tell us how old or healthy he is, he didn't tell us if he has young children, and he didn't tell us whether he has made other investments for retirement or education.
He only asked about using his cash to pay off the mortgage. He can't go wrong with paying it off.  

I agree. Without knowing what room is in his RSP and TFSAs, age, retirement date, marital status etc, wouldn't venture an opinion on what to do with any money. OP didn't ask. See Doug's point...if you just want to blow it all with no financial plan, better just keep paying it. I'll give OP more credit though.

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