this post was submitted on 24 Jan 2024
25 points (96.3% liked)
Personal Finance Canada
1184 readers
1 users here now
Come and discuss anything related to personal finance, directly or indirectly, with other Canadians!
founded 1 year ago
MODERATORS
you are viewing a single comment's thread
view the rest of the comments
view the rest of the comments
+1 for being cognizant of the fact that interest rates wouldn't stay low forever.
I bought my place near the limit of what I could afford, but always mentally prepared for the idea that my monthly payments could go up by 50%.
The weird irony is that since interest rates crossed over the 5% mark, I was thinking that I needed to start making lump sum payments to knock down the total interest I'd be paying -- but throwing the money into my investments has paid back far, far better... One of my broad-market ETFs is up 25%. A tech ETF is up nearly 50%. I'm considering the idea that it might make sense for me to retire with a mortgage, because the markets are going up enough to cover the monthly payment, and then some.
From a purely expected return perspective it only makes sense to pay back debts vs investing if the credit spread in the debt is larger than the investment's risk premium.
For secured debt (like a mortgage) held by someone with reasonable credit the equity risk premium is most likely larger than the credit spread.
The analysis becomes more complicated when you take into account an uncertain income stream to use against the debt. Paying off your mortgage is like buying insurance against the tail event that you lose your house because you can't make your mortgage payments.
Insurance is generally a negative expected return activity. But the value is in reshaping the outcome distribution. Your average outcome is lower but you've flattened out the tail.
I'll readily admit that my situation isn't common. I almost have enough money in my TFSA alone to wipe out my mortgage. But I've easily gained several years worth of interest expense. And while I don't expect that it'll stay that way forever, a drop of more than 10 or 20% is... unlikely.
In fact, you've got me thinking that when my mortgage comes up for renewal in a couple years, I may opt to cash out some savings to wipe out the mortgage, and take another look at early retirement.