Canadian Taxation

Don’t pay down that mortgage – invest in TFSA’s

Published On January 13, 2014 | By Joseph (Ken) | Personal tax, Retirement
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More benefits of paying off your mortgage before investing in RRSPs

Saying paying off your mortgage before investing in RRSP’s is good advice is like saying getting a loan to buy a new vehicle is better than leasing a new vehicle.

Although true, neither are the BEST option as to what to do with your money.

Instead I would argue there is a third option: before paying off your mortgage or investing in RRSPs, you may want to consider investing in TFSA’s.

I’ll look at TFSA’s in relation to the “benefits” the author reflects upon as to paying off ones mortgage:

“1. You have focusd on your most valuable asset – your home. ¬†Your principal residence is your most valuable asset because it increases in value tax-free

It’s funny that the author quotes Albert Einstein’s definition of insanity because the housing market is insanity – thinking that it will continue forever is insanity.

Artificially low interest rates have resulted in artificially high prices in the housing market – when interest rates increase, house prices will fall.

There has always been an inverse relationship between interest rates and home prices – the reason being that people buy houses based on the payment they can afford more than the cost of the house. As interest rates increase, the interest cost on a mortgage increases and so the payment amount increases (all other variables being equal). As housing affordability decreases, people selling homes must ask less to get the same buyers.

If you want more proof that there is a problem in the Canadian housing market and the belief that housing will always increase in value, the following shows you what happened in the US with the collapse of the housing market and what may still be coming in the Canadian housing market.

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What is REALLY TAX-FREE is investment income earned in a TFSA.

“2. Life is easier with nothing to invest. By not contributing to an RRSP not only did you save over $17,000 in out-of-pocket investment expenses”

It is unknown where the author got the information that you will spend $17,000 in out-of-pocket investment expenses but it is an example of fuzzy logic.

You can buy all kinds of different investments within a TFSA, some may involve investment fees but some don’t – there is no universal truth.

“3. With age comes wisdom (hopefully).”

Again, like #2, the “benefit” is based on a sort of fuzzy logic. It’s sort of a reverse-ageism. Older investors lose just as much money as young investors. If we look at #1 above, those who invested in their mortgage may be big losers as well if there is a hard landing in the Canadian housing market.

“4. Life is better when you own your home.”

More fuzzy logic. Knowing that you are saving for your retirement within a tax-free TFSA can cause the same feelings he associates with not having a mortgage PLUS it is far easier to withdraw money from a TFSA in an emergency than it is to get a mortgage or increase your mortgage.

“5. Saving for retirement just got easier.”

Compound interest is the secret to getting wealthy. The author uses the sample that $24,274.64 invested each year at 48 years of age will get your $446,000 by your 60th birthday. It’s important to note that the author doesn’t talk about how much tax you are paying on this money!!

If you started at 22 and saved $200 a month in a TFSA you would have over $600,000 TAX FREE at 60. At the 7.9% rate the author notes, you would shelter more interest tax free at 60 than the $446,000 the author says you’d have saved (not accounting for tax on that income).

“6. Helping your children attain their goals is now possible.”

More fuzzy logic – you can do that with both RRSP’s and TFSA’s.

“7. The timing might be perfect.”

Don’t forget, as interest rates increase on your mortgage, they also increase on income from investments. The goal is to lock in at a low interest rate and invest at a higher rate.

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About The Author

Joseph (Ken)
(Ken) is a Registered Public Accountant with over 25 years of public practice experience in the accounting profession. Ken specializes in accounting information systems, taxation and financial reporting.

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