# Optimizing between Mortgage and Bonds

Lets say I have \$1 million owing in my mortgage, current variable rate of 6.1%, remaining amortization 38 years. I also have 1\$ million in GIC (basically bonds where the coupon can get added to principal and earns interest) paying variable rate of 4.6%. For the sake of the argument, lets assume the inflation rate on average will be 3-4% in the next 10 years.

I'm having a difficult time deciding if I should cash out the bonds and pay off my mortgage or keep my money where it is. Doing the calculation without considering inflation, it seems like because mortages are simple interest and GICs are compound, assuming interest rates stay the same, despite the rate difference the cashflows break even in 7 years and then its better to keep them in GIC. Repeating the calculation for lower interest rates seems to push back this breakeven period so I'm actually benefitting from higher rates. However Im struggling on incorporating inflation into these calculations and figuring out the results based on real rates. Obviously one can just subtract inflation from GIC return% and that's your real rate for the bonds but how does one do the same to a mortgage and incorporated real rates into mortgage payments? Lets say my income is a salary and does not change.

I'm looking to maximize my wealth in a 10 year window, but I'd also like to consider if results would be different over a 20 year window. I don't care for owning my home outright as soon as possible, just maximizing wealth. And how would the results change if the interest rates go down?

I'd appreciate someone walking me through the math here.

• Where did you get a 40 years mortgage? If both are variable rate - is there any fixed diff, Ie are they anchored to the same base rate? Commented Jul 25, 2023 at 18:34
• If you paid off the mortgage now, wouldn't you then put those monthly payments to work earning you interest as well? That doesn't seem to be factored in. Should also consider tax impacts to find effective rate of each. Commented Jul 25, 2023 at 18:37
• @littleadv yea they are both anchored to central bank rate, so mortgage is rate + 1.1% and the GIC is rate -0.4%. Its lower because its instantly cashable at full principal. Commented Jul 26, 2023 at 14:40
• For what it's worth, some personal financial packages have the ability to do "what if" calculations to compare what you're doing now with a proposed change. This particular case is simple; some aren't. Commented Jul 29, 2023 at 1:54
• (Rate+1.1%) > (Rate-0.4%), so paying off the mortgage will always be "better" (i.e. your net worth will be higher from Month #1). But it will take some time for the cash balance to catch up (about 25 years, if I calculated it correctly, at current rates, ignoring tax implications, yada yada). So the real question is how much do you value liquidity? Commented Jul 29, 2023 at 18:27

it seems like because mortages are simple interest and GICs are compound,

No, mortgages are compound interest. If you were to not make any payments, then the amount owed would grow at an exponential rate. The reason it's not is because you're putting money into it. In year zero, you're comparing the interest accrued on a mortgage to the interest accrued on bonds, so that is a like-to-like comparison. But in year one, you're comparing the mortgage that you've put money into to bonds that you haven't put any more money into, so from then on your comparison is meaningless. For Year 10, you have that you still owe \$836,913.00 and your bonds are worth \$1,443,811.00, giving you a net worth of \$606,898.00. But if you were to pay off your mortgage, and then put your payments into bonds, then after 10 years you would have \$774,410.61.

Repeating the calculation for lower interest rates seems to push back this breakeven period so I'm actually benefitting from higher rates.

Im struggling on incorporating inflation into these calculations and figuring out the results based on real rates.

You can just look at which number is larger if you want to know which is better, you don't need to know what the numbers are in terms of today's dollars.

• Im very confused, my apologies. "But if you were to pay off your mortgage, and then put your payments into bonds" but this is not happening, its an either or situation. If i pay off the mortgage by cashing out the equivalent in bonds, that's it. I wont be putting money into bonds after paying off the mortgage. Moving on from that, I can show my work but intuitively because the principal on the mortgage is not changing but the one in bonds is, higher rates bring the breakeven closer. What do you mean look which number is larger? Commented Jul 30, 2023 at 2:31
• "I wont be putting money into bonds after paying off the mortgage." You've presented a scenario in which you keep the bonds, and you also have \$63k/year coming from "somewhere" paying off your mortgage. If you want to compare that to a scenario in which you're selling the bonds to pay off the mortgage, then to make it a fair comparison, you need to still have \$63k/year being added to your portfolio. "higher rates bring the breakeven closer." Is the amount of money coming out of nowhere even higher in the higher interest scenario? Commented Jul 30, 2023 at 23:04
• "What do you mean look which number is larger?" If you want to decide whether selling the bonds is better than keeping them, you need to figure out how much money you would have in the scenario where you sell them, versus the scenario where you keep them. What matters is which scenario results in a larger number, it doesn't really matter how much each number is in current dollars. Commented Jul 30, 2023 at 23:05

Not knowing the tax implication of cashing in your investment, if it were me, I would pay of the mortgage and invest the \$56k per year I am saving.

If you feel you need a larger investment or a bigger loan buffer then you can always either pay off part of it say \$500k, or go for 100k per year or something. If later you feel you need more liquid cash, with 100% or significant equity you can probably take out another mortgage to free up some.

Another approach to avoid cancelling the mortgage is if you can offset your mortgage against your cash. Doing this allows you to effectively pay off the mortgage but have cash available to redraw for any investment you find attractive (or emergency). Sure, you might start paying interest again but you can pick & choose how much and any surplus cash goes back against the mortgage. Once your cash exceeds the mortgage balance you would invest that too.

• i already have to cash in the bonds anyway to pay off the mortgage as that's where my money is at currently. Interesting point on investing the saved interest instead, I didn't consider that actually. There is no offset mortgages in my country. Commented Jul 26, 2023 at 14:37