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My husband and I are looking to buy a new house with a mortgage of about 400K-500K and a downpayment of 200K-300K (max value of home:700k). (We currently own a home that we purchased for 300K, and will probably sell for 300K-350K. We owe around 125K on it.)

We are fairly young- 25 & 28 years old. I was on maternity leave for half of last year, and our gross income was still around 220K. We live in Canada. We are expecting to have more children (1 so far, another 1 later this year), with me working at least half the year, every year. (Unless we have twins or something.)

Our major expenses:

  • $2400/mo. mortgage payments
  • $2400/mo. childcare (me quitting work is out of the question; I need to maintain a yearly salary of 60k for a little while for immigration reasons)

We are able to manage our money and pay down bills OK. Whenever, at the end of the month, if there is extra money in our account, we either move it to savings or extra payments to our mortgage. Then at the end of the year, we take money from our savings and move into RRSPs to get a tax refund.

Our other savings amount to about 200k in RRSP, TFSA and just plain ol' savings.

My question is, should we be saving money or putting all our money into the mortgage? We have no other debts besides the mortgage. We both would like the mortgage paid off in 10 years...is it wise to pay it off in 10 years, or should we extend it? We're buying a large house, and probably won't be buying another one for the next 30-40 years.

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    When you say "saving money" what specifically would you be saving it for? Retirement, education for kids, emergencies? – JohnFx Apr 27 '11 at 21:27
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    I have no idea. Retirement, I guess? I guess I've been raised that you should always 'save', but I have no real clue what the heck we're saving it for. I figured time would just tell =). We both made the decision to not contribute to education for kids. We were thinking to use his TFSA as the "emergency" fund. – Swati Apr 27 '11 at 21:32
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    It's probably worth figuring that out before making a financial decision like this. You can figure 3-6 months of living expenses for emergency funds, then reverse engineer how much you need and when for retirement and the kids college and see where you stand. – JohnFx Apr 27 '11 at 21:39
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I would apply extra cash left over at the end of the month as follows, in order of priority:

  1. Emergency fund of 3-6 months worth of expenses. If his TFSA is the emergency fund, you might consider increasing the amount to cover at least 3 months. (You list $4800/mo as your major expenses and I'm guessing $6k/mo or more is a more likely total, so you'd want at least 18k in that account, possibly more.)
  2. Retirement savings contribution. Use an online calculator to figure out (a) the amount you will need saved at the beginning of your retirement and (b) how much you should be saving monthly to achieve that goal.
  3. Future major spending. Are you planning to buy a car, major vacation, home improvement, etc? If you plan for these and set aside some amount monthly you can avoid debt when making these purchases. (Even if you decide to take a manufacturer-subsidized cheap loan when the time comes to buy a car, you'll have the cash set aside so you have the option.)
    • Set aside 1 to 2% of the value of your home per year for those major expenses like a new roof, the water heater, the new AC unit, etc. (See justkt's comment below.)
  4. Mortgage. The reason I've listed this last is that, while you can save money on the mortgage interest by prepaying, you sacrifice liquidity. In other words, once you make those payments you can't (easily) get the cash back. Also, it sounds like you have a low rate on the mortgage, and as long as you don't panic when the market drops, the rates you're getting on your retirement accounts are likely to outpace the amount you're paying on the mortgage. In essence the bank is subsidizing your retirement.

Realize, though, that this is my take on priority. My experience has been that a liquidity crisis is much more stressful than having a mortgage or other debt -- illiquid wealth is almost useless when you need cash.

So if you still have strong feelings about retiring that debt after considering the liquidity issue, go ahead and swap #3 and #4 above. Make plans to pay off the mortgage over the next 10 years. Find a mortgage payoff calculator and make extra monthly payments that keep you on a 10 year schedule. I'd strongly suggest making sure your retirement savings are on track, though. Time is on your side here, and your required monthly contribution will be low now while you're still in your 20s.

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    They say you should be saving 1 to 2% of the value of your home per year for those major expenses like a new roof, the water heater, the new AC unit, etc. That should go under #3 also. – justkt Apr 28 '11 at 13:23
  • @justkt - Good call, I added it. – bstpierre Apr 28 '11 at 14:29
  • From the online calculator I used, we should be contributing about 20k a year to our RRSPs...which we do. Quite easily. So I guess most of the remaining should go in the mortgage then? – Swati Apr 28 '11 at 15:02
  • Good answer. I'd point out that any money going into the retirement funds shouldn't be into bonds. You'll do better paying off the mortgage (a negative bond). The only reason to hold bonds + mortgage is peace of mind. Just get used to the fact that the best thing for young earners is to lose lots of money in your retirement plans. Young being the key. Stocks go on sale! – brian May 1 '14 at 15:19
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This is opinion, no right or wrong. Two schools of thought, one saying you should aim to be debt free, ASAP, the other suggests that when your borrowing expense is so much lower than expected market return, just keep investing. With your mortgage, a variable, I trust the payment is recalculated so if you pay down half the loan, it will drop to half when the rate changes and new payment calculated, right? If not, you still have a high payment due until it's paid in full. Me, I like the flexibility of going with the full term, and saving the money as long as rates are low. Even moderate inflation will make that payment fell like less over time, and there are funds whose dividends are above the mortgage rate. If/when rates rise, you can always pay down aggressively. I'm concerned that you don't have a good sense of your saving goals. You have less than a years income saved for the long term. To replace 80% of your income you need about 20 times your current income, or $4M. Of course, you get to subtract pension income or whatever Canada's social security system is (forgive my ignorance on this).

  • Nope. Our payment never gets recalculated. We keep paying $1200 biweekly ($2400/mo.) no matter what our variable gets to. Over the last year and a half, the variable has fluctuated from 1.25%-2.5%. – Swati Apr 28 '11 at 14:54
  • Also, why do we need a year's income saved? That seems...like a lot of money just sitting there. – Swati Apr 28 '11 at 15:04
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    The "years income" was not emergency, it was my looking at your total savings. By your ages, I'd have a targeted 1-2 years gross income as goal for retirement savings. Invested for that long term, not sitting, hopefully returning the 6-10%/yr we like to see. – JoeTaxpayer Apr 28 '11 at 15:37

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