Should we use TFSA savings to pay off our mortgage?

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By Julie Cazzin with Daniel Perras

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Q: My wife Carmen and I each have tax-free savings accounts (TFSAs). Should we use the money in them to pay off our $170,000 mortgage? The current rise in interest rates is a motivating factor for me to get the mortgage paid off, but I’m not 100 per cent sure it’s my best financial move. The mortgage is my only debt and between my TFSA and savings, we could pay off the mortgage on renewal. What are the pros and cons of doing this? — Antonio

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FP Answers: Rising interest rates are a common concern for many fixed-rate borrowers such as yourself. However, as you approach your mortgage renewal date, you should be proud that you have put yourself in a position where you have the choice to pay your mortgage down at renewal.

Borrowing costs significantly affect an overall financial plan and can be a deciding factor when choosing whether you should use all your savings to pay off your debt. There was a significantly stronger argument that your investments should earn a higher after-tax return than the cost of borrowing and, therefore, you shouldn’t pay off the debt when interest rates were below three per cent.

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That is not impossible in this higher interest rate environment, but financial prudence has pushed that argument into the rearview mirror. The new reality of higher borrowing costs makes your idea of using your savings to pay off your mortgage quite attractive, but there are several things you should consider first.

Using all your TFSA money and savings to pay off the mortgage essentially turns available liquid money into illiquid home equity. As a result, you may quickly find yourself ill-prepared for any circumstance or emergency that requires quick access to money.

Of course, you can rebuild your savings using the money you formerly put against your mortgage, but this takes time. It’s best to always prioritize keeping an adequate emergency fund so you don’t have to borrow back at the high interest rates you are trying to avoid in the first place. Or, worse, be forced to sell your home to raise funds.

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The amount redeemed from your TFSA will increase your TFSA limit the following January. But the past 15 months have been volatile times for most traditional investments. As a result, if you redeem at a loss, you will have locked in a lower TFSA contribution limit that can’t be restored.

It is also wise to consider the opportunity cost of using your savings. Could they have been used to make a registered retirement savings plan (RRSP) contribution to save taxes today? If the answer is yes and you anticipate withdrawing those savings in retirement when you have lower taxable income, this could be a better option. You can use your tax refund from the RRSP contribution to make a lump sum payment against the principal of your mortgage.

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Alternatively, if you have or plan to have children (or grandchildren), a registered education savings plan (RESP) will attract a grant of 20 per cent or more, depending on your income and contribution limits. Government incentives add to your returns and must be part of your decision.

There is also a behavioural consideration. It’s common to spend more when you no longer have a mortgage payment to meet. The effect is your lifestyle expenses rise. You are building your net worth when you are paying a mortgage. If you stop and increase your lifestyle expenses, this has the double effect of reducing your savings and increasing your current expenses, likely pushing retirement further away in the future. It is great to be debt free, but consider its impact on your retirement plans.

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An excellent middle ground may be to pay down some of your mortgage with your savings and keep your TFSA intact and invested. There is no ideal answer today because we don’t know the future. Only hindsight will show us the perfect answer. Gathering the information to make an informed decision is essential. Antonio, I wish you and Carmen much future success.

Daniel Perras is a certified financial planner and wealth adviser with Veritable Wealth Advisory in Peterborough, Ont. Veritable Wealth Advisory is a full- service financial planning and investment firm that employs multiple certified financial planners and portfolio managers with offices in Burlington, Kingston and Peterborough. 

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