Your Mortgage is not a Real Estate Asset

Your mortgage is not a real estate asset, it is a liability.  Your house and your mortgage is on the opposite side of your personal balance sheet.
    Why financial planners would think that making additional payments on your mortgage would somehow make you more concentrated in real estate is beyond me.  If you own a $300,000 home you will have $300,000 in real estate assets, it doesn't matter if you have a $300,000 or a $50,000 mortgage.
    A mortgage is very much like a bond with monthly payments that you have shorted.  Like all shorted bonds, you will need to eventually cover.  When your mortgage expires you will either have to renew or pay off the balance in full.
    Making additional payments on your mortgage will reduce the bond that you have shorted.  Making regular extra payments is a great way to reduce the debt on your household balance sheet, but depending on your personality you may not want to focus too much on one of the two sides of your household balance sheet.


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Credit Card Nerd Math

Saving a dollar is much more valuable than earning a dollar.  How much a dollar saved is worth will depend on your province and your annual salary.  In Manitoba, with a $68,000 annual salary, a dollar saved would be worth $1.61 to you.  The marginal tax rate is 37.9%, so you will keep 62.1 cents for every $1 earned.  You would need to earn $1.61 to net you a dollar.  Paying off your mortgage is a guaranteed investment similar to a GIC.  Making additional payments on a mortgage with a 2%, 2.5%, 2.75% and 3% interest rate will be the same as earning 3.2%, 4%, 4.4% and 4.8% respectively on a risk free GIC.  In the top bracket in New Brunswick, paying off a mortgage with a 3% interest rate can be the same as earning 7.3% on a GIC.


Balance Sheets for Different Households with the Same Net Worth

Each family will have the same $300,000 house, the same wage, the same age and the same net worth.
    Family one has a $300,000 mortgage and $100,000 in investments.  Their debt to net worth ratio is 2.5:1 and their debt to real estate assets is 1:1.
    Family two has a $250,000 mortgage and $50,000 in investments.  Their debt to net worth ratio is 3:1 and their debt to real estate assets is 1:1.2
    Family three has $200,000 left on their mortgage, but no investments.  Their debt to net worth ratio is 2:1 and their debt to real estate assets is 1:1.5
    Family four is renting and has $100,000 in savings.  There is no debt, but their only assets are their investments.
    Below we have a chart with the four households.  Their mortgage debt, savings, debt to net worth ratio and their debt to real estate asset ratio are listed below.



Family

Debt

Savings

Debt/Net Worth

Debt/Real Estate Assets

1.

$300,000

$100,000

3:1

1:1

2.

$250,000

$50,000

2.5:1

1:1.2

3.

$200,000

$0

2:1

1:1.5

4.

$0 (Renting)

$100,000

n/a

n/a




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Which Household is Better Off?

All four households have the same net worth and have the same amount of real estate assets, excluding the family that is renting.  Which household you prefer to be would depend on how risk adverse, debt adverse and what you like your household balance sheet to look like.  Personally I would like to reduce my liabilities, while keeping a small safety net to fall back on, so somewhere between household 2 and 3 is right for me.