Sophie Salcito, 47, has paid off the mortgage on the third condo she has owned. But the Vancity wealth adviser still believes in diversification. “The best advice is always to diversify and put your eggs in different baskets. Every asset class has market cycles.” Wealth advisor Sophie Salcito poses for a photograph in North Vancouver, B.C., on Friday November 25, 2016. Darryl Dyck/The Globe and MailDarryl Dyck/The Globe and Mail
With home values rising by 20 per cent or more each year in the sizzling markets of Vancouver and Toronto, the unprecedented returns are outstripping even risky investments.
In 1996 the average price of a Greater Vancouver home was $288,300; in 2016 it was $1.02-million. In the Greater Toronto Area, in 1996 it was $198,150 and now it's $729,922, according to the Toronto Real Estate Board's historical data.
Today, a home is more than a place to live; it's the goose that laid the golden egg, to be cracked into upon retirement or unscrambled to finance further real-estate purchases. With that in mind, would it be a good idea to put all of your money into your home, ignoring other investment avenues such as tax-free savings accounts (TFSAs) or retirement savings plans (RRSPs)?
In Toronto, Steve Garganis is asked daily whether it's better to aggressively pay down the mortgage or, for instance, buy blue-chip stocks and open a TFSA. In the current low-interest environment, it's a crapshoot.
"Those with a high risk tolerance use different investment strategies and will put money into investments when mortgage rates are at 1 to 3 per cent," says the Oakville, Ont.-based mortgage broker. "But there's no guarantee with the stock market."
Real estate, meanwhile, is less volatile, he says. "Look at any chart. Real estate goes up in value over the long term. It's tangible and I'd rather not stare at the computer every day wondering if my net worth is up or down."
Mr. Garganis recently had two clients, a plumber and an accountant, who sold their mortgage-free Toronto homes for $900,000 and $1-million, respectively. Both moved to Kelowna, B.C., where they bought no-mortgage condos for approximately $270,000.
"Canadians are tired of being on the stock market roller coaster. How many people do you know that have actually made a net profit being in the stock market? Not many is what I'm seeing," Mr. Garganis says. Meanwhile, those who bought property in the past 20 years have been celebrating.
Sophie Salcito, a certified financial planner with Vancouver City Savings Credit Union (Vancity), has been a participant in Vancouver's full throttle housing market. She bought her first condo at age 24, sold it 10 years later and has already paid off the mortgage on her third, bigger condo. "The large debt made me feel beholden," says the 47-year-old. "Being debt-free means I have choices."
But with almost 20 years of investment and mortgage experience, Ms. Salcito remains cautious when advising clients. "No one knows the future state of the real estate market. If you put all your RSP and TFSA savings into a house and then in a few years you watch the market value drop, I think a client would have been better served to diversify their finances and have some RSPs if they are in a high tax bracket or a TFSA if they are in a low tax bracket," she says.
"If you invest in stocks and bonds, in an RSP or TFSA, you can potentially have a higher rate of return than just 2 per cent or 3 per cent which is the cost of a mortgage today. The best advice is always to diversify and put your eggs in different baskets. Every asset class has market cycles."
Thomas Davidoff is erasing his mortgage slowly. During times of traditional interest rates, paying down the mortgage is a great thing to do, but in a low-interest environment, go for equities, says the University of British Columbia business professor.
Dr. Davidoff, who specializes in housing and mortgages, says that maintaining a moderate mortgage balance in times of bargain-basement interest rates is prudent, even for those looking to retire.
"Many retirees aim to stay in their homes a long time, so that their home equity is not a readily liquidated source of funds. Stocks and bonds in retirement accounts are," he says.
Mr. Garganis is finding that a growing segment of his clients are comfortable with 25- to 30-year amortization terms, choosing to put extra cash into RRSPs or TFSAs or even using their home equity to buy a cottage or rental property.
While he's not near retirement, Sean Cooper, 31, stands by his mantra of paying off the mortgage, pronto. In 2013, the Toronto resident extinguished his $255,000 mortgage debt over three years. Criticized for being a no-fun guy, his mission was about short-term pain for long-term gain, not to mention that after having grown up in a hardscrabble family, he was extremely averse to risk.
His advice? "If you have high-interest debt like credit cards or car payments, pay those off first because mortgage rates are lower, then tackle the house debt.
"When I paid off my mortgage, I put all my money toward my mortgage, forgoing TFSA contributions. You may also contribute to your RRSP and use the tax refund to make a lump sum payment on your mortgage," adds Mr. Cooper, who's releasing a book, Burn Your Mortgage, in 2017.
"Retiring debt-free when you're on a fixed income is certainly ideal. If your house is your most significant retirement asset, there are ways you can unlock the equity, such as downsizing to a less expensive property like a condo or townhouse or taking out a home equity line of credit."
Toronto homeowner Francois Martin and his partner paid off their $300,000 mortgage in 10 years rather than the 25-year term suggested by their bank. Their focus was to build their capital without incurring long-term debt. The couple paid the maximum amount each year, buttressed by large lump sum injections at renewal points. They also contributed to RRSPs and, recently, TFSAs.
And while macaroni and beans weren't on the menu, they focused on necessities and avoided big-ticket purchases that required financing. "If we couldn't pay cash for something, we simply didn't buy it," says Mr. Martin, who's noticed a distinct difference in debt appetites.
"Coming from Europe, I would say that North America is a nation for consumers and very materialistic. Everyone has access to big house, big car, recreational toys, latest technologies. Unfortunately not everyone is in a situation to afford all this. The price to pay is to carry a large debt for a big part of your life."
With a clean slate, Mr. Martin intends to increase capital by purchasing rental properties, using the same accelerated payback strategy. "I consider our first mortgage as the foundation for future investment and these investments will lead to a solid retirement plan," he says.