Should this couple pay down the mortgage quicker or beef up an RESP?

“Is it better to pay down our mortgage or ramp up contributions to our teen’s RESP?”

Caitlin and her husband have been making accelerated mortgage payments, which he wants to pause so they can save as much as possible for his son’s post-secondary education. Who’s right?

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Q. My husband and I, both in our early 40s, bought a house in Toronto four years ago. Since then, our variable rate mortgage has gone up four times and is now at 3.2%.

We have managed to pay down $150,000 of our mortgage in those four years with the extra bi-weekly payments and have $260,000 remaining. My husband would like to stop the extra payments and instead use that money to put towards a Registered Education Savings Plan (RESP) as his son heads to university in four years. I think the money is better spent on paying down the mortgage, which, at our current rate, would be fully paid off in six years, freeing up a lot of cash flow to assist with university costs; I’m also thinking we could take out a Home Equity Line of Credit (HELOC) at that time, if necessary. As interest rates keep rising I think getting the mortgage paid off as quickly as possible is the best choice. What are your thoughts?
–Caitlin

A. Caitlin, you and your husband have been diligently paying down your mortgage with amazing speed.

As a financial planner, I agree with you that being mortgage-free is a great financial milestone to achieve. It’s very empowering and frees up a lot of money to be put towards other financial goals.

But while mortgage debt is extremely important to address, when we look at it within the bigger financial picture of your household’s goals, we must also consider shorter-term goals that need to be addressed ahead of longer-term goals such as early retirement or paying off your mortgage. Financial goal-setting is often fluid, and the financial choices that may seem “best” from a very narrow spreadsheet perspective may not always be the best for your family—and they may not provide the greatest peace of mind to both you and your spouse.

In this case, it may be important to set aside your motivation to pay down the mortgage in a very short few years and instead put this loan into context with other financial priorities in your household. Remember, you will still be making regular mortgage payments and reducing your principal during the next few years when your husband would like to focus on his son’s RESP contributions—you just won’t be supercharging those mortgage payments.

Caitlin, it’s often a good idea for couples to have a financial plan and to re-examine their short, middle and long-term goals on a semi-annual or annual basis. In your case, it appears that your husband would like to fast-track saving in an RESP for your stepson, who will be in college or university soon. It’s not out of the ordinary for couples to discover they have several financial goals to juggle over a few key years, as is the case for you here.

And while up to now paying down the mortgage fast was at the top of both your and your husband’s priority lists, there are often times when such a very ambitious goal has to be set aside temporarily so other key goals can be achieved to make both spouses feel that they are meeting financial commitments to loved ones.

This is likely the case with your husband’s new focus on his son’s RESP. Remember, there is only a very specific period of time in which the annual Canadian Education Savings Grant (CESG) of 20% can be claimed for a child. Your stepson may be reaching those grant cut-off years now and your husband, knowing the importance of a good post-secondary education (as well as the often exorbitant expenses associated with it) is moving this goal to the top of the list for a few years.

If that is the case, I suggest that if your husband has not made the maximum contribution of $2,500 a year for your stepson in order to receive the maximum Canada Education Savings Grant (CESG) of $500 annually (to a lifetime limit of $7,200 in CESG per child), then topping up the RESP to these limits at least is likely a better savings goal for your household than paying off the mortgage quickly at this time. If the threshold has not been met, then this is a very sound financial priority for your family and one that would certainly be worth focusing on in the next four short years.

Remember, it makes sense to re-examine financial goals and always put these goals into perspective. Chances are very likely that your house will appreciate in value over the next few years and this will be adding to your retirement nest egg—even if you hold off on a few years’ worth of bigger mortgage payments. On the other hand, student debt can hang over an individual for several years after a student has graduated. So helping your stepson to start starts his career with as little debt as possible is an important factor in his success as a young adult—and that’s a goal well worth achieving for any parent.

Regarding the second part of your question, perhaps now is that point in time to consider a fixed-rate mortgage. Although in prior years the variable mortgage scenario choice may have been the better decision, in these times of very low interest rates, a fixed-rate mortgage may make the most sense. As you have experienced, variable-rate mortgages are a little less stable, in that the interest rates change regularly. Having the assurance that your rate stays at a low interest rate will give you financial peace of mind and allow you to plan long-term with more accuracy.

Finally, you also mentioned addressing student university costs with a Home Equity Line of Credit. (HELOC). These lines of credit can be fraught with problems—most notably is the potential to rack up more debt than necessary, as they can encourage people to live beyond their means. They also have variable rates of interest, which can cause monthly payments to go up after a certain period of time.

Heather Franklin is a fee-for-service certified financial planner in Toronto.


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