Paying Off Loc Vs. Investing In Tfsa

[bobmarley77]

Hi everyone,

 

I'm hoping to get some advice on my financial situation and how I should invest for the future. I will finish my residency in 2019.

 

TLDR: Are the short term (4-5 year) gains worth investing in a TFSA, or should I just pay off my LOC for guaranteed "returns"?

 

Debts:

- Line of credit (professional LOC) - 206K outstanding at 2.85%

- Mortgage - 240K outstanding at 3.17%. Have 4 more years of fixed mortgage left. On 25 year amortization.

 

Income

- Currently making $4000 a month, and I get a $500/month raise each year for the next 4 years.

- Tuition Credits - Will get me a 10K return next year and 5K for the the year after.

 

Major Costs:

- Housing: 1800/month (includes mortgage, insurance, condo fees, utilities, property tax)

- Food/Entertainment: 700/month

- LOC Interest: 500/month

- Other: 250/month 

 

This leaves me with 750 a month to work with. I just opened up a TFSA with Tangerine and contribute $250 bi-weekly to a balanced growth portfolio. I plan on selling my condo once I finish my residency in 2019 and will have approx 100K in equity at that point (64K downpayment + 46K principal paid). Additionally, since I bought this condo in a very good location for an excellent price, I expect to have at least 20K of appreciation (after factoring in closing costs). 

 

Now I face the question of whether to use my extra income to pay off my LOC as quickly as possible, or to invest the money in the TFSA while making minimum interest payments on the LOC (do not have to pay principal). I will likely be proposing to my girlfriend in the next year or so, and will have to factor in the cost of a small wedding (we both want a cheap, intimate wedding). Once I finish my residency and fellowship (6 years from now), I will be making a staff physician salary, and will have to incorporate to tax shelter and let investments grow within my corporation. I have thought of several ways to approach my situation.

 

Scenario 1: Minimum interest payments on my LOC and put extra income into TFSA index fund. Once I'm done residency, I can either leave my TFSA alone, or withdraw and apply it to my LOC to eliminate my debt (along with the equity in my condo). 

 

Scenario 2: Only pay off my LOC as I get a minimum 2.85% "return" (effectively) that way, and don't contribute to my TFSA. This way I miss out on any potential growth I may get in the fund, but I avoid risk as well.

 

Scenario 3: Keep contributing 250 bi-weekly to TFSA and have the option of withdrawing it to pay off LOC, or leaving it and continue contributing more as a staff physician, for my retirement. In the meantime, any extra raises I get will be shunted to pay off my LOC principal.

 

TLDR: Are the short term (4-5 year) gains worth investing in a TFSA, or should I just pay off my LOC for guaranteed "returns"?

 

Any and all advice would be greatly appreciated!

[MD2B2019]

I'm 4 years behind you, don't have much real experience, my 2cents are:

 

Since Tax is nothing to do with TFSA return, mortgage and LoC interest, so

 

If your TFSA return > mortgage rate 3.17% > LoC rate 2.85%, put extra money into TFSA to make more money better than save interest on mortgage or LoC.

 

If TFSA return < mortgage rate 3.17%, you should use extra money to pay back mortgage first.

 

 

 

There're two type stock's return can easily beat 4% return in history,

 

1. Canadian big bank stocks, like TD bank, RBC, CIBC, BMO, Scotia, National Bank, they make 8~10% after tax profit every year and give share owners dividends every quarter which represent about 4~5% return yearly, since these banks keep about 50% profit at bank for future investment, bank's stock price go higher and higher in history.

 

2. REIT - real estate income trust, like RioCan which own malls and shopping centers, Chartwell which own senior/retirement homes, InnVest which own hotels, they are landlords collecting rents and pay share owner distributions every month, normally they pay out 80~90% profit for monthly distribution (like dividend) which represent 4~6% return, and keep 10~20% in the trust for future investment, in history for a long run, since property's value go higher and higher to against inflation, their stock's price go higher too.

 

 

BTW, Crude oil went down from $110ish per barrel last summer to $40ish two month ago, now at $55~65.

I don't think crude oil can't be at $55~65 for a long run, because oil companies can't make money at this price so they already laid off tens of thousands workers and reduced hundreds billion dollars investment on future projects. if I have money, I'll bet 10~20% on oil company like Canadian Oil Sands, Encana, Enbridge, Suncor, Husky, etc. Since it's betting, you better have stomach for it, don't use your kid's RESP on this.

[ploughboy]

Good problem to have, since I think you're a bit ahead of most residents at your stage in thinking about these things.  All three of your scenarios are good ones.  My thoughts, for whatever they're worth: 

 

A couple of expensive things to factor into your planning...

 

1) In PGY-2 MCC will charge you $2300 for the privilege of sitting the QE2.

 

2) In PGY-5 Royal College exam will cost about $4500 outright, with probably at least another $500 in random ancillary costs (hotel, transportation, new suit, study materials, etc)

 

3) In PGY-5 your provincial college will charge you a hefty application and membership fee for independent licensure ($2400 in my province)

 

As for your three scenarios, I'd personally take the guaranteed 2.85% return on paying back principle on your LOC.  But that's just me, based on my biases and my background.  If you feel really strongly about starting to put away money into your TFSA that will probably turn out fine too, provided that you invest in blue chips and don't gamble on Kazakhstani date-palm derivatives or something else crazy.

 

Usual disclaimer - In the same way that I don't let my accountant intubate patients, you should take anything I say about money with a grain of salt, use at own risk etc.

 

 

PS - since it's a thing with me, I have to ask...do you have adequate life (and arguably more importantly, disability) insurance?  I assume you do and it's just bundled into your figures somewhere, but want to make sure.

[rmorelan]

on thing I should add is that of course the market returns are variable (duh, of course) - but really would you expect them to actually continue to be positive for the next 5 years?

 

Right now we have had 7 straight years of positive growth (since 2008) - that is approaching a record amount of time of positive returns  year over year.

 

5 years is a very short time frame with stocks - you have to be prepared for the possibility their value will decline Do you need the money in 5 years?