Using GICs As Part Of Our Mortgage Payoff Plans

Today I wanted to share a little behind the scenes analysis of what we worked on over the summer to determine the best way for us to pay off our mortgage.

First off, we are very debt adverse people so the idea of holding on to debt (even “good” debt) in early retirement when no income streams are present is not our cup of tea.  Smith Maneuver? Nope, not for us.  (I do see pros to it depending on your situation but not for us.) While this was a win for us to share with you, some others may look at this and think “that’s all you’re making with your home equity, you’re wasting precious resources!” We get it. We could be making more with the money being dumped into our house.  But we’re ok with that.

We are very focused on our “sleep at night factor” these days and a big part of that is keeping our withdrawal rate low and also not carrying any debt.

So, let’s dig in!

Our GIC Ladder Mortgage Payoff Plan

First off, a big thank you to our fellow work optional friend, Chelsey, for digging into this topic with us and nerding out with spreadsheets she created to analyze some scenarios for us. (Yes, she built customized spreadsheets on this for us, thank you!)

Earlier this year our plan was to sell our paid off rental townhouse and pay off the remaining balance on our mortgage on our primary home with the proceeds. Our mortgage balance was ~$300,000 with a 5 year fixed interest rate of 2.04% that is up for renewal in October 2025. The net proceeds from the townhouse sale were ~$368,000.  So shazaam, let’s perform a little magic and wipe out the mortgage with the proceeds and have some money left to invest.  Bing, bang, done.

The reasoning to go this route is mainly from the psychological side of not wanting to owe anyone anything when we are no longer employed.  Mathematically, it likely makes more sense to hold on to a mortgage long term as typically having your money invested in the stock market long term will provide a higher return than the interest you’re paying towards your mortgage. But for us, psychology > math.

The longest fixed rate term we could lock in back in 2020 was for 5 years – so we are currently 2 years into it.  We did not want to be exposed to a new mortgage interest rate in 3 years that could impact our finances without any control from our end.  [Note: it would be very difficult for us to be shop around for the best mortgage rates at the time of renewal as we have no employment income to report.  So we’d be stuck with whatever the rate our current lender gives us.]

Every year, we are allowed to make an additional annual lump sum payment of 15% of the original mortgage amount.  So poof, in May, we sent that 15% figure to the mortgage.  Our plan was either to pay a fee to pay off the remaining balance right then and there or to continue with these 15% annual lump sum payments each year for the next 3 years and once the mortgage term is up the balance will be $0 and we’re on our way.

But then, we did some digging.

We knew we locked in at a very low rate (2.04%) compared to current rates (and they only keep climbing upwards with all the interest rate hikes this year).  So we started tracking GIC terms and playing with spreadsheets to see if there’s a way to arbitrage the situation a bit.

We looked at a few scenarios, but let’s focus on two:

1. Pay the penalty to the bank and pay off the rest of the mortgage.  Debt free in retirement here we come!
2. Keep the current mortgage as is for the next 3 years, pay the minimal monthly mortgage payments during that time frame, and pay off a lump sum at the end of the term. Create a GIC ladder for this.

So, what’s the winner?

Number 2, by a landslide!

There are three main components to this math problem:

1. Early termination penalty costs
2. Mortgage interest costs
3. GIC interest returns

First, we are saving on not having to pay a $1,290 penalty now by not breaking our fixed rate term (which really isn’t bad for Canadian standards, mainly as the bank would love to get that money that they leant out to us at 2.04% back into it’s own hands to then lend out to someone else for a higher current rate).  We confirmed with our fellow FI mortgage broker friend, Angela, (who I promise is going to come on here for a guest interview once I can get some questions sent over to her!) that our mortgage becomes open at the time of renewal which means we can pay the whole balance off with no fee or penalty.

Impact: +$1,290

Second, by holding on to the mortgage vs paying it off right away, we are definitely paying more in mortgage interest over these next 3 years.  To the tune of about $16,000 in interest thanks to holding on to the mortgage owing 2.04% on it.

Impact: -$15,830

Finally, let’s take a look at GICs.  By parking the money into GICs instead of paying off the mortgage, we’re earning interest.

When we locked these in (August 2022) here were the best rates:

• 1 Year GIC: 4.43% (currently best is 4.65% at the time of this writing)
• 2 Year GIC: 4.64% (currently best is 4.70% at the time of this writing)
• 3 Year GIC: 4.70% (currently best is 4.70% at the time of this writing)

Combine that with an average estimate of 2.5% for a high interest savings account yield (currently 3.0%) for the sub-1-year monthly mortgage payments to be parked and we can calculate the interest earned from the HISAs and GICs over the 3 years. (Every year we pull out from a GIC we will shift that annual mortgage money into a HISA account and then shift that to our chequing account monthly to pay for the monthly mortgage payment.)

Impact: +$32,626

Taxes should also be considered here.  Since we have a bit of wiggle room in regards to which accounts to pull from in early retirement we can continue to owe $0 in taxes between GIC interest (reported like ordinary earned income), interest from dividends in our taxable account, our cash wedge, RRSP withdrawals, and withdrawals from our taxable accounts. Note this strategy may not be as lucrative for a family earning say $150,000 as you now have a 29% tax to add to the equation.

Another thing to consider is how will my CCB (Canada Child Benefit) be impacted by this additional GIC interest?  Again, since we have a bit more control over our (low) income, this is a non-factor for us.

Overall: $1,290 – $15,830 + $32,626 = $18,086

After 1 night of setting everything up, our mortgage payoff is setup and we’re ahead by $18,000! Sweet!

Another way of thinking of this is that for the next 3 years we will be making $6,000/year simply by holding our mortgage and having these GICs set up.  That’s like a part time job that’s 3 hours a day, 2 days a week, making $20/hour, for 50 weeks each year.  I’d happily take this GIC mortgage payoff ladder over that!

Or another way to look at it is this $6,000 net annual gain will help us lower our withdrawal rate.  With our projected $40,000 annual spend, we now only need to withdraw $34,000 instead (well even less with CCB but you know what I mean).

So there you have it, a few hours of spreadsheet nerding out and we’re sitting pretty thanks to locking in a 5 year rate at 2.04% and taking advantage of the higher interest rates floating around these days.  Now of course, many people are finding themselves in the opposite position where these higher rates are putting a squeeze on their finances so we want to be cognizant of that and acknowledge our fortunate set up of being able to gain from the current market vs feeling additional pressure.

Do you have any wins like this to share?  Have you ever been able to see an opportunity with your finances and seize it?

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