Should Christina use her entire early inheritance to pay down the mortgage?

Q. I have a question about my upcoming early inheritance . My parents, who are in their 80s, are gifting me $500,000. My husband and I, both in our 40s, have no debt and own a home worth $900,000 with a $450,000 mortgage left on it. I just started a job with a defined benefit pension plan (DBPP) and my husband has no pension. We have about $30,000 in each of our registered retirement savings plans (RRSPs) and about $50,000 cash in tax-free savings accounts (TFSAs.) We contribute $2,500 to the kids’ registered education saving plans (RESPs) every year (they are ages 6 and 8) and $5,000 to charity annually. We make $140,000 annually between us. My question is this. My husband would love for the mortgage to be paid off. I am mostly for that idea. But we may need to move houses for more room and a shorter commute to work. Is putting almost all this money against the mortgage on the matrimonial home the right thing to do? Anything in life can happen and I’d be worried about losing this money if there was ever a breakup in our marriage. Is there a better option for this money than to put it against the mortgage at this time? —Christina in Burlington, Ont.

FP Answers: Hi Christina. It’s nice that your parents have the means and thoughtfulness to gift you $500,000 now while you have young children and housing decisions to make. I am sure it will have a big impact on you, your children and your parents.

Your concern about putting the money at risk if you use it to pay off the mortgage if there is a marriage breakup is legitimate. In Ontario you can protect your inheritance by putting it in an account in your name only, but once you commingle the money in joint accounts or the mortgage on your home, the protection is lost.

If you want to pay off your mortgage and protect your inherited funds, have a marriage contract prepared protecting the $500,000. You can get a marriage contract any time during your marriage, not just before the wedding.

I can see you doing four things with this money: paying off the mortgage; investing the money; spending or gifting the money or some combination of the three. All are potentially good options, depending on what you see coming and what you want to achieve.

The mortgage or investment decision is often made around the math. For example, pay off your mortgage if the mortgage rate is higher than your future expected investment returns, and if lower, then invest. There is also more to it than that. What is paying off the mortgage going to do for you? Think: emotion, stress, freedom. Will you be more comfortable vacationing with children or making a career change? It is not always about maximizing a dollar.

You could decide to invest the money in your name only. Maximize your TFSA, maybe add some to a RRSP and the rest to a non-registered account which you will use to top up your TFSA in future years. If you do this your retirement is likely set. You will still have the mortgage and money will continue to be tight but that discipline will likely ensure your retirement. However, that doesn’t sound like a fun option.

Why not just spend it all? Your kids at ages six and eight will only be with you for another 10 or 15 years. Think of the childhood memories you could create for them with $500,000. Maybe this $500,000 is only a small portion of a larger inheritance you will eventually receive.

I am having a little fun here but you can see there are a lot of sensible things you can do with this money. The question is what is best for you and your family? This is a complex question. Consider doing some scenario-based financial planning, which you have probably already done in your head, such as, “If I do this, that will happen, and then…” Doing this with a financial planner will bring accuracy to your thoughts, making the decision process easier.

The best choice may be to do nothing with the money until you decide if you are going to move to a larger home. Having that money may even speed up your decision. Plus, depending on the terms of the mortgage, you may not be able to pay it off right now anyway. If you do move homes, be mindful of the amount of home you purchase so that you maintain some financial freedom.

Again, Christina, this is a nice thing your parents are doing for you and themselves. Paying off your mortgage or using it to help you purchase a new home so you have more space for the kids and a shorter commute is a sensible move. If that is what you decide, it is worth talking to a lawyer first.

Allan Norman, M.Sc., CFP, CIM, provides fee-only certified financial planning services and insurance products through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. He can be reached at alnorman@atlantisfinancial.ca.

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