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Pay down the mortgage or invest?

Quinn Waddington - May 15, 2017
Of course the answer to this is “it depends”, so give me a call and let’s discuss, but here are few things to consider when making this decision.

Pay down the mortgage or invest?

 

Of course the answer to this is “it depends”, so give me a call and let’s discuss, but here are few things to consider when making this decision.

First of all, if you are making this decision, then congratulations because you are not only lucky enough to own a home, but you have also managed to save money on top of all of your living costs.

 

Your first consideration should probably be your ability to pay your mortgage each month and if you have a variable rate mortgage then what will happen if rates rise?  Will you still be able to easily make mortgage payments if your rate rises by 1%?  If you have a variable rate and already stretched then you shouldn’t take on investment risk and so paying down even a 2% mortgage likely makes sense.  However, if you can cope with an interest rate hike or have a fixed rate mortgage then investing may be a great option, especially if you have room in your TFSA.

 

My second consideration is your Tax-Free Savings Account (TFSA).  This is a great alternative to paying down your low rate mortgage in a lot of cases because it gives you the potential to earn a much higher rate than you are borrowing for your mortgage, can be liquidated at any time and shelters all gains from tax.  The level of risk/return in your TFSA should be discussed with a financial advisor but even if you stayed conservative and only earned 4%/year, you would be way ahead of paying down your 2% mortgage.  Another benefit is that you can use these funds for whatever life throws at you in the future, not just your mortgage.  The TFSA looks even better if you are able to write off part of your mortgage interest.

 

The third consideration is taxes.  Do you have a rental suite or a home office?  If so, you are probably writing off part of your mortgage interest against the income earned.  The lower your mortgage gets, the less interest you can write off and the more tax you pay.  This makes the TFSA strategy even more appealing but your RRSP may be a good option as well.  Obviously you wouldn’t use your RRSP to save money you may need in the short-term but the benefits you receive from adding extra money to your RRSP can’t be ignored.  You can, of course, write off RRSP contributions against your income to reduce your tax bill in the current year but you also receive the benefit of your money compounding until you withdrawal the funds, assumedly at a rate of return much higher than your 2% mortgage rate.  The earlier you are able to add funds to your RRSP, the greater this compounding effect.

 

One final consideration that may trump everything else is your risk tolerance.  If you don’t like any risk and prefer your money in cash or GICs then paying down your mortgage provides the best return.  You do lose the flexibility by focusing on that so look in to a line-of-credit for emergency expenses.

 

There are a number of other considerations and like I said at the top, “it depends” on each person’s situation but every time I have this conversation it is quickly followed by “what do you do?” Here you go…

 

I have two kids so I have no extra money!  Just kidding, but my strategy has changed a little.  I have a variable mortgage so have rising rates to be prepared for.  Starting in January, if we have extra money I top up my children’s RESPs as they received the 20% grant from the government.  We then top up our TFSAs, which we consider emergency funds but are fully invested.  Both my wife and I make monthly contributions through work to our RRSPs but if I had extra money I would want to top up my RRSP and my wife would want to renovate our bathroom!

I should note that we have a basement suite so paying down the mortgage is less advantageous for us than some, but even without it I would follow the same strategy.

 

I have put together savings plans for many homeowners to make sure they are making the best long-term decisions for their money.  Please contact me today to discuss your situation. 

 

quinn.waddington@canaccord.com or (604) 699-0874