Being mortgage-free is a dream for most homeowners. The benefits of owning your home are huge: having 100% equity to draw from and no more mortgage payments can make your finances much easier.
But is it the best use of funds to pay off your mortgage early? Or would you be better off investing your money?
The best course of action will depend on several factors, including your investing style, the amount of your mortgage and the rate you’re paying.
Interest rate versus investment return
If your investment returns outweigh your mortgage interest rate, it usually makes sense to invest. With interest rates currently below 4%, they are still considerably lower than average stock market gains.
For example, the Toronto Stock Exchange has brought average returns of 9.5% annually for the last 50 years. Remember, though, that historic levels of return don’t guarantee similar gains in the future.
The type of investor you are will help you to decide. If you like low-risk, fixed income products like GICs and bonds, returns are currently low, so paying down your mortgage may be more beneficial.
If, however, you have a riskier style and prefer holding a higher ratio of stocks, then gains over the long term could typically outweigh mortgage interest savings. If investments go well, you could have considerably higher net worth than if you paid off your mortgage.
Advantages and disadvantages of investing
If you invest through tax-registered products like RRSPs and TFSAs, your investments will grow tax free. With RRSPs, you will get a bigger tax deferral by maximizing those contributions. When you finally draw from them, the chances are you will pay a much lower tax rate because, by that time, you will be retired. And while TFSAs are funded with after tax money, you can draw from them at any time without penalty and it grows tax free while invested.
Investing provides a much greater potential for growth. However, that growth can be reduced if your portfolio contains products with high management fees, like some mutual funds and ETFs. Investing in products with transparent management fees (like those offered by ATB Wealth) will ensure you know exactly how much you’ll be paying out of your gains.
And don’t forget: investments can drop in value as well as rise.
The pros and cons of paying off your mortgage
The security of owning your home, along with the peace of mind of being debt free, and no mortgage payments to make are all good reasons to pay off your mortgage early.
If you have little home equity and a long period of time left to pay your mortgage, prioritizing mortgage payments could be beneficial. Building up home equity so you can tap into it can be a big help if there’s a change in your circumstances, such as losing your job.
If mortgage interest rates continue to rise and go above the typical investment return ratios, it may make more financial sense to pay off your mortgage quicker.
Remember that, if you are self-employed, you may be able to deduct part of your mortgage from your income, which will reduce your tax bill. In this case, paying it off may not make sense.
Things to consider if you decide to pay off your mortgage
When looking to buy a home, try to buy according to your budget, rather than what your bank will lend you. Buying a home with affordable monthly payments will help you stay on financial track.
If you have some extra cash on hand and are deciding between accelerating your mortgage or fast tracking an investment goal, either is a great choice. Which one is right for you will depend on what interest rate you are paying, how comfortable you are with investment risk, and whether you view a mortgage as a stressor in your life.
If you’re not sure which strategy is right for you, reach out to an ATB financial advisor near you. They’ll take the time to understand your unique situation and goals.