Should you pay down the mortgage or invest?

It’s an age-old question. If you have surplus cash flow or receive a lump sum, such as a tax refund or annual bonus, are you better off making extra mortgage payments or investing the money?

Generally, if you expect your portfolio’s rate of return to be greater than your mortgage’s interest rate, investing may be a better choice. But that’s only a guideline—your decision may be affected by other considerations, including a psychological factor.

Paying down the mortgage 

Conservative investors or anyone with a relatively high mortgage interest rate or who believes future rates will increase may be inclined to choose paying down the mortgage over investing. Making extra mortgage payments gives you certain results. You’ll pay off the mortgage faster and pay less interest, potentially saving thousands of dollars. That certainty can be more appealing than investing in the stock market, where performance—though historically trending upward—is not guaranteed. Also, once you pay off the mortgage, you will free up cash to spend or invest according to your needs.

Some people choose to pay down the mortgage not because of how it compares to investing, but for psychological reasons. They want the satisfaction of fully owning their home earlier in life and the peace of mind of being debt-free.

Deciding to invest 

If you plan to deposit the extra money into a non-registered account, you must assess the tax impact when comparing potential investment returns to mortgage interest savings. If you’ll be contributing the funds to your Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP), the tax advantages can help you come out ahead. Your TFSA gives you tax-free growth and withdrawals, and your RRSP provides tax-deferred growth and an annual reduction of your taxable income equal to your contribution amount.

Choosing both 

When you have extra funds available, wondering about paying down your mortgage versus investing the money doesn’t need to be an either-or decision. One choice is to divide your funds between helping meet both goals. Another method is to contribute as much as you can to your RRSP, and apply your tax refund or the amount of your tax savings to your mortgage principal.

Choosing between your mortgage and investing can involve other financial and personal factors, including market conditions, your age, your liquidity needs and your retirement income sources. So please talk to us for guidance in making your decision.