Should You Pay Off Your Low Interest Mortgage Early Or Invest?
Many Canadians have the same financial goal: Be debt-free. Most choose to do this by to paying off their mortgage early. A recent survey showed that current homeowners believe they'll be mortgage free by the time they're 55, which leaves a short window of opportunity to beef up their savings before it's time to retire.
To be mortgage free faster, you can capitalize of on today's historically low interest rates by accelerating your mortgage with bi-weekly or doubled up payments. Or take advantage of your anniversary/annual lump-sum payment privileges. This is why it's so important to know the fine print of what you are signing when you commit to your mortgage; all those details are very important!
You should always examine each situation considering all possible outcomes. Homeowners should look at the pros and cons of paying off their mortgage debt early versus taking a slower approach and using that extra cash for other investments.
With recent changes to Canadian mortgage rules and record low interest rates continuing for the foreseeable future, now might be the right time to carry long-term mortgage debt while you concentrate on building up your other investments. You never want all your eggs in one basket. Especially when you use that basket as shelter!
The expected return on equities has historically been around 8- 10%. While paying off your mortgage is a guaranteed, risk-free return, the low cost of borrowing means there's potential to earn higher returns by investing in a balanced portfolio.
Think about it. If you can earn 2-3% MORE by investing instead of paying off debt, the compounded returns over a few decades can really add up.
We also need to diversify our investments! Real estate makes up the largest chunk of our net worth, but most of us have nothing else to show for it. By sinking every available dollar into our mortgage in order to pay it off 5 or 10 years early, we're neglecting our investments for far too long.
Instead of putting all your money into one asset – your home – take a balanced approach to build up your savings and other investments. I invested my money with Corey Ferrier at Investors Group & you should too!
Homeowners should consider this question every few years as their financial situation changes. The answer will be different for everyone. If you have consumer debt or more pressing financial needs, you need to take care of that first before even thinking about doubling up your mortgage payments or adding to your investments.
Some people are risk averse and will always be better off paying down their mortgage as quickly as possible. If you'll sleep better at night by taking less risk and living debt free then do it. Others have a higher risk tolerance and feel more comfortable with investing, and even borrowing to invest to further boost their assets.
I'm taking a balanced approach by putting an extra $200 a month on my mortgage on top of my regular monthly payments, saving $200 a month in my tax free savings account and investing $100 a month in my RRSP.
What do you do with your extra money? Save or splurge? Do you want to pay off your mortgage early or build up your investments? I'd love to hear about your challenges and successes! Call/text/email me anytime!
Also, give Corey Ferrier a call! It's never too late to start investing.