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My mortgage: Should I pay it down or invest?

December 30th, 2006

by Ron Lambert, CFP
The Financial Planning Group Inc.

This is a question often asked of Financial Planners and it’s a difficult one to answer! Let me begin with the following comment: It is always a good idea to pay down debt, because debt is paid with AFTER TAX dollars.

Having said this however, there are certain things that should be taken into account before making this important decision.

Suppose that, through saving or perhaps an inheritance, you have accumulated $50,000. The mortgage is $50,000 and so it seems an easy decision. Pay off the mortgage. Simple! Or is it? $50,000 placed in a solid income-producing mutual fund should average about 10% per year. In other words, the $50,000 should produce about $5,000 per annum before tax.

A $50,000 mortgage with the usual amortization and about 10% interest should cost about $500 per month or $6,000 per year. Why not invest the $50,000, and have the earnings pay the mortgage? O.K., I know that amounts to only $5,000 per year. What about the other $1,000, you ask? Well, can you afford about $100 per month in order to make up the difference?

Chances are you can, and if so you still have the $50,000 when your home is paid off because you have spent only the earnings. Had you paid off the mortgage in the first place, the $50,000 would now be gone.

On the other hand, it may be prudent for you to pay off the mortgage. Suppose you had contributed regularly into an RRSP, thus ensuring a financially secure retirement. In this case, paying down the debt might make good sense.

This might also free up more money per month to allow for higher RRSP contributions.

Other considerations are your age and that of your spouse and dependents. When do you want to retire and what kind of income will you need at that time? What is your present financial situation? The considerations are many and varied and a Financial Planner will ensure that you are aware of all the options. Probably the most important of all these considerations is what do you really want to do?

The bottom line here is that there are no hard and fast rules. Each situation is unique. A Financial Planner will not make up your mind for you. The Planner will be able to give you solid advice to enable you to make an informed decision. Once your are aware of all your options, the right decision will usually be obvious.

I would be pleased to answer this, or any other question, you may have regarding your investments.

Entry Filed under: Financing