Should You Pay Off Your Mortgage Early Or Invest?

One of top priorities for many Canadians is to pay 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 ramp up their savings before retirement.

To reach mortgage freedom faster, you can capitalize on today’s low interest rates by accelerating your mortgage with extra monthly contributions or lump-sum payments.

Related: How to pay off your mortgage faster

But homeowners should look at the pros and cons of paying off their mortgage debt early versus taking a slower approach and using the excess cash for other investments.  Here’s why:

Low Interest Rates

With recent changes to 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 investments.

Related: How much house can I afford?

The expected return on equities has historically been around eight to 10 per cent.  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.

If you can earn two or three per cent 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 five or 10 years early, we’re neglecting our investments for far too long.

Related: Why baby boomers aren’t prepared for retirement

Instead of putting all your money into one asset – your home – take a balanced approach to build up your savings and other investments.

Pay Off Mortgage Early Or Invest?

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.

Final thoughts

I’m taking a balanced approach by putting an extra $800 a month on our mortgage on top of our regular monthly payments, saving $800 a month in our tax free savings accounts and investing $400 a month in my RRSP.

I’ll still pay off my mortgage early, but it will take about 10 to 12 years to be completely mortgage free.  Being mortgage free before I’m 45 gives me plenty of time to ramp up my investments for another decade or two before I retire.

What do you do with your extra money?  Do you want to pay off your mortgage early or build up your investments?


22 Responses to Should You Pay Off Your Mortgage Early Or Invest?

  1. Hi Echo,

    Great article with some interesting points. I’ve known for a long time and put in practice the idea of maximizing your gains (for example: other than an emergency fund there’s little point in having loads of cash in an account making 1.5% interest if you’re carrying consumer debt gaining 10%). I’ve never looked at it in regards to a mortgage rate however. We locked in at 2.99% for 5 years just this past Spring, with plans of paying it down sooner than 25 years. But paying down a mortgage (that’s not overly large, lucky us) with 2.99% versus building 8-10% with our investments over the next 4.5 years is something to look at. :)

    We have much the same approach as you described – balanced. We have no consumer debt, and split our money between paying off the mortgage, TFSA contributions and RRSPs. The reason I wouldn’t want to only do the minimums towards the mortgage though, is that we’re sure 2.99% won’t be around when we renew in 5 years. So any extra we can pay down now helps lower the principle and will help when rates inevitably go up.

    • @Rob – Good point that those low rates likely won’t be around in five years. That’s why I recommend looking at this decision every few years as you renew a new mortgage term and the market conditions change, as well as your own financial situation changes.

  2. I was looking into this for some time, but then my wife and I decided that we wanted to move in the next year or so. I didn’t see if financially smart to pay down the mortgage, when I could be using the money to invest and save. Great article.

  3. As I near retirement, I am trying to pay off my mortgage in time for retirement. Up to now, I always compared the interest rate I was paying to what I could achieve as a return on investment. If the ROI was higher it was a no brainer. As retirement gets closer (within 5 years), I am changing my philosophy. It helps that I have sufficient investment funds.

    • My DH retired some time ago, and I will retire in the next 4 – 8 years (unsure how much I want to leave work where they treat me very well!). Reducing expenses is the priority at this point. Paying down the mortgage within 3 – 3.5 years is a good option for us. It still returns more (after tax) than investing in other guaranteed instruments.

  4. We are 3 years 8 months into our first 5 yr term mortgage and have the cash now to pay the mortgage in full. Although we haven’t done that yet we will do it in early 2013 and break the mortgage. Once we pay it in full the almost $1500 a month we put on the mortgage each month will go to TFSA and RRSP investments. I know the rates are low on the mortgages and we thought about what we should do and right now we believe paying the mortgage off will be best and pouring money into other ventures thereafter. Great Post!

    • Consider getting an investment loan to accelerate your portfolio. The interest on the loan is tax deductible (at your marginal tax rate) and if you feel you can get a better return than the investment loan then you should stay ahead. If the loan charges 3.75% interest and you think you can get 4.5% retourn on your investments then you stay ahead. It is like converting your mortgage into a tax deductible mortgage. You’ll need to secure the loan with your house or some other asset, but it is worth considering. I used this strategy for a few years and it was a great way to accelerate my portfolio. If your portfolio is invested in dividend paying stocks you can always use the dividends to service the loan.

  5. Current low rates are a huge gift (and one that has resulted in pretty insane housing prices). Now that I’ll have a mortgage and a low five year rate of approx 3%, my focus will be on getting the principal paid off so I won’t need to renew it at a much higher rate in 2018. Every dollar I put on the mortgage has a guaranteed, after-tax return of 3%. In today’s low-rate environment, that’s an impossible return for riskless investments.

  6. Our current focus is so far from mortgage pay off it isn’t even funny. We really need to concentrate on paying debt off right now but we’re not even 30 yet so have time (as fast as it may go!) but when the time does come, I’ll have a more balanced approach like you- a little extra on the mortgage as well as TFSA and RRSP contributions.

  7. I do not have a mortgage but just a HELOC. I am never sure how much to be paying toward debt versus savings.
    I am in my late 40s so I think that I should be concentrating on eliminating my debt and saving towards a larger emergency fund so that I never increase my debt. Does that sound right?

  8. Great post with some interesting comments.

    Personally I am paying off my mortgage faster. I am on 5 year fixed at 3.55%. My thinking is that it is guaranteed return of 3.55% with no risk and also interest rates are going to go up at some point of time. I would rather have smaller mortgage balance when my mortgage is up for renewal in 1.6 years with interest rates going up. I always max out on my RRSP. I have no other debt. I have knocked off 95K off from my principal amount in 3.5 years. I would like to be mortgage free in next 6 years (when I will be 45). I still have $209K balance. I know it is not going to be easy.

    Wish me good health and luck

  9. I’m in the pay-it-off category. There’s a few reasons, one being the difficulty in achieving such a high guaranteed, riskless return elsewhere. Another is the fact we will likely end up moving to a much more expensive real estate market in the next few years, so having a large amount of capital available that does not require liquidation or tax hits will be very advantageous. I find security in knowing we can survive on two minimum wage jobs and reducing liabilities is key to that. Finally, paying so much now sets us up to be disciplined savers for a long time. We’re on track to be paid off within our first 5 year term :-)

  10. The choice of paying off your mortgage is different for every individual. If you have a steady job with a defined benefit pension plan, it probably makes more sense to pay down your mortgage since a lot of your retirement money is already provided by your employer. If you’re single and have a huge mortgage, it probably makes sense to pay down your mortgage, as mortgage rates are unlikely to be this low in 5 years when you renew. Why thumb your nose at a guaranteed rate of return from paying down your mortgage when investments are anything but guaranteed?

  11. This is an argument that I’ve heard on many blogs and it’s very personal. I think that not paying it off given the chance can be risky in that you never know which way interest rates are going to go. On the other hand, that can be the same for investing.

  12. Great post and great comments!

    I am in the camp of paying the mortgage faster. Mostly because interest payments are up front, interest will rise eventually and investing doesn’t offer a guaranteed return. I find the comparison should not be about today’s rate but about the next 10 to 20 years to really understand the impact of choosing one over the other.

    On the other hand, I find it has to do with your ability save and pay and the risks in between. Will the family income go down? Are you at risk of employment? Will the family grow? These are all important questions to ask and consider.

    It’s almost like deciding whether or not you should do the Smith Manoeuvre … It all revolves around your debt servicing ability over time.

  13. Great article and great points.
    This is actually quite timely for my parents situation. I help with my parents bills and help/guide them through their finances (they don’t have much to manage really. Their biggest asset is their house but there is still a sizeable mortgage on it). Your article helped me clarify what I believe their priorities should be at this point…paying off their mortgage = guaranteed ROI. Thank you.

  14. I am looking at divorcing…i have RRSPS, pension and money in tax free account. Therefore i want to buy a house and if i have enough for to pay the whole mortgage should I. Some say yes and other’s say invest but if i don’t have a mortgage every month then i can save. What is your take??

  15. Taking money from your RRSP hurts badly at tax time. I had to take $5000 from my RRSP two years ago to pay for an emergency home repair and it was very painful come tax time.
    Is there a way that you can pay off the mortgage without touching your RRSP then begin saving to invest?

  16. Great post and very timely for me stumbling upon it at this point. We are just finalizing our 2013 discussion on house payments and part of that discussion was how much to put down on our mortgage to start putting a bigger dent in it. Diversifying is definitely a popular word in our household and you’ve given us a bit more to think about!

  17. The idea of your home being just one aspect of a diversified portfolio is interesting. My husband and I have put almost our entire RRSPs and the kids’ RESPs into equities (growth mutual funds). I wasn’t sure whether to focus on the mortgage first, or invest money, but after reading your article, I am now thinking that paying off the mortgage is like a fixed rate investment which would actually improve our diversification!

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