Invest or pay off a mortgage?

Classical. Advertising campaigns for financial institutions in the past have been designed around the question: Should I invest my money or pay off my mortgage?

When mortgage rates are barely above 2%, we don’t bother with the calculations. The investment seems to be being forced.

But when those same rates approach the 5% mark, the problem suddenly becomes more complex. The analysis deserves a little clarification.

How to approach this dilemma in the current environment?

Opportunity cost

The main problem here again is what is called opportunity cost.

When I invest my money somewhere, I cannot use it for anything else that can be more profitable.

The extra income I leave on the table is the opportunity cost.

If I speed up my mortgage payment to 2%, I’m avoiding low interest rates but forgoing higher returns by not putting my money at 6%.

Now let’s add some variables.

Taxation

We do not insist enough on this point when we immediately reject the “mortgage” option: tax.

When we decide to pay off the debt, the lost interest remains in our pockets. It’s like tax-free income.

If you prefer to invest your money in securities that earn an equivalent interest, you will have to deduct tax unless the investment is inside a TFSA (Tax Free Savings Account).

Thus, estimating the opportunity cost by comparing a GIC (Guaranteed Investment Certificate) or a bond and a mortgage is not that easy.

The comparison becomes even more complicated when we include stocks, and therefore capital gains and dividends, which are less taxed in the equation.

Investor profile

On the scale of risk, mortgage prepayments are at a more conservative level. We must keep this in mind, because this choice affects the distribution of assets.

Suppose I have a “balanced” investor profile and place my money in what is called a “balanced” portfolio of stocks, bonds, and guaranteed securities.

When I choose to invest my money in a mortgage rather than my portfolio, those dollars are concentrated in a “conservative” asset class that doesn’t quite fit my investor profile.

Theoretically, if you speed up your mortgage repayments, you should slightly increase your share of stocks in your portfolio. However, taken to an extreme, this logic leads to a dead end: a “balanced” investor can receive a fully paid house, on the one hand, and a 100% “share” portfolio, on the other; this does not work.

Remember though: the rush to pay off the mortgage corresponds to a “smart” investment choice and changes its asset repair.

Debt level

A household for which the burden of a mortgage loan is too heavy on the budget will want to cut their interest expenses before generating income for retirement. We understand this.

The rise in interest rates will certainly lead to a revision of his calculations for the most indebted families.

With what’s going on in the stock market right now, many will see an excuse to go into their real estate to reduce risk. It’s tempting to want to contribute to the repayment of a mortgage rather than pour new money into your portfolio.

If this solution can improve your sleep, I have no argument against you.

However, I remind you that the most profitable long-term investments are those made during periods of recession, such as the one we are experiencing right now.