Invest or repay a mortgage?

Classic. In the past, financial institutions’ advertising campaigns have developed around the question: should I invest money or pay off a mortgage?

When mortgage rates barely exceed 2%, we don’t bother with calculations. It seems that investments are imposed by themselves.

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

How to approach this dilemma in modern conditions?

Alternative cost

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

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

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

If I speed up the repayment of my mortgage to 2%, I avoid low interest rates, but give up higher profits without investing my money at 6%.

Now let’s add some variables.

taxation

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

When we decide to repay a debt, the interest that has been avoided remains in our pockets. It’s like tax-free income.

If you prefer to invest your money in a security that generates an equivalent interest rate, you will have to deduct tax if the investment is not included in the TFSA (non-taxable savings account).

Therefore, estimating the opportunity value by comparing a GIC (guaranteed investment certificate) or a bond and a mortgage is not easy.

The comparison becomes even more difficult when we include stocks in the equation, and therefore capital gains and dividends, which are taxed to a lesser extent.

Investor profile

On the risk scale, mortgage prepayment is 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 I place my money in a so-called “balanced” portfolio consisting of stocks, bonds and guaranteed securities.

When I decide to put my money in a mortgage instead of a portfolio, those dollars are concentrated in a “conservative” asset class that doesn’t quite fit my investor profile.

Theoretically, if you accelerate the repayment of the mortgage, you should slightly increase the share of shares in your portfolio. However, taken to the extreme, this logic leads to a dead end: a “balanced” investor can get a fully paid house on the one hand and a 100% portfolio of “shares” on the other; it doesn’t work.

Remember all the same: the haste of the mortgage corresponds to the “prudent” choice of investment and changes its asset repair.

Debt level

A household for which the mortgage burden is too heavy for the budget will want to cut interest expenses before earning a profit for retirement. We understand that.

Rising interest rates, of course, leads to a revision of its calculations for the most indebted families.

Given what is happening in the stock market today, many will see a reason to retreat to their real estate to mitigate the level of risk. It is tempting to want to help repay a mortgage instead of investing new money in your portfolio.

If this decision can improve your sleep, I have no arguments against you.

However, let me remind you that the most profitable long-term investments are those made in the low periods that we are currently experiencing.