Tough choice: Pay mort­gage down faster or in­vest?

For a con­ser­va­tive in­vestor, it is prob­a­bly bet­ter to whit­tle away at the mort­gage

The Hamilton Spectator - - BUSINESS - DAVID HODGES

TORONTO — Juan Pablo de Dovi­tiis finds him­self grap­pling with the peren­nial per­sonal fi­nance chest­nut of whether he’s bet­ter off pay­ing down his mort­gage faster or in­vest­ing in­stead.

With mort­gage rates sit­ting near record lows, the 40-year-old Toron­to­nian fig­ures the re­turn on his in­vested dol­lar should ex­ceed the guar­an­teed sav­ings from mak­ing ad­di­tional pay­ments on his home.

But with many ex­perts warn­ing rates will rise in Canada in the com­ing years — as high as a few per­cent­age points, sug­gests Desjardins chief economist François Dupuis — de Dovi­tiis won­ders if chip­ping away at his mort­gage is the smarter bet.

“Pay down my mort­gage or in­vest,” he says. “How do I find out what’s the best course of ac­tion?”

Ja­son Heath, a fee-only fi­nan­cial plan­ner with Ob­jec­tive Fi­nan­cial Part­ners in Markham, Ont., says in the­ory in­vest­ing should win out over debt re­pay­ment pro­vided you’re a long-term, ag­gres­sive in­vestor. But that’s not nec­es­sar­ily the case in prac­tice.

“Over the long run if you look back his­tor­i­cally, stocks have re­turned a higher per­cent­age than the av­er­age mort­gage rate in Canada — but not ev­ery­body is go­ing to be 100 per cent in­vested in stocks and stay in­vested, or not sell out at the wrong time,” Heath cau­tions.

Un­like a con­ser­va­tive in­vestor who favours fixed in­come in­vest­ments such as bonds or GICs, he says, a more ag­gres­sive in­vestor — or some­one with no less than 50 per cent stocks in their port­fo­lio — will be more likely, though not guar­an­teed, to net a higher re­turn.

“But some­one with a low risk tol­er­ance should just pay down the mort­gage,” Heath says. “It’s a high guar­an­teed rate of re­turn even if your in­ter­est rate is only three per cent.”

Those pri­or­i­tiz­ing in­vest­ing also need to con­sider the fees they pay, says port­fo­lio man­ager John De Goey of In­dus­trial Al­liance Se­cu­ri­ties in Toronto. A low-cost ETF in­vestor with a man­age­ment ex­pense ra­tio un­der one per cent will more likely net bet­ter re­turns than the av­er­age mu­tual fund in­vestor with an MER in ex­cess of two per cent.

“Cost is a re­ally im­por­tant con­sid­er­a­tion when you do your in­vest­ing be­cause it is prob­a­bly the most re­li­able de­ter­mi­nant of how you do,” says De Goey.

“The more prod­ucts cost the lower your re­turn is be­cause costs eat into re­turns.”

An­other key con­sid­er­a­tion is whether you have con­tri­bu­tion room avail­able in RRSP or TFSA ac­counts, De Goey adds, as you’ll see the added ben­e­fit of tax re­funds or tax-free growth.

“Are you in­vest­ing in an RRSP or TFSA? … Or are you in­vest­ing in a tax­able ac­count?” he says. “Be­cause ob­vi­ously if you’re in a gov­ern­ment pro­gram, it shifts the ful­crum to­ward us­ing that gov­ern­ment pro­gram.”

“Non-reg­is­tered ac­counts are prob­a­bly the least ben­e­fi­cial place to in­vest when you have a mort­gage,” Heath adds.

One fi­nal fac­tor that should never be over­looked, Heath says, is the length of your amor­ti­za­tion and risk of de­fault.

“If you had a longer amor­ti­za­tion pe­riod left and you don’t have a lot of eq­uity in your home — es­pe­cially if you’re a new home­buyer who was stretched to the max when you bought it — those are the peo­ple that should con­sider mak­ing ex­tra pay­ments in the case of a job loss, or the death or dis­abil­ity of a spouse,” he says.

“It’s those peo­ple who want to en­sure that if they had a neg­a­tive event that they could still stay in their house. If they had home eq­uity, they could po­ten­tially re­fi­nance their mort­gage with lower pay­ments and be OK.”

TORONTO STAR FILE PHOTO

With mort­gage rates at his­tor­i­cally low lev­els, some home­own­ers may de­cide to put money into in­vest­ments rather than pay down their mort­gage faster.

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