Pros and cons of faster mortgage repayment

By Robb Engen, The Toronto Star

Being mortgage free is a top priority for many Canadians. According to a recent poll conducted by CIBC, current mortgage holders 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. But homeowners should look at the pros and cons of paying down their mortgage debt quickly versus taking a slower approach and using the excess cash for other investments. Here’s why:

With recent changes to mortgage rules and record low interest rates, now might be the right time to carry long-term mortgage debt while you concentrate on building up your investments.

The expected return on stocks 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.

Rather than putting all your money into one asset - your home - take a balanced approach to build up your savings and other investments.

To pay it off, or not to pay it off?

“This is something homeowners should ask themselves every few years as their financial situation changes,” says Bob Stammers, Director of Investor Education at the CFA Institute.

The answer is different for everyone. If you have consumer debt or more pressing financial needs, you need to take care of that first. Some people are risk averse and will always be better off paying their house off faster. Others have a higher risk tolerance and feel more comfortable with investing.

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