Pay mortgage or invest

Pay mortgage or invest?

If you have cash on hand, you might be wondering if interest rates have soared, paying off your mortgage earlier might be a good idea. Before you act, read the following.

Homeowners with adjustable rate mortgages are concerned, and with good reason!

Because since March 2022, the Bank of Canada has raised its key interest rate several times, which has had a profound effect on mortgage rates.

So it is not uncommon for households to have to spend several hundred euros on their monthly repayment.

Those who have taken out a fixed-rate loan but need to roll it over in the coming months are concerned about the imminent expiry and the undoubtedly associated rise in interest rates.

In these conditions, many are wondering whether they should try to pay off their loan faster, especially by prepaying if their financial institution allows it.

With the stock market performing unfavorably for investors in 2022, investing cash appears less appealing.

However, Nicolas Karaoglanian, wealth advisor at the FDP, calls for reflection.

Start with tax breaks

According to the consultant, there are some basic principles to follow to guide his decision-making. From the start, he points out that in order to access a mortgage loan, homeowners generally have a job that gives them an income in excess of $50,000 a year.

However, for this income bracket, the total tax rate is 37.12%, up to $90,000. Therefore, before thinking about paying off your mortgage faster, it is best to use tax breaks, especially RRSPs, to reduce your tax burden. “We have to work on both sides of the balance sheet, on the one hand by reducing taxable income and on the other hand by maximizing long-term net worth for retirement,” assures Nicolas Karaoglanian, adding that many people tend to underestimate the powerful leverage of compound interest .

After you’ve maximized your RRSPs, it’s also a good idea if you have children to contribute to their RESPs, especially since you can benefit from government grants.

Do you have any cash left? In this case, consider topping up your TFSA, the amounts of which (investment income and capital gains) are tax-free on withdrawal. “That can make a big difference in retirement,” says the consultant.

Prioritize investments

If we have certain amounts left, on what elements can we base our decision to repay or invest?

“There are several questions to ask as it is generally case by case. It depends on the risk tolerance, age, health status, etc. of the person. ‘ he enumerates. If you have a low risk tolerance, you may be more inclined to prepay on your mortgage. However, it is preferable to primarily consider the return on investment versus the benefit of faster mortgage repayment. Because with our longer life expectancy, good retirement provision and the income you can count on at this point in time are more important than ever.

So if you’ve already maximized your tax benefits, you may want to consider investing what you have left. You should know that more conservative and safer investments like bonds offer lower returns than stocks.

If you have a good appetite for risk and are a long way from retirement, a more dynamic portfolio of 60%, 70% or 80% stocks could be considered. Historically, equity markets have always shown attractive returns over the long term, even if some years have been more difficult.

Finally, if you’re concerned about the idea of ​​still having a mortgage balance to pay off in retirement, Nicolas Karaoglanian has reassurance.

“Retirement without a mortgage is an old adage that doesn’t really apply anymore. A mortgage in itself is not a bad debt. Above all, debts such as credit card debt should be avoided and liquidated before leaving the labor market,” he recommends.