It’s a long-running debate: What’s the best way to get the most from your hard-earned dollars?
You have debts to pay, retirement savings to pad, and an investment portfolio to build.
If you find yourself with a bit more money than expected — maybe because you’re spending less while hunkered down during the pandemic — you have options for how to use that extra cash flow.
There’s no one-size-fits-all approach. You have to consider your appetite for risk and your long-term goals.
Timing can also play an important role. Today, mortgage rates are near all-time lows while stocks continue to reach new highs.
Which is why many people are asking themselves: Should I use it to pay off my mortgage or invest in the stock market? Here are some pros and cons to help you with that decision.
Option 1: Pay off your mortgage early
Let’s make the math easy, and presume you’re not buying in a major city that’s experiencing record price appreciation:
- You borrow $200,000 on a 25-year loan.
- Your interest rate is level at 3 per cent.
- Your mortgage loan payment is $946.50 per month.
- If you increase your mortgage payment by an extra $1,000 per month, the Government of Canada’s mortgage calculator shows you’ll pay off your mortgage in 10 years and save $52,738 in interest — that’s a big number.
Pros:
- Peace of mind: Paying off your mortgage brings comfort and helps some homeowners sleep better.
- Less financial risk: Mortgage payments can feel burdensome when trying to take on other financial risks.
- Cash flow flexibility: Paying down your mortgage frees up cash for other debts like credit cards or student loans.
- Equity building: Paying down your mortgage builds equity, which could be helpful for the future.
Cons:
- Cash liquidity: Paying too much towards your mortgage could reduce the real cash you have access to.
- Missed opportunities: By focusing on your mortgage, you could miss out on higher returns from other investments.
Option 2: Invest in the stock market
Let’s compare how much you can earn by investing instead of paying off your mortgage early.
- Instead of adding $1,000 every month to your mortgage repayments, you invest that money for 10 years.
- The long-term annual return rate on the S&P/TSX Composite Index was 9.3 per cent per year between 1960 and 2020.
- In total, you’d earn $193,453 before taxes, according to an investment returns calculator.
Pros:
- Higher returns: You could potentially earn $193,453 by investing, while only saving $52,738 in interest by paying off your mortgage early.
- Tax benefits: Investing in an RRSP can offer tax-sheltered gains.
Cons:
- Risk: The stock market is not guaranteed, and there’s always a possibility of loss.
- Certainty of savings: Paying off a fixed-rate mortgage offers guaranteed savings, while investing comes with risk.
Weigh your options and decide what helps you sleep better at night while still achieving the financial gains you’re aiming for.
