Debateable Mortgage Topics

The Best Investment?

It’s NOT a Stock or a Bond

Paying off your mortgage is the best investment you can make. Period.

Why, you ask? With today’s low interest rates, it is pretty hard to find an investment that is guaranteed to yield a higher after-tax return than you would get by paying your mortgage down, the selective words here are “guaranteed” and “after tax dollars”.

For example, if you have a fixed rate mortgage at 4% (you can get lower right now) for a five year term, for every $1000 in principal, you are paying $40 in interest annually. If you make a lump-sum payment of $1000 you will be saving yourself $40 in interest for an effective after tax return of 4%. It’s even better when you consider what you’d have to make on a taxable investment to generate the same return.

If you’re in the 40% tax bracket, for example, you’d have to earn 6.7% on a GIC to end up with 4% after taxes. Remember, we’re talking about guaranteed returns. It is possible to do better in the stock markets, but you can also do a lot worse. Paying off your mortgage is different because the return is risk-free.

This raises the question: If the math is so positive, why don’t more people focus on paying off their mortgages early? David Trahair, an accountant and author of Enough Bull, says the wealth management industry has a vested interest in encouraging clients to accumulate financial assets. After all, the more assets a client has, the more the adviser makes in fees and commissions.

If you pay off your mortgage aggressively, you will not have much liquidity left to invest with them!

Unlike in the United States, mortgage interest in Canada is NOT tax-deductible, which is another reason it makes sense to focus on becoming mortgage free as early as possible.  Of course fiddling with the assumptions, one can make paying off the mortgage look like a terrible idea.  If one assumes, for example, that the stock market will generate returns of 10% annually, then investing in stocks is the way to go.  But that’s all it is, an assumption.  If you’re prepared for the risks, then try it.

Once your mortgage is paid off you can always borrow against it again via lines of credit and invest that money.  If you earn investment income from that cash, the interest then would indeed become tax-deductible.  For emergencies a line of credit will more than suffice.

The benefits of focusing to pay down your mortgage are many, financially and emotionally.  It gives you a goal to work toward, while forcing you to save.  There are many different strategies available that will assist you in truly paying down your mortgage quicker.  I’ll get into those in another blog on another day.

Next time you’re considering which investment you can get the highest and safest return, look around you.  Its in your home.