Should you pay off mortgage instead of investing?

Derek, I’m wondering if it makes sense to pay off my mortgage instead of investing?

Derek, I’m wondering if it makes sense to pay off my mortgage instead of investing?

It seems that every week I have this same question posed to me, so certainly you’re not the only one wondering. My answer is the same whenever this question comes up and the answer is always: It depends on you. Let me explain.

The first part to consider is the math behind it all. The reality is that if you have a mortgage at an average rate today of around three per cent, any dollar that you put towards it will “save” you three per cent on that dollar.

Now if you have to make a decision as to where to put that dollar and you feel you can earn greater than three per cent by investing, it makes sense to invest. The math is pretty straightforward, but also not that simple. Any time you consider investing you need to determine what your “net” return is — essentially what have you made once the tax man collects. Taking another look at it, if you earn three per cent on an investment in a taxable account, you really have only earned 2.25 per cent (assuming a tax rate of 25 per cent).

So in that same example, it would have made better sense to pay down your mortgage. Using that same tax rate, you need to earn at least four per cent on your investment to justify investment versus paying down your mortgage. Put another way, earning four per cent on a dollar is equal to saving three per cent interest. If you’re investing in a tax-free account, like a tax free savings account (TFSA), then that may make investing more favourable. The next part to consider is what will interest rates do moving forward.

In the example above, if you would find yourself financially constrained if your mortgage rate went from three per cent to five per cent at your next renewal, it makes sense to pay down your mortgage more aggressively. Or, perhaps you invest that additional dollar (so long as you’re earning at least four per cent), and then take your investment and pay down your mortgage with your earnings at maturity.

With this in mind, the rate of interest is a factor that is known; this won’t change until maturity. The return on your investment is likely unknown, but has the potential to be higher than four per cent This is something that one needs to consider when looking at these numbers.

Another part to consider is whether the interest on your mortgage is tax deductible. Just like the equation above regarding the taxation on your investment earnings, if the debt is essentially a write-off, or an expense for you, it may not make sense to pay down the mortgage aggressively.

This may be the case if the mortgage is on a rental property, but be sure to discuss this with a qualified accountant. The final part to consider is how you feel about having debt. I’ve met many people who would simply rather not have any debt, and I don’t think there is anything wrong with that thinking. Put another way, even if the numbers make sense to invest rather than pay down your mortgage, but you simply cringe each time you look at your mortgage, it may be best to pay it down as quickly as possible.

There are others who don’t mind having mortgage debt and focus all of their attention towards investing. There is no magic formula here and it simply comes down to your personal preference.

Where I typically guide clients is to consider both options. There are many strategies that may apply, with the example being paying down your mortgage aggressively, but directing some cash flow to an investment. For some clients, they invest aggressively to their registered retirement ravings plan, and then use their tax return to pay down their mortgage. Others use their TFSA as an investment account for their future mortgage payout. These are only two small examples and I would suggest speaking with a qualified financial adviser to see what may work best for you.

Lastly, before you consider either choice, be sure to check the rate on your mortgage, contemplate about how you feel about investing for the long term, and decide if you’re the type who can’t stomach any kind of debt. Once you decide on those factors, have a talk with a qualified financial adviser and move forward with your choice. A little planning can go a long way.

Derek Fuchs is a wealth adviser with ScotiaMcLeod in Red Deer, and a certified financial planner, financial management adviser and a fellow of the Canadian Securities Institute. He can be contacted at

Just Posted

SUV smashes through fences and deck in Anders

Driver taken to hospital after SUV veered off 30th Avenue into Anders

Red Deer’s new ‘equity co-ordinator’ will promote tolerance

Andrea Lacoursiere was hired by city with Alberta Human Rights funding

More bridge work this summer in Red Deer’s Coronation Park

The park’s north bridge is being rebuilt to ensure safety

Man badly injured in off-road vehicle collision on Saturday

Incident happened in Mountain View County about 10:50 p.m.

Heat warning in effect for Central Alberta

Environment Canada has issued a heat warning for Central Alberta. Residents in… Continue reading

CFIA inspects after video shows pigs crammed into B.C. transport truck

The video shows pigs piled on top of one another in a transport truck on a “sweltering” hot day last week

‘City of icebergs:’ Study says 100s of Arctic glaciers shrinking, disappearing

The statistics in her recently published paper say it all: hundreds of… Continue reading

U.S. hits back with WTO challenge against Canada’s retaliatory tariffs

OTTAWA — The United States fired back Monday at the Canadian government’s… Continue reading

Croatia gears up to give heroes’ welcome to World Cup team

ZAGREB, Croatia — Fans are pouring in from throughout the country as… Continue reading

Statelessness a hurdle for some rescued Thai boy

MAE SAI, Thailand — The 12 boys and coach of the Wild… Continue reading

Lobbying commissioner rejects complaints against firearms panel member

OTTAWA — A federal watchdog has dismissed complaints that a mass-shooting survivor… Continue reading

CREA reports June home sales down 10.7% from year ago, but up from May

OTTAWA — The Canadian Real Estate Association says the number of homes… Continue reading

Red Deer Royals place second at Calgary Stampede parade

Royals depicted life in forest and portrayed destruction by human beings

Muslim candidates running in record numbers face backlash

SPRINGFIELD, Mass. — A liberal woman of colour with zero name recognition… Continue reading

Most Read

Five-day delivery plus unlimited digital access for $185 for 260 issues (must live in delivery area to qualify) Unlimited Digital Access 99 cents for the first four weeks and then only $15 per month Five-day delivery plus unlimited digital access for $15 a month