Should you focus on paying the mortgage off and invest later or focus on investing while paying down the mortgage more gradually?

Let's look at both scenarios while highlighting proven payment strategies:

Focus on paying your mortgage first 

Strategies to reduce your total borrowing costs:

1. Use a mortgage broker to find a very competitive mortgage rate and terms for your situation.
    
2. Enroll in bi-weekly, accelerated payments to increase the mortgage payment frequency.
    
3. Reduce your mortgage amortization period over time (i.e., start with 20-years; reduce to 15-years after the first mortgage term is up.
    
4. Make a few lump-sum payments early in the mortgage payment schedule to put down more against the outstanding principal owed.²

The lower the amount borrowed + the more frequent the payments = the less interest you'll pay

The graph below compares different payment schedules, showing your mortgage payment, final total payment with interest cost.

https://mortgageintelligence.ca/assets/calculators-mi/CAMortgageLoan.html

*Accelerated weekly and accelerated bi-weekly payment options are calculated by taking a monthly payment schedule and assuming only four weeks in a month. We calculate an accelerated weekly payment, for example, by taking your normal monthly payment and dividing it by four. Since you pay 52 weekly payments, by the end of a year you have paid the equivalent of one extra monthly payment. This additional amount accelerates your loan payoff by going directly against your loan's principal. The effect can save you thousands in interest and take years off of your mortgage.¹

*The accelerated bi-weekly payment is calculated by dividing your monthly payment by two. You then make 26 bi-weekly payments. Just like the accelerated weekly payments you are in effect paying an additional monthly payment per year.¹

If you are paying your mortgage on an *accelerated bi-weekly schedule your mortgage would be paid off in 22 yrs. and 4 months.

And, your savings compared to a monthly payments schedule would be $25,088 ($699,070 - $673,982) which is greater than what you would earn with some lower-risk investments.

The main advantage to paying off your home is debt freedom. The sooner your mortgage debt is paid the sooner this money will go to you. You can use the new cashflow for your retirement savings, your child's post-secondary education, or simply invest in you.²

Note: The GTA average home prices has gone up 335% in 23yrs 8months (from the start of data collection in January '96). Assuming this trend continues, a $500,000 home could be worth $2,175,000 in 23 yrs. Therefore, you could make $1,675,00 on the sale of your house after 25 yrs.

Investing

The longer your money is working for you, the better.

Let's compare the investment strategy for 2 people. One is 25 yrs. old and the other 40.

They both start with a deposit of $1000.

The 25yr. old automates $500 per month towards his Tax-Free Savings Account (TFSA) for 4 decades.

The 40yr. old automates $1000 per month towards his Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) to play catch-up.

The 40yr. old cannot come close to the 25yr. old's wealth even if he doubles the contributions.

When not to pay off your mortgage first

When borrowing costs are cheap - as we find ourselves in currently. Since mortgage costs are low there is no urgency to kill debt aggressively. Use the extra funds to invest in long-term equity investments which should outperform low-interest rate mortgage payments.

However, maintain your minimum mortgage payments. 

Although past performance is never a perfect indicator of any future results, a diversified mix of investments over a 20-25yr. investment time horizon (approximately the same period as your mortgage amortization) should deliver close to 8% return. This would be more money than any amount you'd save in interest charges by paying off the mortgage early.²

Therefore, the best option is a compromise; paying your minimum mortgage payments while investing your extra funds.

Diversification: Having an investment portfolio that extends beyond real estate, will allow you to participate in growth opportunities that are not tied to that sector.  While potentially very nice, your home is an isolated asset in a tiny part of a global investment world.  If for whatever reason something happens to your localized asset, I believe it would be smart to invest in other assets around the world.²

Liquidity: By having some of your assets invested in cash savings, beyond your primary residence, you will have more liquidity should you need quick money for something. Only depending on a mortgage for investments will not provide you with quick assets if an emergency happens.

With all your money siphoned to your mortgage, not in any cash savings let alone in long-term investments, a sudden job loss, health issue or major capital expense could leave you in a financial crisis. The ability to sell investments assets or better still, draw on cash savings for any emergency without borrowing more money for it, is a very liquid and healthy proposition.²

Tax advantages:

• In Canada we cannot deduct mortgage interest costs. However, there is a Smith Manoeuvre where you can convert mortgage debt into tax-deductions. However, it can be tricky to manage from a financial to psychological risks standpoint. This type of leveraged investing is not for the uninitiated investor.
   
• If you are self-employed or run a small business, a portion of your mortgage interest will be tax-deductible to reduce your payable taxes.
   
• If you own investment properties, you can have tax deductions that may be applied against them.
   
• Making an RRSP contribution is a method to reduce your taxes owning. While you should know that always reinvesting the RRSP-generated refund is the linchpin any RRSP vs. TFSA investment debate, contributions to your RRSP offer two great benefits a) you can reduce taxes payable today and b) you can participate in long-term tax-deferred growth as long as investments stay inside this account.²

Bottom Line

A combination of focusing on your mortgage and investing should be used throughout your investment lifetime depending on your current situation.

• When your mortgage is high (generally when your young) you should pay off your mortgage more aggressively.
• When your mortgage becomes more manageable, you can increase your RRSP contributions. Maxing out your contributions for you and your spouse should be considered since you will reap tax deductions.
• When your mortgage is at an acceptable level, maxing out your TFSA’s and RRSP’s every year would be advisable until you are semi-retired.

Deciding when to invest or what to invest in is a big decision and can be achieved with the help of a financial advisor. 

Source:

1 https://mortgageintelligence.ca/assets/calculators-mi/CAMortgageLoan.html

2 https://www.myownadvisor.ca/the-definitive-answer-to-paying-down-your-mortgage-or-investing/