Wait what? DON'T pay your mortgage down faster?! Yup you heard that right. Keep reading to find out why!
Conventional wisdom tells us to pay down and get rid of your mortgage as fast as possible. You have a 30 year mortgage?! Pay it down in...15 years! Every pay cheque or bonus you get, put it straight to the mortgage so your principal gets reduced.
And we're here to tell you, you should keep your mortgage as long as possible.
This conventional wisdom of paying down your mortgage made a lot of sense before the financial crisis in 2008. Mortgage interest rates were at around 5%-6% and during that time, it was a good idea to pay down your mortgage as fast as possible. Everytime you pay into your mortgage, you are guaranteed a return of 5%-6% because that’s how much you are saving. The alternative would be to put it in a savings account or invest it which will be similar or less than your mortgage rate.
But now, times have changed. After the financial crisis, rates have been coming lower, and lower, and even lower. At the time of this post, we just did a mortgage for someone at 1.85%. That’s the rate that you get for putting your money in a savings account. It’s as if you’re becoming the bank!
Because rates are at record lows, this conventional wisdom does not work. You actually want to keep your mortgage because you’re getting very cheap money. When you have extra cash, there’s always a decision to make - should I put it in the mortgage or should I invest it?
Let’s look at option number 1 - putting it in the mortgage. What you’re doing is you are guaranteeing yourself a rate of return of your current mortgage rate - say 3%.
Are you able to find an alternative? Because, assuming that you don’t have a home line of credit, once you put the money towards your mortgage, you can’t get access to the money anymore unless you sell or refinance your property.
What many people are doing is using an investment strategy called leveraging. Leveraging means using borrowed capital for an investment, and expecting the profits made to be greater than the interest payable.
With using 3% money, look for an investment that will help you get at least 5%. Currently, if you buy a bank stock like RBC or TD, the dividend that they pay is at least 5%. And that’s just the dividend. There may be capital appreciation on top of that. So say you get a return of 8% from your investment, minus the borrowed money of 3%, your net return would be 5%. So if you had $10,000, a 5% return would be $500. This is much better than your guaranteed 3%.
This strategy isn’t for everyone though. If you don’t know much about investing, it may be best to take a conservative and safe approach and put it in the mortgage. But there’s definitely better options available offering higher returns. You can invest yourself or hire an investment advisor or financial planner to help you with your investments.
And there you go! This is why you should NOT pay your mortgage down faster.
If you have any questions about this, feel free to contact us and we'll answer any questions you may have!