Most homeowners with a little extra cash will inevitably face the dilemma of paying down their debt or investing. There is no straightforward answer to this question; you will have to look at your particular situation, the prevailing market conditions as well do some number crunching. While getting out of debt is always a good thing to do, it shouldn’t come at the cost of spending disposable income that could have earned you more elsewhere. On the other hand, if your investments don’t do well, you would actually be better off just paying down your debt.
Paying Down Your Mortgage
The interest on your mortgage is a big factor in whether or not you should invest. If your return on investment is less than the interest rate on your mortgage (especially if the interest rises) then the investment is not worth the money. If the interest on your mortgage is 4 per cent, then the annual return on your investment must yield 6 per cent or higher. If it is in a tax-free account, then the money that builds over the years can be used to pay off your mortgage. However, if the yield is under six per cent, or the interest rate on your house rises close to that figure, then it is better to pay down the mortgage. You should also consider if the value of your home is rising rapidly, in which case there is an incentive to pay off the mortgage quickly if you intend to resell the house.
If the investment climate is favourable and you have enough disposable income, then you should put it towards a good investment vehicle. Ideally you should invest in a tax-free account, such as a TFSA. You also need to factor in your risk tolerance. If you have a low risk tolerance then you should stick to paying down your mortgage. The mortgage will always be there when you wake up; you can’t say the same thing for an investment.
Paying down your debt should be a priority if money is tight. However, if you have some savings and you can make some smart investments, it will serve you better in the long run to invest. It is a decision that you should not take lightly or alone. If you are considering making some investments, then meet with our specialists for a free consultation to see if this is the right path for you.