Create or pay off a mortgage?

Classic. Financial institution advertising campaigns have historically been designed around the question: should I invest my money or pay off my mortgage?

With mortgage rates just over 2%, we don’t care about the calculation. The investment seems imperative.

But as those same rates approach 5%, the problem suddenly becomes more complex. The analysis deserves a little refinement.

How to address this dilemma under the current conditions?

The opportunity cost

Here, too, the main problem lies in the so-called opportunity costs.

If I put my money somewhere, I can’t use it for something else that would be more profitable.

The additional return I’m leaving on the table is the opportunity cost.

Accelerating my mortgage repayment to 2% avoids low interest rates but turns my back on higher returns by not investing my money at 6%.

Now let’s add some variables.


We are not insisting enough on this point if we flatly reject the “mortgage” option: the tax.

When we decide to repay a debt, the interest avoided stays neatly in our pocket. It’s like tax-free income.

If you prefer to invest your money in a security that generates interest on it, you must deduct the tax unless the investment is in a TFSA (a tax-exempt savings account).

So assessing the opportunity cost by comparing a GIC (Guaranteed Investment Certificate) or a bond and a mortgage is not that straightforward.

The comparison becomes even more complex when we include stocks in the equation, which means capital gains and dividends, which are taxed less.

The investor profile

Mortgage prepayments are at the more conservative end of the risk scale. We have to keep that in mind because this choice has implications for asset allocation.

Let’s say I have a “balanced” investor profile and put my money in what is called a “balanced” portfolio of stocks, bonds, and guaranteed securities.

If I choose to put my money in my mortgage rather than my portfolio, those dollars will be concentrated in the “conservative” asset class, which doesn’t exactly fit my investor profile.

In theory, if you’re speeding up your mortgage loan repayments, you should slightly increase the proportion of stocks in your portfolio. Taken to the extreme, however, this logic leads to a dead end: the “balanced” investor could have a fully paid-off house on the one hand and a 100 percent “stock” portfolio on the other; it doesn’t work

Still, remember: hasty mortgage payment corresponds to a “prudent” investment decision and modifies asset recovery.

The amount of debt

A household that feels the burden of the mortgage is too heavy on the budget will want to lower its interest costs before generating returns for retirement. We understand that.

The rise in interest rates is sure to cause him to revise his calculations for the most indebted families.

With what’s happening more in the stock market these days, many will see an excuse to retreat to their real estate to mitigate their level of risk. It’s tempting to want to encourage mortgage repayments rather than inject new money into your portfolio.

If this decision can improve your sleep, I have no argument against you.

However, I would like to remind you that the most profitable long-term investments are those made during tough times like the one we are going through.

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