by Denis Doucet
What you’ll learn
- Learn to compare rates
- Peace of mind VS. Investment diversification
- Consider your goals and plans for future years
Being indebted is normal yet uncomfortable.
Most people want to be debt free as soon as possible. What should we do with our money leftovers every month? Is it better to invest in your RRSP or to put to pay down your mortgage? Here are a few guides to further your reflection and analysis:
Shelter yourself from an interest hike
By paying down your mortgage faster, you are reducing the total amount of interest to be paid since debt repayment is a guaranteed return on your money. If rates go up at the end of your term, the cumulated interest rates on your future term will be lower. Therefore, paying down your mortgage faster lowers your risk of paying more interest down the line, now that’s piece of mind!
According to experts, reimbursing your mortgage often beats investing in your RRSP because of the psychological effects of carrying a lower debt on your shoulders. Knowing that the burden decreases is definitely a pleasant feeling for most people, but is it always the best decision? Let’s take a look further.
What about diversification?
If there is one golden rule on financial investments, it’s the importance of diversifying your assets. According to this concept, paying down your mortgage directly contradicts the golden rule of investment. Why? Because it implies that you are putting all your eggs in one basket (your home). Through this philosophy, you could be losing out on gains when the housing market goes down in your area or if the market is slower when you’re trying to sell. Diversification needs to be taken into consideration when it comes to paying debts versus investing.
A strategy based on your lifestyle
The decision to lower your debts or increase your RRSP contributions depends on each individual’s situation. The mortgage balance, interest rate, investment opportunities and the age of individuals have to be taken into account to ensure proper decision making.
The choice will be very different for a couple approaching retirement to a newly formed family expecting a child. Those who don’t have employment stability would most likely prefer to pay down their debts to have debt free property and fund their RRSP at a later stage of their career. To each its own strategy, the important part to remember is to have a strategy.
- You must consider many aspects when it’s time to decide between investing or repay.
- Your risk tolerance, your age and your plans for further years are factor to consider.
- Your mortgage broker is the right person to help you analyzing your different options.