classic. Advertising campaigns have been developed by financial institutions around the question in the past: should I invest my money or make the mortgage payments?
When mortgage rates barely exceed 2%, we don’t mess with the math. The investment seems to be imposing itself.
But when those same rates approach the 5% mark, the problem suddenly becomes more complex. The analysis deserves a little refinement.
How do you deal with this dilemma under the current circumstances?
The main problem here again lies in the so-called opportunity cost.
When I put my money somewhere, I can’t use it for anything else that might be more profitable.
The additional payoff that I leave on the table is the opportunity cost.
If I speed my mortgage payment down to 2%, I’m avoiding lower interest, but turning my back on higher earnings by not investing my money at 6%.
Now let’s add some variables.
We don’t insist enough on this point when we dismiss the “mortgage” option out of control: the tax.
When we choose to pay off the debt, the interest that is being avoided remains clear in our pockets. It’s like non-taxable income.
If you prefer investing your money in a security that generates equivalent interest, you will have to deduct tax, unless the investment is within a tax-free savings account (TFSA).
Evaluating the opportunity cost by comparing a GIC (Guaranteed Investment Certificate) or a bond and a mortgage is not so simple.
The comparison becomes more complicated when we include shares in the equation, and thus capital gains and dividends, which are taxed to a lesser degree.
On the risk scale, mortgage payments are more conservative. We must bear this in mind, as this choice has an impact on asset allocation.
Let’s say I have a “balanced” investor profile and I put my money into a so-called “balanced” portfolio made up of stocks, bonds, and secured securities.
When I choose to put my money in a mortgage rather than my portfolio, those dollars are concentrated in the “conservative” asset class, which doesn’t quite fit my investor profile.
In theory, if you speed up the payment of your mortgage loan, you should slightly increase the share of equity in your portfolio. However, taken to the extreme, this logic leads to a dead end: a “balanced” investor can end up with a fully paid home on one side and a 100% “equity” portfolio on the other; It does not work.
Remember all of this: rushing to pay off a mortgage is a “wise” investment choice and leads to its own repair adjustment to the assets.
A household whose mortgage burden is too heavy on the budget will want to reduce interest costs before generating returns for retirement. We understand that.
To be sure, higher interest rates lead to a revision of their accounts for the most indebted families.
With so much going on in the stock market these days, many will see an excuse to retreat into their real estate in order to mitigate their level of risk. It is tempting to want to promote their mortgage payment rather than pumping new money into their portfolio.
If this decision can improve your sleep, I have no argument against you.
However, I remind you that the most profitable long-term investments are those made during low periods, such as the ones we are going through now.
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