When deciding what to do with newfound funds, whether from a business sale, inheritance, or bonus, Canadians have several options: spend, save, reduce debts, or donate. This article, however, will focus on the choice between investing and paying down mortgage debt, particularly in the context of the current high-interest-rate environment.
Rather than relying solely on numbers, it’s essential to consider personal financial goals and behaviours. With the guidance of a financial advisor, you should establish a clear vision for your future—a principle advocated by Steven Covey, who advised to “begin with the end in mind.”
The arguments for paying down the mortgage
If living without a mortgage is paramount, directing funds to reduce this debt may be your best move. This decision, though, requires a balance to avoid excessive real estate allocation and ensure sufficient retirement savings.
For those who value certainty and financial security, reducing mortgage debt may resonate strongly. This approach could appeal to individuals with a risk-averse nature, often associated with the conscientious personality type. People with a conscientious personality tend to prefer stability and may prioritize the tangible outcome of owning their property outright.
The arguments for investing
If the prospect of higher expected market returns appeals, investing your newfound capital may be in your best interest. Individuals who are comfortable maintaining a mortgage and find satisfaction in investing might lean towards a more open and adventurous personality type. These individuals are typically more comfortable with risk and may be motivated by the potential for higher returns that investments can offer over the long term. They also may value liquidity and the flexibility that comes with having investment assets that can be converted to cash if needed.
Another consideration is if there are other priorities than owning a home; investing while renting can be a sound financial strategy. Yet, this approach carries risks such as potential rent increases and the inconvenience of moving on short notice.
So, what to do?
A balanced approach is usually the most beneficial, allowing individuals to tailor the proportion invested versus allocated to debt repayment according to their circumstances.
While investing offers immediate satisfaction and can promote fiscal discipline, the gratification from mortgage payments may seem less immediate due to the front-loaded interest payments.
With interest rates at elevated levels, the calculus of investing versus mortgage repayment takes on a new dimension. High interest rates increase the cost of borrowing, making debt repayment a more attractive option. Every extra payment on your mortgage not only reduces the principal amount but also saves you from compounding interest at higher rates.
While meticulous spreadsheet calculations are crucial in mapping out the financial viability of paying down your mortgage versus investing, it’s equally important to weigh in your personality type. The numbers might tell one story, but your comfort level, risk tolerance, and financial priorities could suggest another. A risk-averse individual may find peace of mind in the guaranteed ‘return’ of mortgage reduction, while a more risk-tolerant personality might relish the potential gains from investing. It’s this personal disposition towards risk and reward that can often be the deciding factor, tipping the scales in favour of one option over the other. Ultimately, while the spreadsheet lays out the possibilities, understanding your financial behaviour and preferences turns those possibilities into a plan you can confidently follow.
A disciplined approach, considering personal goals and the broader economic context, will help navigate these decisions. For many Canadians, a strategy that accommodates investment and debt reduction, adjusted to reflect current financial conditions, will provide a sound financial footing.