One of top priorities for many Canadians is to pay off their mortgage early.  A recent survey showed that current homeowners believe they’ll be mortgage free by the time they’re 55, which leaves a short window of opportunity to ramp up their savings before retirement.

To reach mortgage freedom faster, you can capitalize on today’s low interest rates by accelerating your mortgage with extra monthly contributions or lump-sum payments.

Related: How to pay off your mortgage faster

But homeowners should look at the pros and cons of paying off their mortgage debt early versus taking a slower approach and using the excess cash for other investments.  Here’s why:

Low Interest Rates

With recent changes to mortgage rules and record low interest rates continuing for the foreseeable future, now might be the right time to carry long-term mortgage debt while you concentrate on building up your investments.

Related: How much house can I afford?

The expected return on equities has historically been around eight to 10 per cent.  While paying off your mortgage is a guaranteed, risk-free return, the low cost of borrowing means there’s potential to earn higher returns by investing in a balanced portfolio.

If you can earn two or three per cent more by investing instead of paying off debt the compounded returns over a few decades can really add up.

We also need to diversify our investments.  Real estate makes up the largest chunk of our net worth, but most of us have nothing else to show for it.  By sinking every available dollar into our mortgage in order to pay it off five or 10 years early, we’re neglecting our investments for far too long.

Related: Why baby boomers aren’t prepared for retirement

Instead of putting all your money into one asset – your home – take a balanced approach to build up your savings and other investments.

Pay Off Mortgage Early Or Invest?

Homeowners should consider this question every few years as their financial situation changes.

The answer will be different for everyone.  If you have consumer debt or more pressing financial needs, you need to take care of that first before even thinking about doubling up your mortgage payments or adding to your investments.

Some people are risk averse and will always be better off paying down their mortgage as quickly as possible.  If you’ll sleep better at night by taking less risk and living debt free then do it.

Others have a higher risk tolerance and feel more comfortable with investing, and even borrowing to invest to further boost their assets.

Final thoughts

I’m taking a balanced approach by putting an extra $800 a month on our mortgage on top of our regular monthly payments, saving $800 a month in our tax free savings accounts and investing $400 a month in my RRSP.

I’ll still pay off my mortgage early, but it will take about 10 to 12 years to be completely mortgage free.  Being mortgage free before I’m 45 gives me plenty of time to ramp up my investments for another decade or two before I retire.

What do you do with your extra money?  Do you want to pay off your mortgage early or build up your investments?


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