answer like a pro

“The priority is to pay off the mortgage quickly; investing can come later.”

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“Pay off the mortgage first, invest later.” Here’s a response to bring balance to that idea.

Mortgage or investments: Why waiting to invest could cost you dearly

It is natural to want to become debt-free as quickly as possible, and the mortgage is often the largest debt. Many people believe they should fully repay their mortgage before considering investing. While this approach may seem prudent, it can actually hinder long-term wealth creation. In reality, a balanced strategy between paying down the mortgage and investing can lead to better financial outcomes, especially in today’s fiscal and economic environment.

1. The marginal return: comparing what you save versus what you could earn

The first question to ask yourself is this: is the interest rate on your mortgage higher than the potential return on your investments?

Let’s take a concrete example: if your mortgage has an interest rate of 3.5% and your investments yield an average annual return of 6%, it’s more profitable in the long run to invest part of your extra funds rather than paying off your loan faster. Even after taxes, several investment vehicles like the TFSA and RRSP can improve that net return.

A study conducted by RBC compared two strategies: one focused on paying off a mortgage faster, and the other on contributing to an RRSP and applying the tax refunds to the mortgage. The result: the combined strategy generated a net value about $100,000 higher over 15 years.

2. The tax advantages of registered accounts are too significant to wait

Attendre d’avoir terminé de payer son hypothèque avant d’investir signifie souvent passer à côté d’années précieuses de rendement composé, surtout dans des véhicules enregistrés :
  • RRSP: Contributions reduce your taxable income and allow you to grow capital tax-free. This can generate tax refunds that you can reinvest or apply toward paying down your loan.
  • TFSA: All earnings are tax-free, and withdrawals are also tax-free and can be reused.
The earlier you start, the more compound growth works in your favor. Investing $5,000 per year for 20 years at a 6% return yields nearly $200,000. Delaying that investment by 10 years cuts that amount in half.

3. The Liquidity Question: Real Estate Is Not a Flexible Asset

Paying off your mortgage first means tying up cash in a non-liquid asset. Once the money is put into your home, it can’t easily be accessed to handle unexpected events such as job loss, medical emergencies, or investment opportunities.

Investing in parallel in liquid assets such as a TFSA provides financial security without having to refinance or re-mortgage your home.

4. Diversification of Wealth Building

Putting all your eggs in the real estate basket exposes you to a certain concentration risk. Real estate markets can fluctuate, and a housing crisis can affect your home’s value. By allocating your resources between real estate (mortgage repayment) and financial markets (investments), you diversify your portfolio and reduce risk.

In addition, certain tax strategies such as the “Smith Manoeuvre” make it possible to turn non-deductible interest into deductible interest by investing while repaying your mortgage. When properly structured, this can generate substantial net worth over time.

5. A Balanced Strategy Is Often the Winning One

It isn’t necessary to choose between paying off your mortgage and investing. Both goals can be pursued simultaneously, depending on your income, risk tolerance, and priorities. A financial advisor can help you determine the optimal balance point between the two.

In summary, paying off your mortgage quickly may feel reassuring, but waiting to invest could cost you tens or even hundreds of thousands of dollars in future value.

Sources :

  • RBC Royal Bank. “Mortgage or RRSP? Why Not Both!”
    https://www.rbcbanqueroyale.com
  • FMOQ Funds. “Pay Off Your Mortgage or Invest: How to Choose?”
    https://www.fondsfmoq.com
  • Autorité des marchés financiers (AMF). “Investing in a TFSA or an RRSP”
    https://lautorite.qc.ca