Robert McLister·
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Invest or Pay Down Mortgage

It’s the age-old question for those with spare cash:

a)  Invest the extra dough in an RSP; or,
b)  Pay your mortgage down first and then save for RSPs.

This Winnipeg Free Press story suggests that option A comes out ahead in the long-run for most people.  However, note the risks and assumptions that apply. For one thing, as the WFP puts it somewhat obviously:

"This strategy only works so long as the interest rate of the mortgage is less than the rate of return on the investment."

Robert McLister
Robert McLister is one of Canada’s best-known mortgage experts, a mortgage columnist for The Globe and Mail, and Founder of mortgage broker intelliMortgage Inc., RateSpy.com, a website comparing Canada's best mortgage rates and Mortgage Editor of RATESDOTCA.
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6 Comments

  1. I think this one has far too many variables to be accurately stated for an individual with a broad ‘do this’ statement. Both scenarios work well to increase your security for the future.
    As long as you don’t just give up trying to figure out which is best and buy a new car or something really dumb, you’d be better off if each year you just flipped a coin and picked which one you were putting your lump sum on.

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  2. Really this debate comes down to a question of which of three options is the better one:
    1) Pay down debt
    2) Invest for the long-term
    3) Spend it
    Most people would agree that option 1 or 2 is better than 3, yet most people choose option 3 – they won’t reduce their spending to divert cash to one of the other options. Because of this, the debate about whether 1 or 2 is the “better” option becomes moot. In all cases, EITHER option yields more benefit than option 3.

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  3. Hi Traciatim,
    You’re right that the result, like any mathematical exercise, depends entirely on the variables. After considering taxes and risk, some people might actually find option B more palatable.
    There are well-known advisors who support mortgage pre-payments before investing as well. It’s usually those who aren’t as concerned with generating money management fees. Adrian Mastracci comes to mind as one example.
    In writing this story the purpose was to convey how the WFP ran the numbers. However, the devil’s in the assumptions so it’s wise to have a financial advisor calculate your optimal scenario before making the big decision.
    Cheers,
    Rob

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  4. As a Toronto real estate agent I think that it is always preferable to pay down the mortgage first. But it always depends on how much you trust your economy. On the other hand you could something like a 50/50 deal, and pay down half and invest the other half. It really comes down to what you want to invest in and how hard you want to get rid of a mortgage.

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  5. The other thing to consider is that if your mortgage rate is 4.0% you would need to earn 4.0% plus whatever that is equivalent to before tax in your RRSP to break even. Otherwise if your gains in your RRSP are worse than what you’re gaining by paying down your mortgage it’ll seem foolish.
    In the long term, most likely an RRSP will outperform a low interest rate, and this is why techniques like the smith manouevre are quite popular (even in the currently bearish equity market)
    I’m personally in favour of making lump sum payments against my mortgage and using any excess cash to put in my RRSP. I guess you could say I’m doing both at the moment.
    just my two cents :)

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  6. Behind the argument for not paying off your mortgage is the reasoning that you could invest the extra money and earn a higher return, while keeping your money more liquid. That may have been a good reason in the past but the rate of return on investing now is more questionable, compared to the fact that every dollar paid
    to reduce a mortgage balance provides a guaranteed return equal to the interest rate on the mortgage.

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