It’s the age-old question that has plagued Canadian savers for generations. Should they take the guaranteed return of paying down the mortgage, or invest in the stock market?
There are compelling arguments on both sides. When it comes to investing, many point at low easy it is to get returns higher than today’s low mortgage rates. Even the average dividend is higher than a sub-3% mortgage.
Over the past five years, investing instead of paying down debt would have been a good move. This recency bias can easily influence decisions going forward.
And many people already have too much of their portfolio in real estate, especially those with a mortgage to pay down. By investing in other asset classes, these folks are lessening their exposure to a housing market that may be overvalued.
But at the same time, there are certainly reasons for paying down the mortgage.
Stocks can easily go down in value, and many people have suffered when they bought overvalued equities at the wrong time in the business cycle. Even the toughest investor doesn’t like to watch the value of their shares decrease.
Paying down the mortgage is also a way for investors to invest in a bond-like product. It offers a guaranteed return about the same as investing in bonds, but there’s no tax on the proceeds. Don’t underestimate the allure of a guaranteed return.
Ultimately, it all comes down to risk tolerance. If you like the idea of getting out of debt, pay down the mortgage. And if you want a big stock portfolio more than anything, then only pay the minimum and invest the rest.
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