Pay down the mortgage or invest?

Freed up some money recently and wondering whether to aggressively pay down your mortgage or invest that extra cash? It’s a good question, and one fraught with unknowns. I’ll stick my personal bias in as well so you know what I think. But, ultimately, you have to do what you think will work best for you both financially and psychologically.

Issue #1: Mortgage rates are at all-time lows, so there’s only one way for those puppies to go: UP! Good sense says to reduce your debt as much as possible while the rates are low so more of your money is going to principal.

Issue #2: Rates of return on investments have been all over the place. Here are the annual returns for the TSX Composite Index for the past five years:

• 2007 +7.8
• 2008 -35.5
• 2009 +30.7
• 2010 +14.4
• 2011 -11.1

That gives an average annual return of 1.26%. Your in-the-pocket results are actually worse because that 2008 loss would have eroded so much principal that the following gain couldn’t have come close to compensating. But I digress.
If you’re going to compare apples to apples, paying down your mortgage makes more financial sense than investing on a purely dollar-for-dollar basis.

Issue #3: Putting all your eggs in one basket never makes sense. Despite the fact that the housing market has been hotter than Eva Mendes, it’s only a matter of time before it slows. We’re already seeing retractions in the condo market: developers are becoming landlords because they can’t move their units. Do you really want all your money tied up in one asset class? That’s bad investing.

Issue #4: Your piece of mind. (And this is where my personal bias comes in.) I’ve always found that doing things in balance helps me sleep at night. I might not be earning the most I can on my investments, but I value sleep and a quiet spirit more than an extra couple of percentages. So I tend to spread things around. You have to do what’s right for you. If getting your home paid off is the thing that weighs most heavily on your mind, then put the money towards your mortgage. If you dread the idea of having only your home and no retirement savings, well, put the money in an RRSP or TFSA.

Keep in mind that the RRSP vs. mortgage question doesn’t strictly have to be either/or. If you put money into an RRSP you can use the taxes you’ll be saving to pay down the mortgage. That’s covering all your bases.