Should retirees pay off their mortgages with investments?

For some retirees, that may include a home downsize, which may or may not be a necessary or even a practical component of a retirement plan.

In your case, Liz, it sounds like you have investments with which you can pay off your mortgage. The question is: what are these investments?

Comparing investment returns to mortgage payment interest

If the investments in question are in a registered retirement savings plan (RRSP) or a similar tax-deferred account, you need to consider the tax implications of using these investments to pay off your mortgage. Taking a large, lump-sum withdrawal may result in significant tax payable and a much smaller after-tax amount that can be used to repay debt.

In this instance, you may in fact be better off taking withdrawals over several years to supplement your cash flow and debt repayment, even though you will be carrying debt into retirement.

If the investments in question are in a tax-free savings account (TFSA), it may be that much more of a toss-up as to whether you should use the investments to pay off your mortgage. Paying off your mortgage results in a guaranteed return, like buying a guaranteed investment certificate (GIC), compared to your TFSA, which may be a riskier investment in stocks and bonds.

Let’s say your mortgage rate is 5%. If you think you can earn a higher return on your TFSA, that may be one reason to stay invested. But paying down a 5% debt with your TFSA is like buying a 5% GIC in your TFSA. For some investors, that would be a good return.

If the investments in question are in a non-registered, taxable account, I may be that much more inclined to consider paying off your debt, Liz. The investments in this case would generate taxable investment income, and your required rate of return would need to be higher to account for taxes payable and justify staying invested compared to simply paying off your mortgage.

If your investments are non-registered investments, by choosing not to pay off your debt, you are effectively borrowing to invest, and need a moderate to high risk tolerance and a medium to long-term time horizon to increase your chances of coming out ahead.

Borrowing to invest and pay off mortgage

I would also consider in this case, if you decided you didn’t want to pay off your mortgage, to at least pay off the mortgage initially with your investments, and then borrow the money back to invest. By tying the debt to your investments, rather than just your house, the interest will at least be tax-deductible.

This approach comes with a huge asterisk though, as I’m not a big fan of borrowing to invest at the best of times, much less in retirement. But if you’re going to do it, at least consider making the interest tax-deductible.

Non-registered vs. registered investment accounts

Another consideration, Liz, if the investments are non-registered, is that you may have capital gains tax to pay on liquidation. Unless the gain is significant and your income is high, the capital gains tax may not really matter much compared to becoming debt-free.

I can’t help but be skeptical that your advisor’s advice is to “keep the money invested to keep making you money.” Unfortunately, the Canadian financial advice industry is such that you need to take your advisor’s advice with a grain of salt, however disconcerting it is for me to say that.

In this case, your choice to keep the money invested keeps making them money. You staying invested ensures the bank gets paid twice—from your investment fees and from your mortgage interest. So, in order to come out ahead, you need a high risk tolerance. Maybe you are an aggressive investor, and your advisor is taking this in account.

What to do about an outstanding mortgage

In summary, Liz, the more conservative an investor you are, the more inclined I would be to consider using your investments to pay off your mortgage. If the investments you would use are non-registered investments, I’d be most inclined, and if they are RRSP investments, I’d be least inclined.

Consider your risk tolerance and the tax implications primarily, Liz, while taking your advisor’s advice with a grain of salt.

Read more about investing and mortgages:

• Borrowing money to invest
• How to invest down payment funds while timing the real estate market
• Should you hold your mortgage inside your RRSP?
• Contribute to RRSP or pay off mortgage?

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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