Should you invest for retirement or pay off your mortgage?

Common Cents with Jacob Gaudet

When interest rates are high, people often think it’s better to pay off their mortgage rather than save. But is it the right choice? We’ll help you decide

Should you invest for retirement or pay off your mortgage?

A recent poll discovered that Canadians’ financial priorities for 2023 had moved away from saving for retirement to paying off debt This was no doubt fueled by fears of a recession, high inflation and interest rates being the highest in over 20 years. But does this strategy make financial sense?

We look at the pros and cons of each option and explain how to decide on the best one for your personal circumstances.

The advantages of paying down your mortgage

A key advantage is paying less in interest, which could save you thousands of dollars. You’ll also free up future income that would otherwise go towards paying the mortgage, which could be particularly important for investors heading into retirement

A recent poll discovered that Canadians’ financial priorities for 2023 had moved away from saving for retirement to paying off debt. This was no doubt fueled by fears of a recession, high inflation and interest rates being the highest in over 20 years.

Once you’ve paid off your mortgage, you’ll have more money available to invest, which can very quickly boost your overall savings. Also, building up equity in your home can give you quick access to more borrowing options, such as a low-interest home equity line of credit.

The downsides of paying down your mortgage

You’ll miss out on investment opportunities that could make you considerably better off: over the last couple of decades (when mortgage rates were typically considerably lower than returns from investments), it usually made financial sense to invest rather than pay off your mortgage.

By focusing on your home, you limit the diversification of your assets, meaning you could miss out on other opportunities. And, if the housing market were to fall, a large part of your assets could lose value for a considerable period.

Depending on your situation, you could also miss out on potential tax savings For example, business owners can often use some of the interest paid on their mortgage to offset against their business income, if they have an office at home.