Money123 Article: Mortgage vs. Retirement – What Should They Do?

A married couple are homeowners who currently save $1,000 a month after paying their bills.

They are wondering if they should pay down their mortgage faster or invest their savings.  

As a financial planner for Global News’ Money123 online email newsletter, I answer reader questions about investing, managing your finances, and planning for your future.

In the latest email to subscribers, I give this couple my insights on what to do with this money (hint: it depends on their retirement goals and investment styles).

By the way, my answer is at the bottom of the email newsletter.

Here’s a link to the Global News Money 123 email newsletter with what I recommend: https://globalnews.ca/newsletter/10830822/

The Question:

“My wife and I are homeowners and we can currently put away about $1,000 a month after paying all the bills. We’re trying to decide whether we should pay down our mortgage faster or invest. We owe $170K of the original $211K mortgage after six years of ownership. Our mortgage allows lump sum payments once per year of up to 10% of the original principal. Current mortgage term is a three-year fixed at 6.4%, up for renewal in two years. This isn’t our forever home, so we’ll likely be moving in the next few years to a bigger property. All that said, how do we decide where this money is best put aside? Thanks.”

— A Money123 reader

Ed’s Answer:

“You are asking whether to prioritize your goal of paying off your mortgage or your goal of retiring when you want with the lifestyle you want. The answer depends on where you are with these two goals now.

From experience, most Canadians are far behind on their retirement goal and very often don’t even know what their goal is or whether they are on track. A financial plan is the GPS for your life and should answer that.

The most effective advice generally is to target paying off your mortgage just before you retire. Allow for your forever home with this. Paying off your mortgage years before you retire usually leads to a few years with a higher lifestyle than you can sustain. I’ve seen many people live great with tons of spending 5-10 years before retiring, and then having a difficult cutback when they retire.

Don’t get used to a lifestyle you cannot sustain long-term.

Just comparing which option gives you more money depends on how you invest. You can compare the most likely return on your investments over time with the average mortgage rate you will expect before paying it off. If you pay extra on a 6.4% mortgage and then renew it for lower rates for the next 20 years, it’s the long-term average interest rate that matters.

Generally, if you are an equity investor (stock market investments), you should get a higher return than the mortgage rate, but not if you are a conservative fixed income investor.”

Ed