Save vs. Pay off Mortgage

Save or Invest

This is one of the most common questions. If you have extra cash, should you save it? Or pay off your property? And as a classical advisor... my first instinct is to say the annoying "well, it depends".  Because there are SO many factors that go into this decision: interest rates, rates of return, TFSA limits, RSP room, age, debt/equity ratio, blah blah blah... are your eyes glossing over yet?

There are definite number crunching approaches that can show you the BLACK + WHITE (or red) "logical" side of each scenario. But factors like risk, stress, relief, peace of mind - are all real pieces of the equation. If by reducing your overall household debt will help you sleep at night or cause less arguments at home, it might be worth it even if the numbers say not to. If you know a family vacation is just what you need for your mental health, squirrel that $$ away for that.

If you're excited getting your investment statements in the mail every quarter

Invest it. You can ALWAYS change your mind. The money is there for you to use. Deposit the extra cash in your account (hopefully tax sheltered - see your advisor for recommendations). If you are going to feel joy and accomplishment when you get your statement and see a healthy sum on there, then "save" it. Your mortgage payments are standard and are not typically reduced even if you make extra payments. So a lumpsum will reduce your overall debt, the amount of time you'll be paying off the property - but not the short term monthly obligations.

You crave some cushion

It's completely natural to feel more comfortable when you have some emergency funds or extra fun disposable cash. Our instincts are to avoid discomfort. If you (1) don't have an emergency fund (2) know there is a big expense coming up that you aren't quite ready for (3) etc. etc. you get my drift... Put that extra cash somewhere safe. Plus, don't forget interest on your mortgage is a tax deduction*. *if the mortgage in question is your investment property

If you want to start seeing more cashflow sooner

The sooner your mortgage is wiped out, the sooner you can put 100% of the cash flow from your rental in your pocket. Which is why we all got into real estate in the first place #amiright. By making a big payment on your mortgage (but be careful not to trigger any fees) you'll pay (1) less interest over the longterm (2) be debt free sooner (3) have more equity in your property to acquire more properties [if that is something you are considering] and (4) going to have more income from your property. 

Why not do both?

I love the idea of "a happy medium". Take the extra $ you have. Divide it in half. If you were to split it 50 / 50 between saving and debt repayment, how does that make you feel? Play around with the numbers, ask your advisor, your parents, your mentor. They might all have different answers for you, but by doing your own research and gathering information (plus how your stress levels react to the various scenarios) you can make a decision that is more in line with you, your goals and your future.

If you would be tempted to spend the money on silly, buyers-remorse items - I would suggest putting up your own guardrails. Whether that is investing in a more restrictive investment (like a GIC or RSP). By putting it somewhere where there are barriers (GICs are time + RSPs are tax consequences) you'll be less likely to make poor choices.

Some resources that could help you to make your decision:

I'm a planner, and I like to have a roadmap to follow + system that help keep me focused. By setting up a financial plan with all your investments, debts, goals, and habits you'll be more prepared to make the decisions. A plan provides me the peace of mind that I know I'm on the right track + can adapt quickly if there's a change in 'plans'. So maybe the right choice is do nothing, and make a plan - that would be a great place to start.

"Life is what happens to you while you are busy making other plans."