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Should you invest any extra money or use it to pay down your mortgage?

Once upon a time, it might have been easier to come up with a clear-cut answer to that question.

However, we’re not exactly living in clear-cut times.

Interest rates are high and inevitably getting higher. The stock market seems to be, well, going in the opposite direction. Plus, there’s been uncertainty in recent weeks for Ontario education workers.

Yet all those things aside, let’s say you still have a bit of extra cash left over at the end of every month—money that you want to put to good use.

“Well, generally it’s always a good idea to pay down mortgage debt—especially as interest rates continue to climb,” says Educators Certified Financial Planner professional Lisa Raponi. “But, if you’re a homeowner that was fortunate enough to lock-in a 5-year mortgage term when rates were still under 2%, you’ve still got a few years grace from paying higher rates.”

If that’s your current scenario, you might want to consider adopting a financial strategy (for that extra money) based on the type of mortgage you have.

Lisa explains, “If your mortgage is currently locked in at a fixed rate and is still a few years from coming due, then I’d suggest putting any extra money into a high-interest savings account versus chipping away at your mortgage just yet. Now’s the time to be taking advantage of the positive side of higher rates by letting those savings accrue—only tapping into them when you need to, such as in an emergency or to help offset the rising cost of living. If you find that you actually don’t need to dip into that money, then you’ll have the means to make lump sum deposits towards your mortgage. That will especially work in your favour should interest rates continue to be high come renewal time.”

On the other hand, if you have a variable-rate mortgage, Lisa suggests another tactic.

“Since variable mortgages are tied directly to the prime rate, every time that number increases, the greater the portion of your payment will go towards interest (versus the principal). To help clients appreciate the financial implications of this ever-shifting ratio, I run the numbers through a mortgage calculator (at their target rate) to see what their payments could theoretically increase to. Then, I have them go one step further by recommending they increase their payments to that amount now. Going through this same exercise will enable you to adjust your monthly budget accordingly, instead of having to scramble at the last minute after yet another rate hike. With so much fear among homeowners right now, I find that these strategies can help to put a much-needed sense of control back in your hands.”

If you’re leaning more towards investing, Lisa recommends putting that extra money here.

“As of late, Guaranteed Investment Certificates (GICs) are paying as much as 5% interest—in some cases even higher,” continues Lisa. “So, if your mortgage is safely locked in at a relatively low rate over the next few years, investing might be a better option for directing that extra money. To be clear though, I’m referring specifically to GICs. If we’re talking about equity investments, well that’s a different ball game altogether. Because with stocks, there are obviously no guarantees and, as we’ve particularly seen in the past year, they can also be quite volatile. So, your tolerance for risk would definitely have to be considered.”

If you’re still unsure about whether investing or paying down your mortgage is the right way to go, try weighing your decision based on the following pros and cons:

 

Decision

 

 

Pros

 

Cons

 

Pay down your mortgage

 

Save on interest, work towards being debt-free, the ability to leverage equity for home renovations or other needs later

 

 

Cut into savings goals,
less money to put towards investments or emergency fund, potential prepayment penalties depending on the type of mortgage you have

 

 

Investing

 

Potentially higher rate of return,
building your future wealth,
better asset liquidity
(i.e., if you need cash in a hurry, it’s much easier/faster to
sell stocks than to sell or refinance your home)

 

 

Greater risk (stocks),
still making regular payments
and yet may not see a return
for quite some time,
investing doesn’t make
debt go away

In addition to your mortgage or investments, there are also other outlets you can put any extra money that are just as beneficial.

“If you have debt over and above your mortgage that still needs to be paid off, such as credit cards or car and student loans, you may want to put any extra cash flow towards that instead,” says Lisa. “As an education member, you also might want to think about putting money away to take that deferred salary leave you keep putting on the backburner. Or maybe you’re an educational worker who wants to build an extra financial buffer for the summer months. Regardless of where you are in your career, it’s always a good idea to be topping up your emergency fund, every chance you get.”

There’s no doubt that investing in your future goals and fast-tracking your mortgage payments both have their benefits. 

As for deciding which option is best for you, that’s where Educators Financial Group can help.

From the various levels of the pay grid to your pension income in retirement, we understand every stage of your education career. That translates to the kind of financial advice that is relevant to your specific needs, goals, and time of life.

Let’s start working on a plan to maximize your cash flow, right now.

Source:
https://wowa.ca/gic-rates

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