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Why Canadians should not pay down their mortgage!

I am a big saver – I love to pay down debt but fortunately, I only have one major debt (no student, car or other loans), just my mortgage that I am not going to pay more than the minimum payment.

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Here are four good reasons not to pay down your mortgage in Canada:

Reason #1: Cheap interest rates.

With the current interest rate environment, savers are being punished. Why pay down my mortgage at a variable 2.3% when I can invest it in an RRSP or TFSA and make 8-10% on my money? 

When you look at inflation, the

Reason #2: Current housing bear market.

I am not sure what is happening in your neck of the woods but the housing prices are not going up like the years 2000-2009.  The major increases in your house has been factored in so why pay down debt when if you sell this asset you will not pay tax on the gain.

If your house is worth $500,000 (reasonable in Victoria, BC), and only goes up another $50,000 in the next five years, why spend $25,000 extra paying down the mortgage (if you had this money)? The $25,000 will just evaporate while if you invested in a TFSA you could have a nice diversified investment with interest.

Reason #3: Other investments

With my daughter being born last year, we are starting an RESP and instead of paying down the mortgage we are putting some money aside for her education. Why would you turn down a 20% return on your investment!

Reason #4: Higher financial priorities

I strongly believe in education and opportunities.

I am planning on using some of my savings to take some exams that will further my payscale and career.

[quote]So I can earn more money and pay more taxes![/quote]

Canada is an amazing country but our housing market encourages risk. You could take all the equity out of an existing property and leave 20% to avoid CHMC fees and use the remainder as a down payment for an investment property using leverage and the bank’s cash.

All I am saying in this post, is to look at your options, you do not want to look back and not take advantage of any opportunities that came your way.

 

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2 thoughts on “Why Canadians should not pay down their mortgage!”

  1. I too have a low interest rate of 2.4% and I accelerate my mortgage. The thing is that when interest rates do go up, the compound interest on the mortgages will kick in and I would prefer to pay less interest to the bank. Early in a mortgage term, paying a little extra can shave years on the mortgage term because of that compound interest. Paying bi-weekly saves 3 years for example, that’s huge and I am not sure any arguments can show a better way.

    Don’t get me wrong, I also max out my TFSA, RESP and I contribute to my RRSP. My savings rate is quite high.

    It goes without saying that you need to pay yourself first and stash the money away which I believe you are highlighting by not ignoring the other accounts. However, I disagree on playing the interest rate game since not everyone can invest well. 8% or 10% are unrealistic investment returns to bank on nowadays too. Dividends don’t pay that much and equity fluctuates.

    Are you early in your mortgage term? I truly believe there are different strategies to focus on depending on how much you have left in your mortgage and your ability to service the debt.

  2. Decent article – but you actually only have 1 reason for not paying down your mortgage, which consequently can also be used as a reason TO pay down your mortgage (despite your other “four” reasons).

    You reason is that there are better ways to grow your money, rather than the avoidance of compound interest working against you.

    Said another way – your 1 reason that you aren’t going to pay down your mortgage is that you prioritize the growth of your money.

    There’s nothing wrong with that but inferring that any other priority is wrong is…well…wrong.

    So Here’s the #1 Reason To Pay down (or not) pay down your mortgage – You want to spend your money in a manner congruent with your values. i.e. you prioritize something in your life (growth of money, security, freedom, time with family, etc) and then you spend your money in the most advantageous way to maximize the enjoyment of that value.

    When giving financial advice (like NOT paying down your mortgage) try and remember that people have different values, and thus different priorities.

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