There has been a common trend recently among clients with the concern of whether they should pay off their mortgage before it runs its natural course OR should I pay down as fast as possible using the pre-payment method.
The misconception I find in todays society is that we see our home, the one where we live, an asset. In my opinion, an asset is an instrument that puts money in your pocket on an ongoing basis, rather than require you to make constant payments to keep it operating. What I mean is, at the end of every month you are left with a net deficit because your principle residence does not generate monthly cashflow (unless you rent a portion of your home).
Yes, I understand that the home grows in value over time, but those are just paper profits! To build wealth we must invest in instruments that generate monthly cashflow that is positive net of any expenses. A more important point is that those expenses should be at the very least covered by someone rather than yourself.
I recommend taking a moment to sit down with a mortgage professional that has some level of understanding of assets VS liabilities, cash flow and balance sheets. This professional will be a tool in your arsenal of weapons which will allow you to deploy your capital in a way to build generational wealth.
Below you will find a few scenarios that will speak to the pros and cons of paying down your mortgage early:
You have a super low mortgage Rate
If you locked in at a great rate and have low interest on your mortgage, take advantage of it! Pay it back as you can but do not feel pressure to go above and beyond your monthly mortgage payment if it is not an option for you. I would advise in this instance, to speak with your financial planner or accountant to find out what your strategy is for debt repayment.
Having a solid plan can help set you up for future success and help you focus on paying down debts that have the highest interest amount first, thereby lowering the overall debt load you are carrying and paying out each month. I can recommend some fantastic accountants and financial planners if you are on the lookout for one!
The Property is a rental or investment property or houses a home-based business
This may be a consideration for some people as a portion of the interest (on rental properties and homes with home offices) are tax deductibles. In these cases, aggressive payback could have a downside in relation to your tax right offs.
Again, this is an instance where an accountant’s guidance can direct you towards the best option. For some, the tax break is significant and for the circumstances, it makes sense to keep the payments as they are. For others, it would make more sense to increase the payment as the interest is minimal Talk to a professional to get the best advice on this area and consider all your options.
You have a better investment opportunity
If you have an opportunity that will give you a higher return on your investment, consider taking that avenue vs. paying down your mortgage. For example, if you put $100,000 into your 3.00% mortgage, you save $3,000 next year but if you made a 5% return on that $100,000 instead, you could put that $3,000 towards your mortgage next year and still have $2,000 left over.
With that said, there are many instances when an investment may seem excellent on paper, but, is not ideal. Always seek advice from a professional first before making a financial decision.
These are just 3 examples of times it doesn’t make sense to pay down your mortgage right away. Ultimately though, you should consider what choice will be the right one for you. There are many instances where paying down your mortgage does make sense. As a Dominion Lending Centres mortgage agent, I am here to inform you of every option available to you and advise you on what we feel is the best course of action. I can work with you and your financial advisors/accountants to determine when and if paying down your mortgage is a good option for you—but at the end of the day, the decision is yours!
Thank you,
DF
416 550 3101
Daniel@finkelbergfinancial.com