With interest rates soaring, many are wondering if they shouldn’t be using their cash to expedite their mortgage repayments.
But this is not always the ideal solution. In some cases, it’s actually more profitable to invest your money so it grows, explains Antoine Auger, financial planner at IG Wealth Management. These tips will help you make the decision that works best for you.
Consider interest rates
Should you pay back your money faster or rather invest? “Suppose a person makes a prepayment on their mortgage that allows them to pay it off in full ten years sooner. This can save her thousands of dollars in interest,” says Antoine Auger.
However, he adds that the answer is nuanced and we must be careful not to generalize. In fact, various factors should be taken into account, in particular the interest rate paid on the mortgage loan, but also the investor profile and therefore the potential returns on the investments.
“If the interest rate on the loan is 2% and we can hope for a 4% return, there is less advantage in paying off your mortgage faster. On the other hand, the higher the loan interest rate, for example 6 or 7%, the more interesting it is to pay in advance,” he says.
This is all the more true when the investor profile is cautious rather than moderate, for example, as the return on their investments is certain to be lower.
Taxation of Investments
Another important element that comes into play: the taxation of investments. “The return on any amount paid into a TFSA is tax-free. So in this case, we could see a net return of 4%. But if our TFSA is maximized and we put our money into unregistered investments instead, then the income would be taxable and we would only receive 2% net,” explains Antoine Auger.
In summary, if the investor profile is cautious, the lending rate is high, and you invest in unregistered investment products, you will benefit from being able to repay your mortgage loan quickly.
On the other hand, if you can contribute to a TFSA and the interest rate on the mortgage loan isn’t very high, there’s little benefit from faster repayment.
The special case of plexus
Many Quebecers have complexes. You live in one apartment and rent out the others. In this case, many lenders allow borrowers to set up “tranches,” or sub-mortgage accounts. For example, the first installment is 40% of the loan and the second installment is 60%.
“In this case, the interest on the installment relating to the rental part is deductible, but not on the other. It will therefore be interesting to repay more quickly the tranche whose interest is not deductible, i.e. the one relating to the accommodation in which you live,” recommends Antoine Auger.
Finally, he reminds us that every situation is different. Get advice and calculate well before you make a decision. In order to avoid penalties, it is also necessary to check the conditions for the early repayment of the mortgage loan granted by the financial institution.
CASE STUDIES:
Example 1:
6% mortgage rate
Return of an unregistered account of 2% net
Clearly advantageous for paying off the mortgage faster
Example 2:
2% mortgage rate
4% TFSA return
Clearly beneficial to invest your money
Example 3:
6% mortgage rate
4% to 6% return
· A more differentiated response, scenario planning should be done.