Friends of My Own Advisor know I don’t like debt. Since moving to our current home and taking on a fat mortgage, I struggle now and then with our debt load. My wife and I are fortunate to have good jobs but you never know when that might change. On that note, I can only control a few things when it comes to my job, namely my performance and behaviours on the job: do what is asked of me and more; complete my work effectively and efficiently; be professional; continue to mature my subject matter expertise and acquire new skills when and where I can. With a significant reorganization underway at work the future looks both promising and cloudy. With that weather forecast, you think I’d want to kill off debt much sooner than later. Lately, I’ve been considering the opposite:
While paying down debt will continue (I can’t stop my mortgage payment), I’m wondering if I should stop making lump sum payments on my mortgage for a short period of time (1-year) and invest that money instead?
Our mortgage is easily our largest monthly expense. Our bi-weekly mortgage payment plus our lump sum payments constitutes over 30% of our net income. If we are lucky to keep the borrowing rate fixed in the future, and we march on with our current lump sum payments, the mortgage will be killed in eight years.
On the flip side, while extra contributions on our mortgage seem like a great thing to do in this low-interest rate environment, these payments are competing with my investment objectives. I could probably earn a better yield from a basket of dividend paying stocks or a better return from the appreciation gained by broad-market Exchange Traded Funds (ETFs) over the “guaranteed return” my mortgage payments provide. To date, my approach has been to tackle both; take down the mortgage using prepayment privileges and buy investments when I can afford to.
Focusing on investing over the next 12 months would likely see:
- The Tax Free Savings Account (TFSA) maxed out sooner, and
- Registered Retirement Savings Plan (RRSP) contributions increased.
- The mortgage will take longer to pay off, and
- We’ll need to borrow more money when our mortgage term comes up for renewal.
What would you do? Focus on debt reduction? Focus on investing instead of lump sum mortgage payments – making money work longer for a larger reward? Do a little bit of both?