With recent changes to Canadian mortgage rules and ultra-low interest rates continuing for the foreseeable future, the temptation to pay less on one's mortgage and invest more elsewhere must be powerful to say the least.
But it's always wise to look before you leap. Ask yourself, what are the pros and cons of paying down mortgage debt quickly versus taking a slower approach and using the excess cash for other investments?
Bob Stammers, director of investor education at the CFA Institute in New York City, says the question facing mortgage holders is the same one facing investors: How to bridge your need for return against your need for security?
"Whether someone is going to pay back their mortgage or not is really going to be a function of how conservative they are. Some will want that asset paid for because they want the security," he says. "Others will question why they're putting extra money into a low-rate mortgage when they could be using the funds in the market where the expected return is much higher."
What is right for one investor is not right for the next. Each individual's circumstances -- retirement horizon, size or mortgage loan, consumer debt level -- will dictate whether disposable income should be shuttled towards mortgage debt or better used to meet additional financial goals.
"There's no one rule of thumb. Each individual should look at their own personal circumstance; it may be advantageous to do so with the record-low interest rates to pay down your mortgage quickly," remarks Frances Hinojosa, mortgage expert, BMO Bank of Montreal in Toronto. "Any lump sum that you do use towards your mortgage and any extra funds you put towards it will pay it down that much faster … it's the smart thing to do."
Hinojosa says she's been telling her clients to take advantage of the present situation but to base their payments on higher interest rates.
"It wasn't that long ago that rates were closer to four or five per cent. Now, if you're looking at a rate in the three per cent range, what I'd suggest is to figure out what the payment would be at a higher interest rate and make it now. That way, if you do renew in the foreseeable future and rates do go back to the normal range, then you're already used to that payment. In the meantime, you're paying down your mortgage faster."
Tips on how to become mortgage free faster
There are a number of small changes that homeowners can make which will make a big difference in helping them become mortgage free faster if that's the goal, remarks Lezley Chafetz, director, real estate secured lending, Scotiabank in Toronto.
"These include moving to bi-weekly payments, making small extra lump sum payments, even $500 a year makes a difference, and small annual payment increases of say two per cent," she says. "Also, (there are) programs that give homeowners the flexibility to split their mortgage to take advantage of low interest rates in the short term while protecting against increases over the long term."
If home owners concentrate on paying more on their loans while interest rates are low, they'll save interest over the life of their mortgage and free up their cash flow for other things such as saving for their child's education, she adds.
When paying off your mortgage fast doesn't make sense
But if time is on your side and you plan on investing your funds instead of pounding your mortgage debt into oblivion, the CFA Institute's Stammers says the expected return on the market, if one is willing to take the risk, is relatively high.
"If you have a high-rate mortgage you've a much more compelling reason to pay it off. But if you have a low-rate mortgage, it's not very compelling to pay it off (at present)," he says. "There's a spread to be had if you're willing to take that risk. But there's no compelling reason to be paying down your mortgage unless you're getting later on in your years. As you get older, it becomes a more compelling reason because I'd never advise anyone to go into their retirement years without having that asset paid for."
"What I've suggested to some of my younger buyers or individuals with RRSP room, a great strategy to do if you can do it tax efficiently, is do an RRSP contribution with your savings," BMO's Hinojosa adds. "Come tax time when you get that refund, turnaround and pay down your mortgage. That way, you're building up savings while paying down your debt with your refund."
Scotibank's Chafetz says it's always beneficial for a mortgage holder to pay off their mortgage faster. "For younger homeowners, the interest savings over the life of their mortgage can be significantly higher than for homeowners further along their mortgage amortization curve," she adds.
But younger homeowners usually have higher interest rate debt to contend with vis-à-vis credit cards. Stammers says to focus on crushing that debt first and foremost.
"We are at historically low rates on mortgages and if you can pay yours off within the 30-year period, you're not going to get any additional break for paying it off quickly," he adds. "You can do accelerated plans and shave some years off of your mortgage and save some interest expense, but when you're talking about mortgage rates that are this low, and in some jurisdictions they're tax deductible, there's no real reason to pay it down early."
Meanwhile, another thing Hinojosa recommends homeowners do if they don't consistently is to revisit how your mortgage plan is panning out annually. Many folks she finds make the mistake of not doing so frequently enough.
"I'm always of the firm belief that you should sit down with a professional. Contact someone like myself and sit down and do a mortgage plan," she advises. "It's unfortunate. A lot of people get a mortgage and then forget about it. I've been guilty of that too; life gets busy. But you should be looking at your mortgage at least on a yearly basis."
The importance of mortgage renewal
A lot of mortgage holders will be coming up for renewal now or within the next few months and their previous rates were probably about four per cent. Now, they'd be presently surprised to see lower rates. Hinojosa says to keep paying what you're paying at that four per cent.
"I just did one mortgage renewal recently and by keeping their payments the same, this client is shaving off about seven years off their amortization," she adds.
Scotiabank's Chafetz echoes Hinojosa where the customer is renewing at a lower rate by advising them to keep their mortgage payments the same as they have already budgeted for that payment amount.
"The one thing that will not reduce the amortization curve or shorten the life of a homeowner's mortgage is the interest rate," she says. "Therefore, when looking for a mortgage, it is important to ask about the pre-payment options available. Some low rate mortgages have more restrictive pre-payment options that restrict their ability to pay off their mortgage faster causing them to pay more interest over the long run."