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Should You Pay Down Your Mortgage or Invest? Here’s 1 Simple Answer

Christopher Liew, CFA
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Are you in a fork in the road? Are you deciding whether to pay off your mortgage or invest? Either way, you are facing a crucial moment. Debt is a thorn when you are building wealth or a nest egg. The earlier you can pay down debts, the better. You’ll have more money to make money.

Sound basis

It’s a worthy goal to be debt-free but not necessarily the right choice. I can offer a rational basis to help you decide.

If your investment prospect can deliver a higher rate of return than the interest rate on your mortgage, you can invest. However, if your mortgage’s interest rate is higher or can outperform your investment prospect, you should pay off or aggressively pay down your mortgage.

The mortgage rate forecast in Canada from 2019 to 2021 is between 3.02% and 3.34% per annum. Refinancing to obtain lower interest is an option. Also, you can compare the rate predictions with some investment options.

Investment options

H&R (TSX:HR.UN) is a $6.2 billion real estate investment trust (REIT) that owns and operates several regional mall real estate properties in Canada. Before the quarter ended September 30, 2019, H&R had to decide to pay off a substantial outstanding debt.

Management opted to repay U.S. mortgage of nearly $219 million with 4.5% interest per annum. As a result, H&R received US$195 million distribution from its 50% ownership at the luxury Long Island property in New York City. A portion of the fund was used to repay other debts.

H&R’s prime asset is The Downtown Calgary, where the principal tenant is Encana. The oil company is set to vacate and relocate to the U.S. Even if Encana decides to pull out of Calgary completely, the lease agreement will remain active for the next 18 years.

Also, despite the threat of online retailers, H&R expects the occupancy rate in 2020 to remain within the 95% range.

This REIT is a generous dividend payer. At $21.70 per share, the annual dividend due you is 6.42%. Since H&R pays the dividend every month, a $100,000 investment will generate $535 monthly passive income.

Specialty REIT

Northwest Healthcare (TSX:NWH.UN) is the owner of medical real estate around the world. The top tenants of this $1.66 billion REIT include the leading hospital operators in both Australia and Brazil.

Alberta Health Services and Germany’s largest rehabilitation provider are prime tenants, too. In total, there are 171 properties in the portfolio with more than 14 million square feet of leasable space.

This REIT stock is trading at $12.55 per share. With a 6.46% annual dividend that’s payable monthly, your monthly income is almost the same amount from H&R.

Traditionally, Northwest partners with major institutional investors that assume the roles of manager and minority partner. This setup allows its assets to grow quicker. Notably, healthcare spending is outpacing GDP growth around the world.

You can expect growth in 2020 and beyond because significant opportunities in the healthcare space abound. Northwest can capitalize and expand into new markets, including the U.S.

Your call

The final decision on whether to pay off a mortgage or invest rests with you. H&R and Northwest Healthcare are your investment options. But the worst decision is to spend and not to pay off debt or invest.

More reading

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends NORTHWEST HEALTHCARE PPTYS REIT UNITS.

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