November 6, 2002

Pay Down the Mortgage or Invest?
by Marcel Chartier

This is one question I really struggled over until a past financial advisor just said - do both. Somewhere, I read that if you were making more in returns from investments than you were paying in interest, then investing was the thing to do, not paying down debt. What I discovered later was that lowering your monthly debt by lowering your mortgage (or other debt) increases cash available to invest and helps secure stage two and increases net worth. (This was a good example of text book advisor information that was not meant for me at my financial stage.)

Well, here is my no nonsense guide to sorting out this question:

1) Are you putting away your maximum RRSP (401k, etc) amount now?

If no, then that is your priority.

2) If you are putting away your maximum, take your tax return and put it on your mortgage.

Why max your RRSP first? Well there are two main reasons, the first being money makes money and if you don't have some built up it won't make much for you. Secondly, when you have some money built up you can use it in a hardship situation if you desperately need to. It is much more difficult to raise money from your house, especially in a soft housing market than to cash in part of an investment. You can always dip into your RRSP investments for quick cash without having to put your house up for sale, or add additional debt through a second mortgage.

Of course, if you are a person who does not invest anything, and have a huge mortgage, the only reasonable thing you can do (if you want to stay in this financial situation) is try to pay down the mortgage.