With the current low mortgage rates, I am finding a lot of my members have the same question: should I try pay down my mortgage faster, or should I start/continue investing in my future? My answer is always the same: it depends! The reason I cannot give a definitive answer is due to the number of factors that make each of us unique. In this blog, I would like to share some of the factors I consider when giving advice to my members, and I am hoping I am able to help more people make the decision that is right for them.
Where should I start?
First, I feel we need to deal with the fact that there is a lot of talk about an over-heated stock markets, a crazy real estate market, hyperinflation and the (hopeful) end of this never ending pandemic. With all of this news, I have also read a lot of predictions of possible events that may happen. While there may be some embedded truth, I believe determining how these events could affect you and your financial wellbeing is the most important.
Now, I totally get that paying off your mortgage early means not having to pay out more of your hard earned dollars to interest and the thought of that savings can be super enticing. As well, thinking of not having a mortgage payment could mean a significant increase to your cash flow once those payments stop down the road, but what I would like you to consider for a moment is the value of compounding.
Compounding causes your wealth to grow faster. It makes a sum of money grow at a faster rate than simple interest because you will earn returns on the money you invest, as well as on returns at the end of every compounding period Compounding will allow your investment to get a turbo charge boost. This strategy over the long term can be significant as the more years the savings accumulate for the greater the savings will be.
I would like to give you some insight into a few of the factors I consider prior to giving my members advice on whether to pay down their mortgage or invest for their future:
Interest savings now versus possible higher returns later.
- It is easy to quantify the interest savings associated with altering your current mortgage payment and the effects of these changes can be significant. However, it is more difficult to calculate the possibility of earning a higher return on your money. But, I believe having a trusted financial expert present this data to you, gives you the opportunity to make the best decision based on your circumstances.
Build equity versus having access to your wealth.
- Paying down your mortgage means faster means building equity faster. The down side to equity (if you can call equity a downside) is how you can access the equity when you need it. To create net worth through an investment account, you do have access to your money if an emergency, or opportunity arises.
Like I said at the start, there is not a definitive answer one way or the other (frustrating, isn’t it?). Each person I meet is unique and their goals are different. This is why I feel so strongly about finding a trusted financial expert who can get to know you and your goals.
As it relates to my original question, I find most people have heard about accelerating their mortgage payments as a way to pay off their mortgage faster. This is done by either switching your payments from monthly to biweekly/weekly or by increasing your payments by a small margin. Making these simple changes can shave off years of mortgage payments and get you to the ultimate ‘mortgage free’ point faster. However, this strategy has the greatest effect when interest rates are high as it will help you bring your mortgage balance down faster. The opposite strategy is to allocate the extra funds into a biweekly or monthly investment account. By starting a savings plan now, it will allow for your money to start working for you.
So, let’s take a look at a real life scenario.
- A mortgage of $450,000 at 2.29% will have a bi weekly payment of $906. If you were to increase the payment by $80 this will reduce the mortgage balance over a 10 year period by $9066
- To invest in yourself and take your $80 bi weekly and place into a balanced diversified portfolio that averages a return of 6% over the same 10 year period. You will have an invested balance of $30026.
- That’s a difference of $20,960!
Of course, this does not necessarily need to be an ‘either, or’ type decision, we will work together to determine the best balance for you based on projections relating to your goals.
Let's sum it up
In conclusion, with the current market conditions, now is a great time to re-evaluate your plan. You can then be confident you are making the right decisions today to ensure you give yourself the best chance of realizing your goals down the road. By meeting with an advisor, we can create an efficient plan for your needs and help you stay on track. We have the tools, expertise and passion to create a strong financial foundation and help monitor your success as you get closer to your goals. Please never hesitate to contact me, or any of our PenFi advisors if you have any questions.
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