Should you pay off your mortgage early? Maybe not

Many Canadians hope to pay off their mortgages sometime before retirement to reduce financial stress in their golden years. But few of us have the financial discipline to do it in less than a decade. Still, the Financial Post recently profiled three thirty-something Canadians who’ve already paid off (or are close to paying off) their mortgages, an unusual feat in an era of 25-year amortizations. Citing motivations like wanting greater financial flexibility and increased saving potential, these homeowners used strategies like doubling up on payments, cutting back on cable TV and dinners out and putting raises towards mortgage payments.

It sounds pretty impressive—and these thirtysomethings likely saved thousands in mortgage interest—but The Globe and Mail’s Rob Carrick offers a contrarian point of view in this piece about why retirement savings should come before extra mortgage payments.

Carrick cites the Canadian Association of Accredited Mortgage Professionals’ mortgage market survey showing that between 2010 and 2014, 16 percent of owners used lump-sum amounts to pay down their mortgages (compared to 9 percent in the 1990s, as this table shows). This strategy offers more flexibility than raising the amount of regular payments, so that may explain why it’s becoming more popular than increasing the frequency or amount of payments.

But the trouble, according to Carrick, is when these lump-sum payments come at the expense of retirement savings.

With many mortgages costing the 2 or 3 percent (or in some cases, even less) and net investment returns in the 5 or 6 percent range, Carrick argues that young homeowners would be better served by investing extra money for retirement rather than paying down the mortgage. Just as mortgage prepayments made early on in the mortgage have the most benefit (because early mortgage payments skew more toward interest than principal), early investments in retirement savings have the most potential for growth thanks to compound interest.

Another argument in favour of prioritizing retirement over mortgage prepayment is that retirement investments use pre-tax dollars, while mortgage payments use post-tax dollars, giving the former an added financial boost.

However, some people like the feeling of owning something tangible like a home, and retirement can often feel like a distant, intangible concept (albeit an increasingly important one as we age). For those people, it might make sense to do a combination of saving for retirement and paying the mortgage on an accelerated biweekly basis, which could shave off a few years of payments.

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About Atrina Kouroshnia

Atrina Kouroshnia is an independent, licensed, mortgage broker in the province of British Columbia. She has a degree in Human Relations & Commerce, and past work experiences in HR & Real Estate Development. She comes to the table with great customer service and problem-solving skills. Her approach to finding the best mortgage solution involves both short and long-term planning, making sure her clients are in a suitable mortgage that is flexible to their needs.