Should I Pay Off My Mortgage Early?

A question I hear a lot from many homeowners is, “Should I pay off my mortgage sooner?”. Unfortunately, there are no straightforward answers. Ultimately, It all comes down to your personality, risk tolerance, and personal goals.

Reasons for paying it sooner

If debt and financial obligations cause a lot of anxiety and fear, inability to sleep at night, job security then paying it off early would probably be a sound decision. Nothing wrong with that and something that I would personally do too if this was a concern. 

However, the financial obligations as a homeowner doesn’t end there. In fact, if you plan to stay in your home till you die – your financial responsibility is for life. It must be remembered that you still have to continue paying property taxes, home insurance, maintenance, utilities and many more. 

Uniquely, you may be able to mitigate some of these factors if you have a mortgage helper or parts of your home that has been rented out. 

In reality, You can only truly be liberated if you don’t have to fulfill all these financial obligations.

Reasons for not paying it off sooner

In my opinion, it will come down to your risk tolerance, how well you understand interest rates, and the market. If someone who is already investing in the stock market or rental property investor, this scenario might come slightly easier. Essentially, it is understanding the numbers behind it and the use of common sense. 

In this current low interest rate climate it doesn’t make sense paying off your mortgage sooner. At the time of writing, there are few lenders in Canada that offer variable rates at 1.25% or lower – if you can manage to qualify. With this in mind, you are far better off investing in the stock market which historically gives you an average annual return of 8-10% instead of paying your mortgage faster.

However, it is also true that investing in the stock market is very risky and the value of your investment may go down or some companies in your portfolio will underperform. Thus, it is very important to invest only in businesses that you understand or household names – blue chip companies.

For instance, you may find dividend growth stocks with yield ranging 3-6%. Certainly, I have to admit that I am biased as I only invest in individual dividend stocks. Identically, I am a firm believer of building passive income through dividend stocks. Equally, If you pick solid blue chip dividend growth stocks, not only will your passive income grow steadily over time but also your investment through capital appreciation. Our priorities are to contribute to our registered accounts – TFSA followed by RRSP aiming to maximize annual contribution room if we can.

Our ultimate goal is to live off passive income through dividends without harvesting its capital. Any other sources of income such as defined benefit pension, CPP and OAS towards retirement will be a huge bonus and an icing on the cake.

Desire to Learn

For this reason, it is also important to educate ourselves in personal finance. A topic that many of us didn’t learn from our parents and not taught in school. Continue to seek knowledge by reading books, learn from others, seek mentors and coaches who will guide you to understand the fundamentals of dividend investing and picking the right company. Consequently, learning to do it yourself offers huge benefits and also eliminates the need to pay for a financial or investment advisor. 

Finally, choosing a nominal or No commission fees brokerage will also be beneficial in the overall compounding returns of your investment. Again, using simple math, if you are paying 2% MER fees with your mutual fund or investment advisor and paying $5-10 every time you trade then that’s a huge chunk eaten away on the total return of your investment.

Another reason for not paying it off sooner is, if you still plan to downsize and move again in a couple of years, then it’s futile to keep your money tied to an illiquid asset. 

Personal Finance is Personal

For many homeowners, there is definitely an emotional and psychological advantage of being mortgage free. However, given those points I have mentioned, I would personally continue the minimum mortgage payments and invest the difference in a liquid asset such as dividend stocks in this current low interest rate environment. In short, we can tolerate small interest rate changes as we have a buffer zone in the form of our liquid investments.

Admittedly, it’s a risky assumption that house prices will continue to rise in the future. However, if this trend continues as what we have seen in Canada then you will still benefit from capital appreciation even if you’re just paying your minimum mortgage payments.


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More related topics:

One of my recent blog posts highlighted our mistakes in buying our first home in Canada. With those lessons learned we felt we were equipped with much-needed information this time around buying our recent home using leverage instead of selling our investments to use as a down deposit. In doing so, we improved our total current net worth without dipping into our long term investments.

Moreover, we also made dramatic changes in our lifestyle and embraced minimalism hence we perceived that living less is more. A few simple moneysaving tips we have done are reducing our cell phone bills and switching to No fee bank accounts.  Similarly, I find dividend investing easy and more fun and you can choose a no fee trading account either as a new or seasoned investor.

Finally, when we are employed, we are receive a regular income and a feeling of financial security. However, jobs are not guaranteed and can be also lost and taken away beyond our control as many have experienced during this pandemic due to an abrupt closure of businesses. Therefore, it is very important to generate multiple sources of income to protect ourselves from these unfortunate events.


DISCLAIMER: Everything I have shared in my blog is wholly related to my personal experience. It. is for entertainment and educational purposes only and should not be construed as advice.

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1 year ago

Have you read Psychology of Money by Morgan Housel? In his book he talks about just that. He paid his house off even though he could borrow at low rates. Whatever helps you sleep at night can be a good financial decision and doesn’t necessarily equate to the most rational and logical choice (not paying it off early in a low interest rate environment).

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