Should you pay down your mortgage faster or invest?

Is it better to pay down your mortgage faster or invest instead? With mortgage rates sitting at near-record lows, some borrowers have figured that the return on their invested dollar should exceed the guaranteed savings from making additional payments on their homes.

However, many experts say rates can’t stay at record lows forever and will eventually rise. This could be as high as a few percentage points in a few years, according to François Dupuis, chief economist at Desjardins.

Jason Heath, a fee-only financial planner with Markham-based Objective Financial Partners, said in theory investing should win out over debt repayment provided you’re a long-term, aggressive investor. However, that’s not necessarily the case in practice.

“Over the long run if you look back historically, stocks have returned a higher percentage than the average mortgage rate in Canada – but not everybody is going to be 100 per cent invested in stocks and stay invested,” Heath said.

Unlike a conservative investor, who favours fixed income investments like GICs, a more aggressive investor, or someone with no less than 50% of stocks in their portfolio, will be more likely, though not guaranteed, to net a higher return.

“But someone with a low risk tolerance should just pay down the mortgage,” Heath said. “It’s a high guaranteed rate of return even if your interest rate is only three per cent.”

Those prioritizing investing also need to consider the fees they pay, according to John DeGoey, portfolio manager for Toronto-based Industrial Alliance Securities. A low-cost ETF investor with a management expense ratio below 1% is far more likely to net better returns than the average mutual fund investor with an MER in excess of 2%.

“Cost is a really important consideration when you do your investing because it is probably the most reliable determinant of how you do,” DeGoey said. “The more products cost the lower your return is because costs eat into returns.”

Just as importantly, you need to consider the length of your amortization and the risk of default.

“If you had a longer amortization period left and you don’t have a lot of equity in your home – especially if you’re a new home buyer who was stretched to the max when you bought it – those are the people that should consider making extra payments in the case of a job loss, or the death or disability of a spouse,” Heath said. “It’s those people who want to ensure that if they had a negative event that they could still stay in their house. If they had home equity, they could potentially refinance their mortgage with lower payments and be OK.”