Mudit Jain, Senior Vice-President of Specialized Advice at CIBC, says that decisions about how to allocate surplus cash should begin with a full review of a family’s financial picture. Taking into account both short-term priorities and long-term objectives helps ensure that larger financial decisions are aligned with what matters most.
“The next step is to compare the return on your money,” he says, which typically involves comparing the existing mortgage rate against anticipated market returns.
“While paying down a mortgage offers this guaranteed reduction in the amount of interest you’ll pay over the term of the mortgage, you have to contrast that with the often-higher long-term returns you can potentially achieve in a diversified portfolio of securities.”
Another overlooked factor is tax implications, Mr. Jain says. He explains that while after-tax earnings used to pay down debt will reduce mortgage interest expenses, those same dollars invested through a registered account may deliver immediate and long-term tax advantages.
For example, the tax-free growth offered by a TFSA can, in some cases, outweigh the benefits of accelerating mortgage paydown. The optimal approach, however, depends not only on an individual’s tax position, but also on broader financial goals, risk tolerance, life stage and the sequencing of debt repayment versus investing.
“As always, it’s important to speak with a financial advisor to fully understand the after-tax implications and determine the strategy that best fits your overall plan,” he adds.
While paying down a mortgage provides a guaranteed reduction in interest costs over the life of the loan, Mr. Jain emphasizes that it should not be viewed in isolation. Higher-cost debt, such as credit cards, personal loans or lines of credit, may warrant priority before directing additional funds toward mortgage prepayments.
Mr. Jain notes that timing also plays an important role. Making prepayments ahead of a renewal in a higher-rate environment can help reduce future payment shock, while committing to aggressive paydowns when rates may decline can limit flexibility later on.
Insurance and protection planning need to be considered too, he adds.
“Adequate life and disability coverage can increase a household’s comfort with carrying debt, helping protect against income disruption and unexpected life events, and reducing the pressure to aggressively eliminate a mortgage before other financial priorities are addressed.”
