One of the biggest debates in the personal finance community is whether someone should use their extra cash to pay down the mortgage or put that money to work in investments.
The mortgage paydown strategy is popular with risk-adverse folks. Investing is risky, while shoveling extra cash towards the mortgage offers a guaranteed return that’s usually better than GICs or high-interest savings accounts.
Paying off the mortgage early is also incredibly empowering, at least for some people. They yearn for debt freedom more than anything.
This will enable them to do things they’ve always dreamed of, like travel, take a lower paying job, or retire early.
The investing argument essentially comes down to one factor. Investments in the stock market grow much faster than mortgage interest. If stocks return 8% over time and a homeowner can reasonably expect to pay 3% annually over a 25-year mortgage, the investor would end up with more money.
It works out to taking a 3% loan to make 8%. The only problem is the 8% return won’t be consistent. It will vary from year to year.
Perhaps the best solution is a hybrid approach. Paying down the mortgage early is a worthy goal that can save thousands in interest over the life of the loan. But investing for the future is incredibly important too. A 50/50 split between the two goals is a worthy compromise.
Remember, neither of these choices are terrible. Both will ensure you become richer in the long run, which is the ultimate goal.