In Canada not every homeowner will have enough funds to pay down mortgage and have money left for investments at the same time. Thus, most homeowners are in a constant dilemma on what to do with their money. Will they be better off financially by paying their mortgage at a faster schedule, or by investing and letting their mortgage take its natural course?
The key is to answering this perennial question is to determine which option would offer more benefits. If you have been struggling to come up with a decision on whether to pay down or invest, determine how much you earn from your invested dollars. Will it be more than the savings you expect to enjoy from making bigger payments on your home mortgage?
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With the current mortgage interest rates hovering on all-time laws, investing would sound like a lucrative proposition. It may be time to invest. However, financial experts predict that the rates are expected to experience a steady rise in the next few years. You can confirm this with your mortgage broker in Bradford. In this case, slowly chipping away at your mortgage balance would be a wiser move.
If this is the case, how then do you determine the better course of action to take? Financial planners say that theoretically, investing should prevail over mortgage repayment hands down – unless you are an aggressive, long term investor. In practice, however, that does not happen very often.
Historically, over the long term, stocks have the tendency to yield a higher percentage of returns compared to the average mortgage rates in Canada. The problem is not everyone would be invested in stocks 100% – and remain invested. Many would be tempted to sell out at the most inappropriate times. That is the danger.
A more conservative investor who tends to be partial to fixed income investment vehicles such as GICs or bonds are likely to gain steady income. On the other hand, an aggressive investor, or one who maintains at least 50% stocks in their investment portfolio, would be more likely to gain a higher profit, although there is no guarantee.
If you have a comparatively low tolerance for risk, financial experts would advise you to just pay down your mortgage. Even if the interest rate is pegged at only at a low 3%, you are still guaranteed of a safe rate of return. Over time, a bigger chunk of your payments would go towards lowering your principal, and less for interest payments.
As a rule of thumb, it would make sense to pay off your mortgage faster if the effective interest is more than your expected post-tax gains from your investments. If you are a conservative investor, the decision is easy – pay off your mortgage before investing.
On the other hand, if you are a more aggressive type of investor with a higher risk tolerance, filling up your investment portfolio with high-yield stocks would be an enticing option. While success is not guaranteed, it has the potential to pay higher dividends in the end.
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