High mortgage rates have temporarily settled one of the longest-running debates in personal finance: invest or pay off your mortgage.
You might be able to consistently earn a rate of return on your investments that beats the interest rate on your mortgage, but who knows? Fees can eat up returns, and markets can be volatile. Paying down a mortgage is a guaranteed result – a point that resonates in these stressful times.
A reader recently asked about mortgages versus investing. His mortgage renews in July; given how high he expects his mortgage rate to be, should he take all the money out of his tax-free savings account to pay off the mortgage in full? No mention was made of how much money is in the TFSA, how long it took to build that much or what the rate of return was. But, even so, it’s still possible to build an argument of using the TFSA to pay the mortgage.
First, today’s mortgage rates are on par with average annual returns for a balanced portfolio at 5 to 6.5 per cent. Second, the TFSA withdrawal is tax-free. Every dollar of the withdrawal can be used against the mortgage. Third, the money withdrawn from the TFSA can be replaced.
This latter point is the key. As soon as that mortgage is paid off, refilling the TFSA becomes a priority. A good starting point might be to contribute the same amount to the TFSA each month as is currently going toward the mortgage.
Becoming mortgage-free feels great, but the practical value is having hundreds or thousands of dollars per month freed up. Mortgage payments helped you build wealth in real estate. Now, use that payment money to diversify your wealth into stocks, bonds and funds.
Make TFSA contributions automatic, just like mortgage payments. Set up regular transfers into your TFSA account from your chequing account every time you get paid, and mind the TFSA contribution and recontribution rules.
Money withdrawn from a TFSA in 2024 should not be replaced until 2025. The contribution limit for the current year is $7,000.
Rob Carrick