Rob Carrick: A winter 2022 take on the age-old question of whether to invest or pay down debt

There’s a standard answer to one of the most-asked questions in personal finance, but you might want to set it aside right now.

The question is this: If you have extra money, should you pay down debt or invest? The usual answer is derived from a comparison of the rate of interest on the debt and anticipated rate of return on the investment. The higher of the two rates is where your money should go.

Now, I’m not so sure. Interest rates are rising and the bull market of the past two years is looking tired. There are a lot of uncertainties in the financial outlook right now and the benefits of debt repayment are guaranteed.

The most recent of many questions about debts and investing comes from a reader who sold a rental property. “Is it better to pay off our mortgage or invest the money with the proceeds?” he asked.

A question to consider in working through this question: When does the mortgage come up for renewal? This is relevant because the renewal rate is very likely to be higher than the current rate, which means a higher hurdle for investment returns in order to be the better option.

Discounted five-year fixed mortgage rates were around 2.9 per cent four years ago, pretty much in line with current rates for that term. Figure on paying 3.5 per cent or more for renewals later this year or next year.

Meantime, annualized total returns from the S&P/TSX Composite Index over the past 10 years of ups and downs come in at 9.1 per cent, while the S&P 500 made 16.6 per cent. The S&P 500 made almost 29 per cent last year, while the S&P/TSX Composite made just over 25 per cent.

Stocks are high and could come down, even crash. Borrowing costs are low and will certainly rise, if not by an extreme amount. On this basis, debt repayment looks like the better bet in the near term.

And what if I’m wrong about that? The buzz from being mortgage-free is a pretty good consolation prize.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.