Invest or pay down the mortgage as rates soar and stocks tank?

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High interest rates require us to take a fresh look at the long-running debate over whether it’s a smarter financial move to invest or pay down your mortgage.

When interest rates were low, investing was an easy choice. Pay down a mortgage at 2 to 3 per cent or invest in a Canadian stock market that has produced an average annual total return – dividends and share price gains – of 7.3 per cent over the past decade.

Now, we have mortgages at 5 to 6 per cent, and the S&P/TSX composite index is off about 10 per cent on a year-to-date basis. Mortgage paydown for the win, right?

If you’re looking for a guaranteed good outcome, pay down the mortgage. Reducing principal is a great idea with mortgage rates at today’s elevated levels. This is particularly true if you have a mortgage that will renew at a much higher rate in the next 12 months.

There is an argument for investing over the mortgage paydown, though. Stocks could fall further from current levels, possibly a lot more. But the S&P/TSX index was down about 18 per cent from its year-to-date peak as of early this week, which is a substantial amount. You’re buying stocks at marked-down levels today, which means you’re well positioned for gains over the next five to 10 years.

With a variable-rate mortgage, your cost of borrowing is likely to rise a bit more, plateau and then edge lower as the Bank of Canada adjusts rates back to more normal levels. As the next five years roll out, it’s going to be progressively easier for your investments to produce average annual returns above the rate on your mortgage.

It’s harder to make the case for investing if you have a five-year fixed-rate mortgage because your investment returns will have to clear a hurdle of, let’s say, 6 per cent after fees on an average annual basis over a span of five years. Doable, but by no means a done deal.

Now for a practical take on this question: There’s more financial stress in our lives than we’re used to because of inflation, rising interest rates, falling house prices and disappointing investment returns. Paying down a mortgage is a way to reduce stress. Investing in choppy stock markets is not.

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Rob’s personal finance reading list

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Remote work was supposed to allow people to move to far away from their jobs to find better living conditions. Here’s a first-hand account by a guy who headed to rural Prince Edward Island from Toronto in the pandemic, but found it hard to work remotely. Now, he’s back in Toronto.

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Toilet in the kitchen

A story from a crazy rental market – in Sydney, Australia. A room recently went on the market with a toilet, shower and kitchen all in the same space. Interesting to see rents expressed in weekly amounts in this report. That’s a lame trick for hiding monthly costs.

Cooking oil on the boil

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Ask Rob

Q: I have a balanced mutual fund in my tax-free savings account with Toronto-Dominion Bank that I contributed to for several years before online investing was even possible. I now also have a separate TFSA with TD Direct Investing, where I invest current TFSA contributions. I would like to sell the mutual fund with TD bank and transfer the money to my TD Direct Investing account, where I can buy a very similar exchange-traded fund and save significantly on fees. Is that possible? Will it cause any issues with CRA?

A: The online brokerage business, TD Direct included, thrives on this kind of account transfer. So, yes, it’s possible. There shouldn’t be any issues with CRA if you transfer the TD Bank TFSA directly into the TD Direct TFSA.

Do you have a question for me? Send it my way. Sorry I can't answer every one personally. Questions and answers are edited for length and clarity.

Today’s financial tool

The Canadian Bankers Association has created some fun quizzes to help increase awareness of cyber-scams.

The Money-Free Zone

The new song Love on the Run by The Broken Bells has a mellow retro-soul feel that picks you right up.

Listen to this

Got gift cards? CBC Radio’s Cost of Living show on why you should spend them right now.

ICYMI

• The big question today in real estate is whether renting or owning is worse for your finances
• Do you have a safety net? The coming recession could be the most unfair ever
• Buy low? Forget it – investors today are buying safety

More Rob Carrick and money coverage

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