It's a great question, and one where the "right" answer often depends on your unique situation. At a high level, there are multiple datapoints that need to be considered when answering this question, one of which is the mortgage interest rate. Let's look at two examples below.
* The following are hypothetical scenarios; Tom and Jane are not actual RBC Wealth Management clients, and these outcomes are not representative of any client's experience.
Scenario 1*
Tom has a mortgage with a 6.5% interest rate. He believes being debt free is the best way to live his life, so he chooses to apply "extra" money toward paying down his mortgage as quickly as possible. For Tom, the psychological benefit of eliminating debt outweighs other considerations, and there is value in that peace of mind. It can reduce financial stress and aligns with his core values around security and independence.
Scenario 2*
Jane, on the other hand, also has a 6.5% rate mortgage, but she is less concerned with becoming debt free as early as possible. Her personal values tell her building up her retirement accounts are more important than paying off her mortgage early, so she chooses to invest the discretionary money she has available at the end of every month. Jane is comfortable carrying the mortgage while prioritizing retirement savings.
Who is right?
Does the fact that Tom and Jane are both paying 6.5% on their mortgages mean one is right, and one is wrong regarding their choices for how to handle their monthly income surplus?
Absolutely not. Financial planning can be as much of a psychological art as it is a math-based science. The numbers tell part of the story, but not the entire one.
We believe that a great advisor should spend time getting to know their clients on a personal level, asking questions to learn about their risk tolerance, debt psychology, and long-term aspirations. The advisor having a strong grasp of their clients' risk-taking preferences allows them to make recommendations based not only on data and hard numbers, but also on client emotions and values. The data-versus-emotion balance is critical, as these two hyper-important elements often conflict with one another.
What actually matters
It's impossible to come up with a one-size-fits-all answer to a question like this. Many different factors impact the best path forward, including:
- Emotional tendencies around debt and security
- Mortgage interest rate relative to potential investment returns
- Amounts and types of other debt you're carrying
- Size and composition of your existing investment portfolio
- Tax implications of different strategies
- Your timeline to retirement
- Your overall income stability
What is best for you?
While interest rates, potential investment returns, and other numbers-based factors are important when answering this question, they're only part of the equation. The best decision you can make will consider both your full financial picture and your core values, blending the two together to help create a solution that makes financial sense while also creating a feeling of confidence and security for the path forward.
If you're wrestling with this decision, that's exactly what we're here for- to help you navigate the numbers while honoring what matters most to you.