Low, low mortgage rates are encouraging some well-off Canadians to forget about paying off their homes ASAP. Instead, they're using extra cash to invest. It's a new approach, but is it wise? Gordon Powers of RateSupermarket.ca takes a close look.
Despite repeated warnings from the Bank of Canada, Canadians seem to be in no particular hurry when it comes to clearing away their mortgages, according to recent research from CIBC.
Historically low interest rates are driving this trend, and so is the idea of "good" debt a notion that didn't really exist 25 years ago.
While slightly more than half of homeowners with mortgages (55 per cent) say they're doing something to pay their mortgages down sooner, a similar poll last year found that more than two-thirds (68 per cent) were taking steps to accelerate their repayments.
Paying the Mortgage is No Longer Priority
In fact, CIBC reports, rather than try to work off their mortgage debt, Canadians are spending more this year on other items such as home renovations (up 30 per cent from a year ago), and summer vacations (up 20 per cent from last year).
So why isn't everyone whittling away at their mortgage whenever they can?
Well, they could be tackling even more expensive debt. If you've got an outstanding balance on a credit card, for instance, that's always the best place to start. Or maybe they think they can do better elsewhere particularly with rates at these levels.
High net-worth Canadians those with investable assets of $500,000 or more are using mortgages as a deliberate investment strategy, according to a new Investors Group survey.
Disregarding the Retirement Deadline
Two thirds of those who have cash available to pay for their home in full still have a mortgage and about one quarter of them aren't even planning on becoming mortgage-free before retirement.
What's more, not even the looming inevitability of rates rising has them concerned about clinging to those mortgages.
When asked if they were worried about rates going up in the next year, only 8 per cent had any concern. Fourteen per cent were concerned about rates rising in the next three years and 18 per cent worried about what rates might look like in five.
"The notion that a mortgage is used only when funds aren't available to pay cash for your home doesn't ring true for many wealthy Canadians," says Peter Veselinovich, vice president of banking and mortgage operations at Investors Group.
Will You Be Rewarded For The Risk?
Many within this group think they'll be better off putting money aside in stocks or real estate than by throwing it at the mortgage but that may not be as true as it's been in the recent past.
Even with today's relatively low rates, it's tough to find an investment that's going to yield a higher after-tax return than you'd get by paying your mortgage down.
Remember, it's not sufficient to just get a higher return from stocks than it costs to carry that mortgage. The borrowing cost or rather, the effective return that you get by repaying the mortgage and eliminating the associated interest cost is guaranteed and risk-free.
Investing in stocks, on the other hand, is clearly risky and, arguably, more so that it was a couple of years ago. Plus, you've got to do a lot better than you may think to come out ahead.
No investor would prudently pick a highly risky return just because it's barely higher than a risk-free alternative. In practical terms, this means borrowers shouldn't eschew pre-paying the mortgage and investing in stocks simply because equities are expected to earn a higher return.
If they're going to be compensated for the actual risk they're taking, they shouldn't direct money towards stocks unless they expect to earn the mortgage interest rate plus something like a 5 per cent risk premium and that's not easy to do these days.
