2023-08-23 11:30:00
With the dizzying rise in interest rates, many are wondering if they should not use their cash to accelerate the repayment of their mortgage loan.
But this is not always the ideal solution. In some cases, it will indeed be more profitable to invest your money to make it grow, explains Antoine Auger, financial planner, IG Wealth Management. These tips will help you make the most appropriate decision for you.
Consider interest rates
Should you repay faster or invest your money? “Let’s say a person makes a prepayment on his mortgage that will allow him to pay it off in full 10 years earlier. She will therefore be able to save thousands of dollars in interest,” says Antoine Auger.
However, he adds that the answer is nuanced and that we must be careful not to generalize. Indeed, various factors should be taken into account, in particular the interest rate paid on the mortgage loan, but also the investor profile and therefore the potential returns on the investments.
“If the interest rate on the loan is 2% when we could hope for returns of 4%, paying off your mortgage more quickly will be less advantageous. On the other hand, the higher the loan rate, for example 6 or 7%, the more interesting it will be to make advance payments, ”he says.
This is all the more true if the investor profile is of the cautious type, instead of moderate for example, since the returns on his investments will certainly be lower.
Taxation on investments
Another important element that comes into play: the taxation applicable to investments. “The return from an amount placed in a TFSA will be tax-free. In this case, we could therefore obtain a 4% net return. But if our TFSA is maximized and we instead deposit our cash in non-registered investments, then the returns will be taxable and we would only get 2% net,” illustrates Antoine Auger.
In summary, when the investor profile is cautious, the interest rate on the loan is high and you invest in non-registered investment products, it will be to your advantage to repay your mortgage loan quickly.
Conversely, if you can contribute to a TFSA and the interest rate on the mortgage loan is not very high, there will be little gain in paying it off faster.
The special case of plexes
Many Quebecers own plexes. They reside in a dwelling and rent out the others. In this case, many lenders allow borrowers to create “tranches” or mortgage sub-accounts. For example, a first installment will represent 40% of the loan and a second installment 60%.
“In this case, the interest will be deductible for the installment relating to the rental part, but not for the other. Therefore, it will be interesting to repay more quickly the tranche whose interest is not deductible, that is to say that which concerns the accommodation in which one resides, ”recommends Antoine Auger.
He concludes by recalling that each situation is different. Get advice and do your calculations well before making a decision. It is also necessary to check what are the conditions for early repayment of the mortgage loan granted by the financial institution, in order to avoid penalties.
CASE EXAMPLES:
Example 1:
6% mortgage rate
Return of a non-registered account of 2% net
Clearly advantageous to pay off the mortgage faster
Example 2:
2% mortgage rate
4% TFSA return
Clearly advantageous to invest your money
Example 3:
6% mortgage rate
4% to 6% yield
· More nuanced answer, scenario planning should be done.
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