Paying Down Your Mortgage or Saving For Retirement?
Paying down your mortgage and saving for retirement are two worthy goals. But can you work toward them at the same time?
First, the advantages of paying down your mortgage:
• You will pay less in interest over the long term. The sooner you pay off your mortgage, the less you will pay in interest.
• You will realize more equity when you sell your home. The less you owe on your house, the greater the equity you have built up when you sell it.
• You could get a psychological benefit. If you can pay off your mortgage, you may feel as though a burden has been lifted.
Now the disadvantages of paying down mortgages early versus saving for retirement:
• You might sacrifice investment returns. If you hold off saving for retirement to make larger payments on your mortgage, you could lose substantial growth. The difference between investing $5,000 for 25 years rather than 35 years even at a conservative rate of 6% can reduce the amount of your investment by 50% or more. Furthermore, you get an immediate tax break on your annual contributions.
• You will tie up cash in an illiquid investment. If you may need quick access to a large amount of cash it's harder to get money out of your home than it is from your savings and investments.
• You will risk being under-diversified. If you put all your money in your house, and the housing market slumps, your net worth might suffer more than if you had spread your money among a variety of assets, such as equity based, fixed income based and mutual funds.*
Paying down your mortgage early offers some significant benefits. But as you could be retired for two or three decades, you may want to take full advantage of your RRSP's, Tax-Free Savings Accounts and other retirement savings vehicles.
Ultimately, the mortgage-versus-retirement question is a highly personal one and does not lend itself to easy solutions. But it is not necessarily an either-or situation. You could, for example, increase your RRSP contribution and use your tax refund to make an extra mortgage payment each year.
