should you pay down your mortgage or should you invest hey guys it's Adrian here the Canadian
in a T-shirt and today I'll be breaking down this Timeless question the Bank of Canada just
increased interest rates by another 0.25 this is the highest interest rate we've seen in 22 years
so now more than ever Canadians need to decide what's the best way to handle their money and
their debt from a purely Financial perspective it boils down to this question can the rate of return
on your investment beat the interest rate on your loan a few years ago it was an easy question if
you had a fixed interest rate of three percent and Investments earning you 10 percent that's a
no-brainer invest and keep the difference but now if the interest on your mortgage is six percent
and Investments only earn you eight percent not so easy a six percent sure thing is likely better
than an eight percent maybe this is an important point to understand whenever you have a loan
either a mortgage student loan or credit card debt that interest rate is working against you so if
you can pay down that debt faster you are getting a guaranteed rate of return equal to the interest
rate investing is never guaranteed whether it's stocks bonds or real estate there is always an
element of risk and uncertainty but paying down a debt that is guaranteed that's why I always say
don't even consider putting money into Investments if you have credit card debt in my video on the
four steps to build wealth paying off your credit card and other high interest debt is literally the
very first step most credit cards charge you 20 interest if you don't pay your monthly balance
that's huge so pay it off right away there is no investment out there that can beat a guaranteed 20
rate of return but mortgages are a different story they charge much lower interest rates
because they are secured loans they're backed by the house itself if you don't pay them back the
bank takes your house they have collateral so it's far less risky for the bank that's why mortgages
come with lower interest rates than other loans here's the bottom line if you have any loan with
interest above 10 percent pay it off it's unlikely for the stock market to earn you more than 10 in a
year so you're better off paying down that debt with your extra cash but if you have a mortgage
with interest around six percent then investing may actually be the better choice there are a
lot of factors to consider and that's what this video is about as always I include timestamps for
each chapter so feel free to skip ahead so can investing beat six percent interest historically
speaking yes if we look at the U.S stock market over the past 100 years we can expect an average
rate of return between eight and ten percent every year depending how you measure it again this is
never guaranteed some years you'll earn far more some years you'll earn less and some years the
market will lose money look at this graph here there's only been a few times when the yearly
return lands on the average value of 10 percent we see some big red losses like 37 percent in 2008
when the housing market crashed but we see a lot more big wins of 30 percent or higher so if you
take the average over the long term you can expect a profit of 10 a year just don't expect a fixed
return every year the stock market is not like a GIC or a savings account some years you may gain
30 percent some years you may lose 10 percent so if you can handle that volatility and remain
focused on the long term then investing may be right for you if you zoom out the stock market has
an overall upward Trend and in the long run even major crashes like 2008 or 2020 are just small
dips that always recover on that note we're in the middle of a market downturn right now especially
in the Canadian Market Banks telecoms and real estate which dominate the Canadian Market are all
down right now I look at this as an opportunity to buy these quality stocks at a discount
and when they eventually do recover I expect to earn significant capital gains far more
than the 10 average continuing to invest during rough times can be a huge wealth Builder as I've
discussed in these past videos it's not easy it takes discipline but if you can weather the
storm for a year or two you might be rewarded with significant profits markets have always
recovered and that's where a lot of money can be made that's what I'm banking on but instead
if you pay down your mortgage you lose out on that opportunity sure you lock in a six percent
rate of return but you don't get to benefit from the recovery and that's another important point
when you pay down your mortgage that money is locked in you can't change your mind once you
give your money to the bank you can't get it back technically yes you could refinance or apply for a
HELOC to access that money but those new loans will charge a higher interest rate than your
original mortgage the way I see it investing in the stock market gives you more flexibility I've
said this this many times I never put money into stocks unless I will hold them for at least three
years because the market can be unpredictable in the short term but if I absolutely needed
the money I could always choose to sell my stocks at a moment's notice if you pay down your mortgage
instead you don't get that choice so make sure you plan ahead on paper if your Investments can beat
the interest rate on your loan then investing is the way to go but there are more factors to
consider don't underestimate the psychological impact that debt can have on you paying off your
mortgage early will lower the total interest you pay and give you peace of mind especially if you
have children and a family depending on you and once a mortgage is paid off you now have
extra cash on hand every single month personal finance is personal you know yourself and your
tolerance for risk I quit my job to become a full-time YouTuber so I'm used to taking on a
bit of risk and I'm independent no family or kids can counting on me so for me I'd rather invest my
money for larger future returns even though the interest rate on my variable mortgage has
more than quadrupled in the past two years it's true my brother and I bought a rental property
together our mortgage started at 1.5 interest and now with the latest hike we're paying 6.2 percent
in interest no question that hurts but there are some tax benefits to holding a mortgage so in the
end I'm only paying about 3.5 percent in interest let me explain if you take on a loan and you use
that money for business or investment purposes then the interest you pay can be tax deductible
this is incredibly powerful don't underestimate it since I bought the house as a rental property
I'm running a business so whatever interest I pay on that mortgage I get to deduct from my taxable
income if I'm in the 43 tax bracket I get to reduce my taxes by 43 of my business expense that
includes mortgage interest my mortgage charges me 6.2 interest but it's a business expense so
I get to save 43 on that in the end my after tax interest rate is only 3.53 that's barely anything
I can easily beat three point five percent in the stock market especially in a tax-free account like
the tfsa I get to use this tax benefit because I'm renting out the house if I've lived in it then I'd
have to pay the full 6.2 percent interest in the United States you can deduct mortgage interest
on a principal residence but not in Canada but if you run a business from your home then there
are tax benefits to a mortgage even if you live in it here's an example if I run a home business
and I have a designated office space I can deduct a portion of my home expenses if my office that I
only use for work takes up 20 of my home by square footage I can deduct 20 of my mortgage interest
as a business expense so just like my rental example my effective interest rate will be lower
after taxes check out my Canadian business guide my videos with the purple thumbnails to learn
more tax saving benefits if it's not a rental property and you don't run a business then your
options are limited but there is one last way to save taxes on your mortgage it's called the
Smith maneuver this is a pretty Advanced technique I'll be making a whole video about it in fact I'm
making a whole series on real estate investing so stay tuned for that here's the bottom line
if your investment return can beat the interest rate then paying down your mortgage might not
be the best call you're better off investing that money instead especially if your mortgage interest
is tax deductible but like anything with money you don't have to choose one or the other you
can try a hybrid approach pay down a bit of your mortgage every month to guarantee those
interest savings and invest the rest to enjoy future profits it's your money and your choice
so thanks everyone and I'll see you guys on the next episode of the Canadian in a t-shirt bye guys