Should You Pay Off Your Mortgage As Soon As Possible?

The answer to this question is simple - maybe.

Deciding on what to do if and when you have extra cash comes down to 3 major factors: a) opportunity cost, b) cash flow and c) positioning.

Let me break it down further.

Opportunity Cost - essentially, this refers to the "lost opportunity" of using your cash to pay down your mortgage. Suppose you had an extra $50,000 and you decided to put it towards your mortgage balance; well, the opportunity cost of doing so would be equal to what you now cannot do with that cash ie: invest elsewhere. On a pure mathematical basis, it makes no sense to pay down a mortgage at 2.0% when you can invest elsewhere and make 4.0%. This is the primary reason that I live debt free but only own one property without a mortgage. It simply makes sense to use my cash elsewhere other than paying down cheap debt.

Cash Flow - many Canadians live pay cheque to pay cheque and thus a change in cash flow can really make things stressful, or relieving, depending on the situation. Recently, I advised a client to take an $85,000 inheritance, pay down her mortgage by the same amount and then convert the mortgage from variable to fixed. Her payments dropped dramatically and considering she is very risk adverse, the thought of her investing that cash gave her more anxiety than the mortgage payment itself. Here, cash flow was the main concern not the math as per #1 above.

Positioning - Once, I had to pay off a $180,000 HELOC in order to qualify for further financing. In this example, it made perfect sense as the additional benefits of owning the new properties were staggering compared to a fraction of a percent I would lose via the opportunity cost. The golden rule is that if paying down a mortgage somehow allows you to further expand, it is almost always in your financial best interest to do so.

If you have extra cash and don't know what to do with it, hit me up. We'll build a plan that makes sense.