• Many say forget about the stocks and bonds until you’ve eliminated your mortgage.

    In the perennial personal finance debate over whether you should pay off your mortgage or invest your savings, some take a firm stand.

    “Second only to eliminating debt, paying off your mortgage is one of the most important steps to retiring richer,” says Kevin O’Leary, author of Cold Hard Truth on Family, Kids & Money. “In other words, forget about the stocks and bonds until you’ve eliminated your mortgage.”

    Mr. O’Leary says maximizing your mortgage payments will be the safest investment you’ll ever make.

    Now, experts don’t always agree. Also, many will tell you: “It depends.” What, for example, is your age, your risk tolerance or your level of discipline when it comes to savings? Which action gives you a greater tax advantage?

    When looking at your personal situation, try crunching some numbers.

    Say you have budgeted $5,000 a year to invest in either paying down the mortgage or putting the money into a portfolio of stocks and mutual funds. You’re carrying a $250,000 mortgage at a 4% rate; you have a five-year term and your amortization period is 25 years.

    Under these conditions, your monthly payment would be $1,315.06, says Gordon Pape, author of RRSPs: The Ultimate Wealth Builder and publisher of The Internet Wealth Builder newsletter. Assuming the rate didn’t change, you’d pay $144,513.15 in interest by the time the mortgage is discharged.

    If you use the $5,000 to pay down the mortgage principal over the next 16 years while maintaining the normal monthly payments, you will have the whole amount paid off in 16.4 years and save more than $56,000 in interest, he adds.

    But if instead you had invested the $5,000 in a portfolio that returns 6% annually in a tax-free savings account, your portfolio would be worth $136,064.40 after 16 years.

    At that point, the balance remaining on your mortgage would be just under $120,000; so you could withdraw the $136,000 tax free and pay off the balance of your mortgage and have about $16,000 left. “However, this assumes your mortgage rate will not rise during the period, an unlikely scenario.”

    Another variable to consider: are you investing in a taxable account? Mr. Gordon notes that if you did so, your real investment returns would be reduced.

    “You also need to consider the fact that the mortgage pay down is a sure thing whereas investing carries risk. If you don’t make the 6% target, or worse lose money, all the calculations fly out the window,” he says.

    “The bottom line is that the pay down is the best option if you are the conservative type and/or don’t have a lot of investing acumen. If you are comfortable with stocks or mutual funds and are willing to take some risk, go the investment route – but be sure the money is tax-sheltered.”


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