Crunching the numbers on mortgage repayment

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Brokers are increasingly taking on the role of advisor for their clients, and a new study will better help them with consulting on debt management and repayment strategies.

With mortgage rates at all-time lows, one major bank is advising Canadians to pay into their RRSPs instead of paying down their cheap mortgage debt.

“The decision to pay down debt, at the expense of retirement savings, is often an emotional one that isn’t driven by the numbers,” Jamie Golombek, managing director for tax and estate planning with CIBC Wealth Advisory Services wrote in a recent report. “With mortgage interest rates at a 60-year low, neglecting your long-term savings in favour of debt repayment may result in sacrificing the quality of your retirement.”

According to Golombek, if Canadians can earn a higher rate of return on their investments than the interest rate on their debt, it makes sense to invest now while rates are low.

“As of February 1, 2015, a five-year fixed residential mortgage could be obtained with an interest rate of under 3 per cent and a ten-year fixed residential mortgage was under 4 per cent,” Golombek wrote. “Consequently, if you have low-rate debt, it might make sense to leave your debt outstanding and, instead, contribute to an RRSP / TFSA if you expect to get a better rate of return on investments over the long term.”

Of course, the rule often only holds true for mortgages at the moment, as unsecured consumer interest rates are nearing the 20 per cent mark in many cases.

The strategy should be assessed on a case-by-case basis, but in this unique rate environment mortgage brokers are positioned to advise clients on mortgage payment strategies that will help them thrive into their financial future.

“If you have a high level of debt and would not be able to sustain an increase in mortgage interest rates, it might be best to minimize your risk and simply focus on debt repayment,” Golombek wrote. “But if you are willing to tolerate some risk in your investment portfolio while saving for longer-term goals, such as retirement that may be 20 or 30 years away, choosing to invest via an RRSP / TFSA may result in more money at the end of the day, albeit with an assumption of greater risk.”
 

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