Imagine this hypothetical situation: Greg and Maya are in their early 30s and recently made a significant financial move: They bought a new $400,000 home, but only put down 5%.
At the time, they hadn’t yet sold their previous home — a decision that left them with a $380,000 mortgage at a steep 7.5% interest rate. Now that the old home has sold, the couple is facing a classic personal finance dilemma: Should they aggressively pay down their mortgage, or invest the money elsewhere?
They have around $150,000 in liquid assets across chequing, savings and investment accounts — and another $190,000 in retirement savings.
They plan to refinance once interest rates come down. But in the meantime, they’re weighing what to prioritize. Here’s what they should think about.
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Pay down the mortgage?
By attacking the mortgage aggressively, the couple could save hundreds of thousands of dollars over the life of the loan. Even an extra payment each year can save you six figures and take years off the term. More aggressive strategies can save them even more money and shorten the payment schedule.
Paying down the loan aggressively could also help Greg and Maya eliminate their mortgage insurance payment faster, once they hit 20% equity.
The benefit? Paying off a mortgage at 7.5% provides a guaranteed return that would be hard to beat with low-risk investments. The psychological reward of reducing debt — especially one that stretches 30 years — is another factor.
Or invest the money?
On the other hand, some argue that the couple would be better off focusing on investments, especially inside tax-advantaged retirement accounts. It’s possible a diversified portfolio of stocks can net a higher annual return on average than what would be saved on the mortgage — although there’s no guarantee in any given year.
Greg and Maya already have solid retirement savings, but maxing out their TFSA and RRSP accounts could further grow their tax-advantaged wealth.
There’s also the question of liquidity. If Greg and Maya put most of their spare cash toward the mortgage, they might not have enough left to handle a surprise expense.
The couple can determine an appropriate emergency fund based on their monthly spending. From there, they either use the balance to pay off the house or invest it.
Read more: Here are 5 expenses that Canadians (almost) always overpay for — and very quickly regret. How many are hurting you?
A blended approach
Financial experts often suggest a hybrid strategy: Establish an emergency fund — between three to six months’ worth of expenses — then split the remaining money between retirement contributions and additional mortgage payments.
That way, they preserve flexibility while still knocking down interest costs. It also lets them build equity faster, which could make refinancing easier when interest rates eventually drop.
No one-size-fits-all answer
There’s no perfect solution. The right approach depends on the couple’s risk tolerance, retirement timeline and plans — including whether they want to pay off their home early or keep their money working in the markets.
Meeting with a financial planner could help them align their mortgage and investment strategy with their long-term goals.By asking the right questions, they can feel more comfortable with their choice.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.