Here are four reasons why you might not want to pay down your mortgage as soon as possible:
When the Interest Rates Are Low
With the Bank of Canada continuing with the same interest rate for the fourth straight year in a row, it makes sense to not pay down the mortgage as quickly because you can make more money with your money through other means. For example, investing. Find an equity that pays dividends at 5% and you are already beating the interest rate that the bank charges you for your mortgage.
Afford Anything breaks it down (paying down the mortgage or investing in the market). Peace of mind versus Opportunity cost. You decide.
When You Use Your Home For Work At Home Expenses Or To Offset Rental Income
One of my favourite reasons for not paying down my mortgage so quickly is that I can use the interest income that I pay for my mortgage as a tax deduction for working from home. Of course, it is only a portion of the home that you use but it is still better than no deduction, in my opinion. In addition, if you have a rental suite you can use the portion of your mortgage for that suite to offset the rental income that you receive so that in effect, you pay less taxes on your rental income. This is especially relevant for those lucky enough to have rental properties. Many people opt to stretch out their amortizations on rental properties while paying down their principle residence.
Related: How Wrong We’ve Been About Mortgages
When You Don’t Want All Your Eggs In One Basket
Leverage. It’s a powerful word. I could technically be mortgage free right now but then I would have most of my assets tied up into real estate. Real estate is just one basket and to be diversified and reduce risk (you know that the real estate market is going to crash) it is a good idea to not keep all your eggs in one basket. Having a mortgage allows me to invest extra money into the stock market and into exchange traded funds or index mutual funds. Of course, I could technically pay off my mortgage and use the equity in the mortgage and my Home Equity Line of Credit to invest in the market and obtain a tax deduction on the non-registered investments (as known as the Smith Maneuvre) but that’s a little complicated for me at the present moment. Maybe in the future.
The blog Retireby40 agrees, putting all your eggs in one basket is not diversification.
When You Don’t Have Enough Of An Emergency Fund
MSN Money cautions people thinking of siphoning all their money to pay off mortgage debt if they don’t have enough reserve of emergency fund money in the first place. Everyone should aim to have three to six months of living expenses saved up in an emergency fund (e.g. liquid cash) in case of job loss. It might be fine and dandy to have your mortgage paid down but if you lose your job you still need to pay for things like food and utility bills. Of course with your mortgage paid down it will be a lot less stressful but let’s not put the cart before the horse shall we say.
I must admit, I am of the camp of not paying down my mortgage so quickly, but it might be a good idea because the rates will rise soon enough. That’s why I put an extra payment today. Contrary to what this post talks about!
Readers what do you think? Are there are there other reasons why you would not pay down your mortgage quickly?