A common question that arises as you take on a mortgage is whether to pay it off early or whether to invest any extra cash you have on hand elsewhere. For many people, the idea of debt is something you should avoid at all costs or at least quickly eliminate it if you have to take it on. For others, there is a level of acceptance when it comes to debt and a willingness to work with it or even leverage it for the sake of greater financial stability.

How do you know whether paying down your mortgage is best? Is there value in trying to invest at the same time? Let's look at a few factors to see what kind of options are out there.

Paying Off Your Mortgage First: Pros and Cons

The idea of paying off your mortgage and living debt free is often an ideal for Canadians even if it seems lofty when you first sign those mortgage documents. The thought of paying thousands of dollars in interest on top of a large mortgage amount can be cringe worthy.

A mortgage payment is likely your largest monthly expense and who wouldn't want to get rid of that? With that big monthly expense out of the way, you have access to more money on a monthly basis to invest which might feel like you can make more progress quicker.

That said, this approach can also neglect the power of long-term, compound interest. You will likely remember from any basic financial management course that compound interest over a long period of time can produce a surprising amount of growth.

So which is better? Eliminating interest payments or leveraging interest that can work in your favour?

Knowing Your Interest Rates

Knowing your interest rates and how they are working for you or against you is a good place to start in trying to determine the best path forward. One of the benefits of mortgages these days is how low the borrowing interest rate is with lenders across the country.

Only a few short decades ago, interest rates below 5% were unheard of. These days, interest rates of 2-3% and sometimes even lower are quite common. This is a really important factor in deciding whether to pay down your mortgage or invest.

On the flip side, conservative returns on RRSPs, TFSAs or other non-registered investment options are often between 5-7%. This might not sound significant as you're receiving this return on only a small amount of money initially, but it's important to remember the power of compound growth.

Additionally, investment options like RRSPs and TFSAs are tax sheltered. You can use this tax benefit as either a single lump sum payment on your mortgage or to put right back into these investment funds which will increase the power of the compound growth that is happening.

It's generally safe to say that if the interest rate you are borrowing at is less than the rate of return on a potential investment, it's likely worthwhile to invest at the same time as paying down your mortgage. Throwing your Christmas bonus money or your wage increase money at your mortgage can feel like you're making big strides, but in reality, you're maybe saving yourself $10-20,000 in interest payments. That's commendable, but the flip side is that those Christmas bonuses can be invested and interest can be compounded over a long period of time giving you returns of nearly $100,000!

Alternative Investing Options: The Smith Manoeuvre

If you're especially interested in the power of compound interest and willing to let the interest payments on your mortgage be what they are, many Canadians are leveraging what is known as The Smith Manoeuvre. The Smith Manoeuvre is a relatively new investment strategy that leverages compound interest on the investing side of things as well as huge tax savings.

The Smith Manoeuvre in its simplest form allows you to borrow money against the equity you have built up in your home. For this, you need a Home Equity Line of Credit (HELOC) instead of a traditional mortgage. With this in place, you are able to borrow the equivalent of your equity. This borrowed amount must be invested in non-registered investments products with a reasonable expectation of return on your investment.

In Canada, there is a tax rule where if you borrow money to invest in an income-producing investment like a rental property or a particularly promising stock that pays dividends, you can deduct the annual interest paid on that investment loan from your income tax. This annual deduction can then be used to pay down your mortgage which increases your equity and ability to invest further.

This process can accelerate quickly meaning you can pay down the mortgage side of your HELOC much quicker than the traditional ways people attempt to accelerate their mortgage payments. At the same time, The Smith Manoeuvre is a fairly high risk form of investing. All of your investment money is "borrowed money." In a way, it might feel like you're gambling your home on the stock market. If you are considering this, it's incredibly important to do further study on this first so you know what you are getting into. It's also important to be very aware of how comfortable you are with investment risk.

Is Investing The Right Move For You?

For the most part, investing at the same time as paying down your mortgage will put you in a position of greater financial success. This is largely dependent on interest rates as well as your ability to stay disciplined with your spending. As always, talk to a financial advisor or a mortgage professional who can help you crunch the numbers to see what a long term outlook might look like for you.