For decades it was a basic tenant of financial advice: Pay off the mortgage. Get the debt out of the way. Then invest your money to generate a retirement nest egg.
For years it seems this was the most basic bit of financial wisdom passed on from parents to kids. Pay down the debt first, then invest. But in an era of ultra-low interest rates the advice does not always follow from a total wealth perspective.
A new survey from Investors Group finds that high net-worth types seem to be maintaining mortgage debt into retirement as a way of keeping money in the market.
"The notion that a mortgage is used only when funds aren't available to pay cash for your home doesn't ring true for many wealthy Canadians," says Peter Veselinovich, vice-president of banking and mortgage operations at Investors Group.
Today, with interest rates so low it makes more sense to keep paying a mortgage, rather than take money out of the market to pay off the mortgage.
This overturns oft-repeated notion that step one of any plan should to pay off the mortgage first and reduce debt payments. Now it seems, this advice is less widespread, at least among high-net worth types. The rich are taking a more complex view of estate wealth. More than one-quarter of wealthy Canadians with mortgages don't have plans to become mortgage-free before retirement. Of those with investable assets of $500,000 or more, sixty-seven per cent of those who have a mortgage indicated they have the cash available to pay for their home in-full, but do not pay off the mortgage right away.
"We've seen a trend over the last several years, not just high network, but regular Canadians....not paying down the mortgage," says Veselinovich in an interview with WP. "The low rates are a big driver. This is a trend that has been accelerating over the last number of years. As rates came down, those with more of a cushion have been more likely to carry in a mortgage into retirement. They don't want to trigger capital gains."
The logic is simple: Fifteen years ago you would pay 12% for five-year money. Now the cost of a five year mortgage is as low as three percent. "My parents' generation reduced debt at all costs. But cashing in investments to pay off your mortgage before retirement could trigger capital gains. That would mean additional taxes and less money to invest. It is much more reasonable to think you're can beat that with market gains," says Veselinovich.
"Retirees in this financial demographic who are not concerned about meeting their mortgage payments see a tax advantage to maintaining a low-interest mortgage on their homes," says Veselinovich. That is, the relatively well-off should not collapse an investment portfolio to pay off low-fee debt. Carry the debt, invest money that otherwise might have been used to pay off the mortgage in the market. Because of the tax efficient nature of the flows, the investor will be a little better off in the end."There are a lot of opportunities out there. A low-fee mortgage is among the cheapest financing going. It's something many planners need to take into account. Understand what the tax situation, long-term goals and the investment time line," says Veselinovich.
There is, of course, one caveat: This is only a good idea, as "long as you have an ample cushion to pay that mortgage off if rates go up," says Veselinovich.