Clients have extra money? Forget paying down mortgage!

Clients have extra money? Forget paying down mortgage!

Clients have extra money? Forget paying down mortgage! Two new surveys suggest Canadians want to pay down debt. However, one wealth expert suggests advisors should do the exact opposite. Who’s right?
 
Last week CIBC released the results of two online surveys it commissioned over several days in January. The survey asked 1,510 randomly selected adults across Canada a number of questions about their personal finances.
 
The findings were hardly surprising.
 
For instance, 53 percent of those surveyed suggested that making financial decisions today are more complicated than they were 20 years ago. Two-thirds believe they could use more financial advice and/or knowledge. Only 14 percent said they were very confident about their overall level of financial knowledge and those people are probably deluding themselves.
 
Let’s face it. Most Canadians are hopeless when it comes to making financial decisions. Now, if you’re talking about which player to take in an NHL playoff fantasy draft, well that’s an entirely different matter.
 
Jamie Golombek, CIBCs managing director of Wealth Advisory Services, suggested in the CIBC press release February 19 that Canadians might want to think twice when it comes to making financial decisions such as repaying debt. Although a majority of survey respondents (72 percent) would rather repay debt than contribute to an RRSP, Golombek believes this is not necessarily the best course of action.
 
“The decision to pay down debt at the expense of retirement savings,” says Golombek, “is often an emotional one that isn’t driven by logic.” He goes on to say, “You may not be doing yourself any favours by rushing to pay off your home while mortgage rates are at rock-bottom levels. If you’re able to take some risk in your investment portfolio, you might be tens of thousands dollars richer by any extra money in an RRSP or TFSA.”
 
While his sentiments are understandable this statement doesn’t take into consideration the fact that interest rates will eventually rise.  
 
If an individual takes extra funds earmarked for the repayment of their mortgage and puts those funds into RRSPs or TFSAs instead, when interest rates do rise their interest costs will be that much higher because the mortgage balance will also be higher.  
 
The troubling part about Golombek’s statement isn’t that he’s being disingenuous but rather that he ignores the fact over half the survey respondents want the financial freedom of being debt free.
 
Whether you’re an independent or you work for a bank, ultimately, your allegiance should be with your client. If they want to pay down their mortgage — let them.