Valley First

To Pay or Not to Pay

Our mortgage experts weigh in on mortgage payment practices

With interest rates hovering near historic lows, many households are wondering whether to take advantage of the low rate environment and pay down their mortgage faster or divert money elsewhere while they are paying less interest on their home.

There are two sides to this argument and the answer ultimately depends on each household’s unique situation says Valley First’s assistant vice-president of wealth management, Kevin Tom. Some of the factors that must be considered are the size of the mortgage, how long is left on the term of your mortgage and additional expenses you may have.

“For those households with large mortgages and long amortizations, it may make more sense to pay more now,” says Tom. “The advantage of paying more now is that when rates do eventually increase and homeowners must renew their mortgage at a higher interest rate, the loan principal will be lower resulting in a smaller amount on which you will be paying interest at a higher rate.

“A further advantage of paying more on your mortgage now is that with home ownership you are building your asset base and net worth while reducing debt at the same time. The more you pay and the sooner you pay it, the faster you see gains.”

However, if you have a smaller mortgage or a number of other expenses, the same logic can be used for paying less on your mortgage today.

“We all have multiple expenses such as saving for retirement, putting money away for the proverbial rainy day or building a fund to help put our children through school,” says Tom. “In a low rate environment, particularly when the return on investments is also low, the decision on where to put your money can become clearer if you look at other factors.

“Take, for example, a couple with children they want to help put through college. With the immediate 20 per cent return on your contributions via the Canadian education savings grant, it may be more beneficial to divert money to a registered education savings plan. Similarly, depending on your tax bracket, it may make sense to contribute to an RRSP and use the tax refund to pay down your mortgage. Or, if you are looking into building an emergency fund or for some future purchase, then it could be better to contribute to a tax-free savings account.”

Tom points out that while each situation is unique, the big picture can become less confusing with the help of one of Valley First’s financial experts.

“It can be hard to fit all the pieces together yourself,” says Tom. “Valley First has a team of experienced experts who can help you identify what is most important to you and structure a financial plan that will allow you to meet all your financial goals.”

 

Talk to us

Whether you’re looking for more information, or you’d like to let us know how we can serve you, you’ll find our contact information here.
We encourage you to visit a representative at any of our branches for more information on how Valley First can make things simple!


Simplify Your Finances

Make the most of your money with an account that is simple and free—get a Simply Free Account™ today!

Learn more