Ten days ago the Bank of Canada raised interest rates for the second time in less than 2 months. The prime rate is now 3.2 %. This increase will affect variable rate mortgage holders and those who carry a balance on a line of credit. The reason for the increase is that the Canadian economy is healthy. Collectively, Canadians carry a large amount of debt, and perhaps the Bank of Canada would like to curtail Canadians’ love of borrowing, since more rate increases are predicted.
This event nicely dovetails with a question clients have asked me a few times recently. It is also related to the title of this blog post.
The question I have been asked is: Which is better: To pay off your mortgage faster or to invest? I would answer: Both or it depends. No I am not playing round and round the mulberry bush.
Mainstream media has a habit of making generic pronouncements without too much background information. In order to properly answer that question to get the maximum benefit for your personal situation your own unique financial factors must be considered.
A general rule of thumb is that if your borrowing rate is less than the rate of return you could get to invest then it is more profitable to invest. However, with careful planning both objectives could be accomplished.
There could be situations where the debt would take precedent. Two examples of that would be where future income would be lower, or where the interest rate on borrowing is obscene(think rewards credit cards.)
An increasing rate environment is not good news for those with unproductive spending habits. If someone lives pay cheque to paycheque when times are good(full employment, ample salary, 2 incomes, or healthy), the inevitable financial storms will find them unable to cope with unexpected events which oftentimes are expensive.
So what is the scariest thing a client can tell their financial advisor? It is: ”I don’t care about next year!!” Since this is a blog post I will have to add this was said with emphasis, despair, and a bit of panic.
Unfortunately how this person arrived at this point could have been completely avoided if there had been FULL disclosure of financial factors that would have to be considered in any advice given by a professional. The advice a professional gives will only be as good as the information that is disclosed. Professionals are not mind readers!
Don’t let market forces of the economy persuade you to deviate from your future financial goals. I could write a book on the many wild goose chases and rabbit trails that can tempt clients off their financial journey.