Mortgage or invest? How about mortgage and invest

The decision to pay down debt at the expense of saving for other goals is often an emotional one that isn’t driven by the numbers.

It’s wise to consider all the factors, including return on investment, interest rates and inflation. Can you get a higher rate of return on your investments than the interest rate on your debt, given a level of risk you’re comfortable with? If yes, then conventional wisdom says that investing is the better bet; otherwise, paying down debt may be the better choice.

However, it doesn’t have to be — and often shouldn’t be — one or the other. The balanced compromise is to do both. Let’s look at why it makes good financial sense to make small additional payments towards paying down your mortgage and save for other goals at the same time.

A double-sided approach that reduces debt and grows savings offers some important benefits.

• Interest savings: The main benefit of paying down your mortgage early is that you could save thousands of dollars in interest costs over the long term. That makes good financial sense.
• Borrowing opportunities: Paying down your mortgage can also open up the opportunity to borrow against it. Learn more about how to combine a mortgage with a home equity line of credit to enjoy ongoing access to funds at a low interest rate using the CIBC Home Power Plan.

Assess whether the funds to make extra lump payments or increase mortgage payments would make better sense to be redirected to other financial goals. Consider instead if there is value in contributing to an emergency fund or if there are higher-return opportunities with other investments.

• Emergency fund: It’s important to stay liquid and have an accessible emergency fund in case of a health issue, job loss, or other unexpected expense. A cash-on-hand emergency fund allows you to stay financially nimble.
• Diversification: When you invest outside your home, you diversify your investments. Your home is only one investment in a single sector —real estate—in one region. Real estate is also less liquid, meaning it’s harder to quickly convert to cash, than an investment portfolio. You have to sell the property to access any appreciated growth without borrowing against the equity.

Building an investment portfolio that extends beyond real estate lets you take advantage of growth opportunities in other sectors and maintain liquidity. Varied investments in a broad portfolio can help to minimize risk and maximize gains.

You may be wondering how you can come up with the funds to take advantage of the benefits of both paying down a mortgage and investing.

Consider these tips to help you better understand your financial situation, and make small changes today that can make big differences tomorrow.

1. Assess your cash flow and debt load

Cash flow is your incoming and outgoing stream of money. To understand your cash flow, tally up your monthly income, debts and expenses. Draw up a monthly budget - an Excel spreadsheet would work well - and determine if you have a surplus or deficit at the end of the month.

2. Free up extra cash

A couple of ways you could free up extra cash every month include:

• Debt consolidation: If you have other high-interest debt, you may want to consider debt consolidation options. Debt consolidation might be a good idea if you can get a lower interest rate by rolling all your debt into one loan.

For help with managing debt and to get in touch with a credit counsellor, visit our debt help site.

• Cutting back on expenses: You can also free up extra cash by determining if there are any expenses in your monthly budget that you can cut back. Maybe you can cook one more night per week instead of ordering out? Reducing expenses gives you additional funds to allocate towards your goals.

Check out the CIBC Mobile Banking^® App Insights tool. It can help you identify the areas where you're spending the most, like subscription services and rideshare services, and help you find opportunities to cut back.

3. Reallocate funds

Once you’ve identified sources of extra cash, you can reallocate the money to both paying down your mortgage and saving for other goals.

It doesn’t have to be a question of paying down your mortgage OR investing. You may be able to do both! Connect with us about creating a plan that can help reduce your debt and also help you save for the future.