We’re often told paying off your mortgage as quickly as possible is the best investment you can make, but not all Canadians see it that way. Two thirds (67 per cent) of high-net-worth Canadians – those with over $500,000 in investible assets – that have a mortgage have the cash available to pay for their home in full, according to a recent Investors Group survey. Although high-net-worth Canadians still see homeownership as an effective means of building wealth, with interest rates showing no signs of budging, the majority of them aren’t in any hurry to repay their mortgage.
Infographic Source: Investors Group: Nielsen poll of 500 high-net-worth Canadians
Why Get a Mortgage If You Don't Have To?
Why do so many wealthy individuals have mortgages? To many high-net-worth Canadians, having a mortgage may be considered a deliberate investment strategy.
“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 mortgages at Investors Group.
Homeownership is Part of the Financial Plan
With skyrocketing housing prices, many Canadians are top-heavy in real estate. If we were to see a major housing correction, many Canadian households would see their net worth plummet. That’s why it’s important to consider real estate as part of your overall financial plan.
The survey found seven in 10 high-net-worth Canadians say they would not think about purchasing property without reviewing it as part of their overall financial plan, and almost half (46%) say they wouldn’t make changes to their mortgage without reviewing it as part of their overall financial plan. In fact, one in five were given advice by their financial advisor on mortgage options that would best suit their financial situation.
“It’s good to see that some Canadians are including these important decisions as part of their overall financial plan and engaging experts for advice,” says Veselinovich. “Your current and future business strategy, retirement plans, stage of life and overall financial goals will all influence the mortgage you select.”
A Mortgage in Retirement: Not So Taboo?
It may be time to challenge the notion that we should pay down our mortgage at all cost before our golden years. While some Canadians plan to pay off their mortgage before retirement, more than one-quarter of wealthy Canadians don’t plan to.
If you’re in the top marginal tax bracket, it often makes a lot of sense to maximize your contributions to your RRSPs over paying down your mortgage. Furthermore, if you have the stability of a five-year fixed rate mortgage and you’re only paying a mortgage rate of 3% or less, you really have to ask yourself if accelerating your mortgage repayment makes sense when the funds can be invested elsewhere for a better return. You also need to consider tax implications.
“Cashing in investments to pay off your mortgage before retirement could trigger capital gains. That would mean additional taxes and less money to invest,” 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.”
Limited Fear over Rising Rates
With the overnight lending rate frozen at 1% for nearly four years – the longest stretch in Canadian history – relatively few wealthy Canadians are concerned about an interest rate hike anytime soon.
When asked if they were worried about rising rates in the next year, three years or five, those with any concern amounted to 8%, 14%, and 18% of the overall group in each respective time frame.
“While fluctuating interest rates can play a role in selecting a mortgage that fits with your financial situation, there are a number of additional considerations that Canadians need to factor into the equation,” adds Veselinovich. “A financial advisor can help you look at the entire picture and select an option that will work for you.”