| When faced with the fortunate problem of having a | | | | interest rates are expected to go. |
| little too much cash on a monthly basis, people often | | | | In periods where interest rates are low or about to |
| wonder whether they should save aggressive or | | | | go down, using extra funds to repay a mortgage will |
| allocate those additional funds to repaying their | | | | make sense. However, since the cost of borrowing is |
| mortgage. This is an extremely common dilemma | | | | so low, investing those funds in assets that are |
| when it comes to individual financial planning and one | | | | expected to return more than the costs of the |
| that, unfortunately, is not easily resolved. | | | | mortgage will actually help the borrower get ahead |
| For the individual who face such a dilemma, the | | | | faster. |
| immediate question is whether the borrower is | | | | In other words, allowing the mortgage to stay "as is" |
| comfortable with carrying mortgage debt. While most | | | | while investing in vehicles that earn a greater return |
| people are, many are not and in such instances, it it | | | | than the cost on the mortgage will allow for those |
| highly recommended that extra cash flow be | | | | savings to enjoy compounded growth that outpaces |
| allocated to the mortgage. | | | | the benefit of repaying the mortgage. Put simply, |
| For borrowers who are not concerned about | | | | investing in assets that return, say, 8% while the |
| mortgage debt, the question becomes a little | | | | mortgage costs 3% means that the invested funds |
| complicated. The first thing to determine is whether | | | | will go 5% farther than prepaying the mortgage. And, |
| this borrower, who is comfortable with mortgage | | | | as rates start to creep up (particularly with variable |
| debt, has enough of a savings base and whether | | | | rate mortgages), those same funds including their |
| their existing plan and savings contributions will allow | | | | growth can be applied against the mortgage anyway. |
| them to achieve their financial goals (e.g. the | | | | Of course, there are other considerations that |
| retirement they are hoping to enjoy). If the answer | | | | borrowers will keep in mind, such as the potential for |
| is no, then of course these extra funds should go | | | | a reduced payment, reduced amortization and so |
| toward their savings. | | | | forth. And since there is really no "right or wrong" |
| If they are both comfortable with their mortgage | | | | answer to this common problem, borrowers are |
| debt and have a plan in place that will meet or | | | | advised to speak with their planner or advisor to |
| exceed their financial requirements, the dilemma | | | | consider the various scenarios and consequences to |
| becomes more complicated yet. The matter may | | | | each alternative. |
| come down to an economic forecast, including where | | | | |