Ed Rempel on Why Paying Off Your Mortgage Early May Not Be the Best Retirement Strategy

Many Canadians believe that paying off a mortgage gives them financial security and freedom. Reducing monthly payments can ease stress on a household, especially as retirement approaches. However, prioritizing mortgage repayment over investing might not always be the best way to achieve long-term financial independence.

Ed Rempel, a Certified Financial Planner in Brampton, says homeowners should focus less on becoming mortgage-free and more on retirement savings. In a recent article posted on his blog, Unconventional Wisdom, Ed argues that the real question is not simply how quickly someone can pay off their mortgage, but what happens to their finances once that debt is gone.

“Once your mortgage is paid off, what percentage of that former mortgage payment will you actually invest?” he asks. If your answer is less than 90%, then you should pay your mortgage off more slowly and invest instead.

It might be a decent strategy to pay off your mortgage and then redirect all of your extra cash flow to investing. However, paying off your mortgage and then spending most of your extra cash flow means you are likely not building enough wealth to support your desired retirement lifestyle.

Rempel refers to the potential pitfall as the “mortgage victory trap.” It happens when homeowners pay off their mortgage years before retirement but end up spending most of that money, not investing it for their retirement, and getting used to the more comfortable lifestyle.

For example, someone who pays off their mortgage 10 years before retirement may suddenly have hundreds of thousands of dollars in additional monthly cash flow. Without a solid plan, the money can be spent on things like travel, restaurants, and home renovations. Eventually, the homeowner gets used to a more expensive lifestyle without considering their retirement savings.

As Rempel explains, “The problem wasn’t paying off the mortgage. The problem was both not investing enough and becoming accustomed to a lifestyle that their retirement savings may not be able to support.”

The issue becomes more noticeable when employment income stops. Even with a mortgage-free home, retirees still need sufficient income to cover property taxes, utilities, maintenance, healthcare, and everyday living costs, plus the extra travel and entertainment they want after they retire.

A paid-off house can reduce financial obligations, but it doesn’t replace the need for a solid retirement fund.

The issue is the opportunity cost of directing additional money toward a mortgage instead of investments.

With effective investments, the growth should be far higher than the interest saved on your mortgage. This is especially true after years of compounding. Making extra mortgage payments reduces the outstanding balance and the interest at a rate of perhaps 4% per year today. However, the long-term growth of the stock market has been more than 10% per year.

For example, if your investments average 10% per year over the long term, $100,000 would grow to $1.75 million. However, at 4% per year, it would only grow to $325,000. The same amount invested gives you more than 5 times as much after 30 years! That makes a huge difference for your retirement income.

The more appropriate choice depends on factors like the mortgage interest rate, investment time horizon, risk tolerance and overall financial situation.

For homeowners with many working years remaining, the potential benefits of compound growth may be worth considering before committing all available savings to accelerated mortgage payments. Money invested earlier has more time to grow. However, market volatility and the possibility of losses are also important considerations.

That doesn’t mean investing should always be the priority. Homeowners with high mortgages, limited tolerance for debt or a preference for financial security may reasonably choose to pay off their mortgage more quickly. However, they should realize this choice likely means a lot lower retirement lifestyle.

The goal is to evaluate the mortgage with the rest of the household finances rather than prioritizing early payment. Instead of eliminating a mortgage as early as possible, Rempel suggests considering a strategy that coordinates the final mortgage payment with retirement.

“My general preference is to structure your finances so that the mortgage is paid off around the time you retire, perhaps a year beforehand, rather than a decade earlier,”  Rempel advises.

With this method, homeowners can make regular mortgage payments while building their investment portfolio during their working years. When they retire, they should have built a significant retirement portfolio and the mortgage is paid off. Most importantly, they did not have years of missed investment growth.

Homeowners can benefit from investing during their high-earning years without becoming accustomed to an expensive lifestyle funded by a mortgage pay-off years before retirement.

This strategy requires careful planning. Investment performance is uncertain, mortgage renewal rates can change, and the right timing of a final repayment depends on your financial situation. Homeowners should also consider whether withdrawing investments to eliminate a mortgage could trigger taxes or undermine their retirement income plan.

For these reasons, coordinating mortgage repayment with retirement is a strategy to evaluate that works for most people, not a universal rule. The decision to pay off a mortgage early involves balancing current financial security with the resources needed to live comfortably in retirement.

For some Canadians, becoming mortgage-free as soon as possible will provide valuable peace of mind. For others, making mortgage payments while investing surplus income probably means retiring with a more comfortable lifestyle.

Rempel’s main argument is that homeowners should focus on their financial goals rather than treating an early mortgage pay-off as the ultimate measure of success.

As he concludes, “The goal isn’t simply to own a mortgage-free house. It’s to retire with a paid-off home, a strong investment portfolio and the financial freedom to maintain the lifestyle you worked so hard to build.”