Q&A With Gordon Pape: Invest in the Market or Pay Down Mortgage?

A picture of a small wooden toy house sitting on a calculator.

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Q – My husband and I would like your advice. We invested in the stock market in 2008 when we were in our late 20s and made a little money. Then, about four years ago, we rolled some of that money into buying a small four-unit apartment building that has been working out well for us. The apartment building covers its costs and is starting to make a small income.

Our five-year mortgage term is up next year on it and our financial planner has suggested we take out our initial investment ($30, 000) and put it towards something else. We are wondering what our smartest course is:

  1. Leave it in the building and try and pay down the mortgage faster so we can have more income.
  2. Take out the $30,000 and put on our home mortgage (we have about $120,000 left on our mortgage — currently making regular small extra payments on principal)
  3. Take the $30,000 and look to invest it in something else that would generate a passive income.

We are in our late 30s with two young children. We have no debt besides mortgages, have built up RRSPs, will have two defined benefit pensions and have relatively healthy RESPs set up for our girls. We have worked hard to get to this position and don’t want to miss an opportunity but also don’t want to make a misstep! Any advice would be appreciated! – Allison M.

A – For starters, make sure the financial planner does not have a vested interest in your decision. If he’s a fee-for-service advisor, no problem. But if he sells products, like stocks and mutual funds, he may be looking to add to his commissions. Ask the question.

The safest route is paying down the mortgage. Whether it’s on your home or the apartment building depends in part on the rate you are being charged for each. But you should keep in mind that interest on the rental loan is tax-deductible whereas interest on your residence is not. All things being more-or-less equal, I would pay down the home mortgage first.

Investing the money may earn you a better return but it raises your risk exposure considerably. Only you can decide if that’s a gamble worth taking.

Bottom line, I’d opt for a mortgage pay down. But then I’m a very conservative person. – G.P.

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