3 Repayment Strategies You Need to Know!
We spend a lot of time discussing, “how to get the best mortgage possible!” that we often forget to acknowledge, what do we do once we have one?
In this blog, I’ll highlight 3 competing options to help you increase your net worth, and Make Your Debt Work for YOU!
Keep in mind, each of these options has a different risk level. It is recommended you chat with a financial planner and a reputable mortgage broker to develop a plan matching your risk-tolerance.
1) Pre-Pay Your Mortgage – Risk: Low
Paying off your mortgage as quickly as possible is the simplest way to reduce the amount of interest you pay on your mortgage. Every lender offers their unique pre-payment options, allowing you to make extra payments on the balance of your mortgage. Each prepayment reduces the amount of interest charged on the balance of the mortgage and pays down your mortgage faster. I’d argue this is the least risky option and the most stable.
2) Invest in the S&P 500 index fund – Risk: Medium
Instead of pre-paying into your mortgage, consider investing this money instead. This option has a greater amount of risk, but also keeps your money more accessible.
Your goal with this option is to achieve an average rate of return on your investments greater than your average mortgage rate. If you can achieve this, your investments will outperform the Pre-Payment Option.
If you decide to invest, chat with a financial advisor to help you determine the correct fund.
History does not predict the future, but there is some comfort in seeing previous rates of return.
S&P 500 Average Rate of Return (Source)
- 5-yrs: 14.87%
- 10-yrs: 12.86%
- 20-years: 10.47%
- 30-years: 10.733%
- 50-years: 11.86%
3) Smith Maneuver / Creating a Tax-Deductible Mortgage – Risk: High
The final option, and the one that carries the greatest amount of risk, is using a technique known as the Smith Maneuver.
This is an advanced technique with better upside potential for those of you in a higher tax bracket. The goal behind this technique is converting your mortgage into a tax-deductible expense over a period of 7-10 years. This is a hands-on technique, and is recommended for those who:
- Active Investors, medium to high-risk investments (ETF’s and Individual stocks)
- High income Earners (tax bracket +$150k)
- Can sleep at night with a large debt-burden.
If you would like to determine which option is best suited for your scenario, book a strategy call below.