I should have known when I read the title of the study, Mortgages or Margaritas, which choice Jamie Golombek, managing director of CIBC Wealth Advisory Services, would take. With RRSP season about to wrap up next Monday, readership on the thorny question Golombek was addressing – pay down the mortgage or invest your money in a balanced portfolio – was bound to be high.
Surveys have shown that three-quarters of Canadians favour paying down debt but Golombek says that "when interest rates on debt are low, the short-sighted objective of getting out of debt now may actually negatively impact your long-term retirement savings." Golombek's thesis is that when the rate of return on investments exceeds the rate of interest on debt, investing in an RRSP or a Tax Free Savings Account makes more sense than paying down the mortgage quickly.
Who could disagree? But all of his examples assume mortgage rates of 3 percent and an annual return on investment of 6 percent over a thirty-year period. Mortgage rates are very unlikely to remain that low for that long, but more important, a long-term 6 percent annual return is not easy for an individual to attain. When Claude Lamoureux ran the Ontario Teachers' Pension Plan, he used to tell me that 6 percent was the best he could expect in the long haul even though Teachers' has hundreds of people picking stocks and running the numbers.
I recently met with the wealth advisory branch of a competitor to Golombek and their ten-year rate of return was 6 percent – before fees. After fees it was 5 percent. So I emailed Golombek and asked what his prognosis looked like at 5 percent. "The numbers don't look as good," he admitted. "The examples were meant to be directional." He pointed me to a report he'd done in February 2013 where he did use a 5 percent return but the charts aren't comparable to those in the current study. What is clear, however, is that the difference between paying off the mortgage and saving at 5 percent is nowhere near as advantageous as it is at 6 percent.
Maybe all this should be no surprise. Golombek works for a bank. A bank makes money when a client does both: take time to pay off a mortgage AND invest in the market. In this case, it seems like mortgages for the client and margaritas for the bankers.