When it comes to saving for retirement, if you’re like most Canadians, you’re probably not thinking about your mortgage as bringing you closer to your financial goals. In reality, your home is your largest asset.

If homeownership is a goal for you, you’ve likely considered getting a mortgage in order to fund that purchase, and rightfully so. A mortgage is a tool that can help you afford a home without needing a massive amount of cash upfront. What you might not have considered however is that it’s often a good idea to get a mortgage, even if you had the cash to buy your home outright.

A mortgage is simply a loan from a financial institution, and loans have long been used by investors to grow their assets. Borrowing money to fund investments is commonly referred to as using leverage, and with the history of home prices in Canada, real estate has become a top performing investment.  

How a mortgage helps grow your investment portfolio

Investors utilize leverage to increase their returns in a simple way: if you borrow money at a set interest rate and invest that money into an asset that returns more than the interest, you net a profit. For example if you borrow $100,000 from the bank at 2.00% interest, and invest it into an asset that returns 5.00% annually, you will net a profit of ($50,000 – $20,000 = $30,000). With interest rates being relatively low for the past decade, it’s been a no brainer for the financially savvy in Canada to take out a mortgage to pay for their home, which has certainly paid off for buyers in areaslike the GTA. 

With that being said, when rates are increasing, as they have been since 2022, the decision becomes a little harder.

However, there’s a better way to look at things.

By taking out a mortgage to buy your home, you’re not only investing that money into real estate, you’re also freeing up your own money to be invested into assets with a higher return than the interest rate on your mortgage. 

While no one can be certain about the future of the real estate market (though we can try and analyze trends), other investments could offer even more lucrative returns.  Take the stock market for example. Most financial advisors will recommend that investors early in their career invest into broad market index funds which track the returns of the largest companies stocks. The S&P500, a common market index, has returned between 7.00-10.00% on average over long enough time periods (20-30 years).

Let’s look at 2 potential situations. In the first situation you purchase a $500,000 home in cash. In an alternative situation you instead borrow that $500,000 with a mortgage and invest your money into an index fund. For simplicity we’ll assume you have a fixed interest rate of 5.00% over the length of your mortgage. If your investment returns an average of 7.00% annually over the 30 years it took you to pay off your mortgage, you would end up with over $900,000 more than you would have, had you bought your house with cash.

(The 2% return rate comes from subtracting the interest rate of 5% from the 7% assumed investment return)

Of course, this is an extreme oversimplification of the math, and you’ll need to factor in your monthly mortgage payments, and how fast you want to pay down your mortgage, to find the exact numbers. 

Investments in the stock market aren’t guaranteed returns either, and leveraging yourself to invest increases your risk in return for the potential reward. The bottom line: if you can get a better return on your investment than the interest rate you pay to borrow, it pays to leverage.

When not to get a mortgage

While getting a mortgage and building real estate equity is helping many Canadians to secure their financial future, it isn’t always a good idea to take out a mortgage, especially a large one. 

If you are nearing or are already in retirement, you might not have the time to wait out lengthy downswings in the stock market. In times when interest rates are high, the difference between investment returns and the cost to borrow money shrinks.

When you’re retired and no longer earning income from a job, you’ll need to rely on your investments to pay for your living expenses. Generally closer to retirement, it’s a good idea to move your portfolio into safer assets that won’t have a huge variance in their value. Things like bonds and GICs are fixed income investments, meaning they pay out cash at a set amount. While the price of bond funds for example can fluctuate, these investments are considered less risky than other assets, like stocks. While younger investors can wait out lengthy periods of negative returns such as in a recession in order to achieve the long term average returns of the stock market, when you rely on your investments generating income to pay your bills, you may not have that luxury.

For those with a long-term investment horizon of 10+ years, a recession is less of a worry as you will be able to continue paying your living expenses with other income, such as a salary, leaving your investments to weather the storm and having the opportunity to invest more while the market is down. 

For a recently retired investor relying on income from your investment portfolio to pay bills, a recession means expenses will become a much higher percentage of your portfolio you’ll need to withdraw. Common advice for retirement is to ensure you’re withdrawing a safe amount each year, generally less than 4%. If a recession comes around and you have all of your portfolio in the stock market, a 30% dip in the market could leave you with your expenses far more than the desirable 4% withdrawal rate. In this case, you risk running out of money as you are forced to liquidate assets while they are down in order to pay your bills.

Borrowing money to invest in assets with relatively high risk might not be a great idea if you’re at an age when you should be moving your portfolio towards more conservative investments. In an ideal situation you have your mortgage paid off and can even consider something like a reverse mortgage to take advantage of your home’s equity to fund your retirement.