Is it smarter to invest in the stock market right now or pay down your mortgage? 

With the recent Bank of Canada overnight rate increase to 3.75%, mortgage rates are anywhere at 6 to 7 per cent if renewing, and the TSX index is down substantially and typically will move even lower with more interest rate hikes and a looming recession. 

So, the big question for many homeowners is: Do you pay down your mortgage and receive a risk-free return using after-tax dollars or do you take advantage of lower prices in the stock market and purchase Blue-Chip stocks yielding 6 to 7 per cent dividends and move those into your RRSPs or TFSAs?

The decision is very specific to each household’s situation and appetite for risk – consider:

If not renewing your mortgage for the next two to three years, given that a recession is almost certain in 2023 which tends to depress stock market prices even further and push up dividend yields, buying Blue Chip stocks for that duration of that time before the renewal occurs would seem like a good idea if you can handle the stress of further stock market erosion in the short-term after a purchase.

However, consider using a weekly purchase method for purchasing a basket of Blue-Chip stocks as the stock market can be very volatile.  Make sure the stocks you are buying have a solid record of dividend growth and solid earnings profile.

At the tail end of a recession, interest rates tend to fall so in the above scenario whereby you still have a few years before renewal you may be able to renew at a rate below what they are today which makes your investment in depressed priced stock with strong dividend yields attractive over the long term as the stock market recovers.

Paying down the mortgage instead of purchasing “fire sale” stock, if risk averse to stock market downturns and a mortgage renewal is coming fairly soon, is a good idea as it yields a risk-free return and the higher the household income tax bracket the more attractive this strategy is. 

Whichever strategy is best for your household should be discussed with a mortgage broker to help you make the right decisions for your needs and chose the correct mortgage product for you.