Is a Mortgage an Investment or a Savings Plan?
We are sometimes asked if mortgages are considered investments. The answer is a resounding yes if you’re a lender. But, what if you are the borrower? Let’s take a look and see if mortgage debt can be considered an investment.
Simply put, a mortgage is classified as debt
In simple terms, a mortgage is a debt borrowed to acquire real estate. Standard mortgages in Canada are amortized with blended payments of principal and interest. With interest rates so low, there is a meaningful amount of principal paid off with each mortgage payment. Borrowers who pay weekly or bi-weekly are accelerating repayment of principal, typically reducing their amortization by 3-4 years. Despite 25-30 year amortizations at inception, most mortgages in Canada are paid out within 18 years.
Why some people may see a mortgage as an investment
On the real estate side, home values typically appreciate over time based on inflation and demand from a growing population. During the average 18 year time frame it takes to pay off a mortgage, home values in Canada have appreciated. If you are lucky enough to own in Vancouver, average real estate values have more than doubled and, in certain areas they have more than tripled during the last 18 years due to population growth, strong economic conditions, and record low interest rates. Appreciation of real estate creates equity for the homeowner, which is the difference between debt owed and the market value of their home.
The fact that home values have significantly increased in our area over the last 18 years and created a vast number of equity-rich homeowners, has given the appearance of mortgages being an investment. If we add in mortgage helpers such as basement suites or laneway homes, homeowners have used the additional rental income to retire their debt and accelerate positive equity.
Think of mortgages as a forced savings program
While some may argue debt is debt and others that mortgages create passive wealth, our team views mortgages as more of a “forced savings program” than an investment. Amortized debt forces repayment to the principal while demographic forces and inflation cause property values to rise over time. Helping our clients build home equity that adds to their overall net worth makes us feel proud. The ability to own your home outright is, in our view, foundational for our clients financial well being!