Q: I may be coming into an inheritance and I want to know if it would be better to pay off all the debt I have or invest the money? I have the following debt:
Mortgage: $60,000, at 2.5%, variable rate
Line of credit: $20,000 at 5.7%, variable rate
Car loan: $24,000 at 3.75%
I am 62 years old and the thought of being debt-free is very appealing, but also want to make the best financial decision for the long run.
— McFeely, Alberta
Nawar Naji, mortgage broker with Mortgage Architects:
The answer to your question really depends on a few factors:
1) When is your retirement date? i.e, how many more income earning years do you have?
2) Do you have any other savings, such as RRSPs, that will be used during your retirement years?
Now, if you have a few working years left and you have a retirement plan, then consider paying off the high interest debt first (line of credit at 5.7%). Paying off a depreciating asset (car loan) is not the best idea. If there are additional funds in the inheritance consider investing them into cash producing (such as dividend stock) to supplement your retirement income.
Nawar Naji is a licensed mortgage broker with Mortgage Architects in Toronto, Ontario. He has been brokering since 2007, helping clients finance homes and investment properties.
Robert McLister, mortgage planner at intelliMortgage and founder of RateSpy:
For most folks, the older they get, the less risk they can take. Seniors are usually on fixed incomes and have less time to make up for investment losses. The fact that you have consumer debt in your sixties hints that you’re not as financially secure as you need to be. This assumes the debt is not being used to generate business or investment income, of course. Hence, eliminating interest that’s paid in after-tax dollars is a compelling low-risk use of your inheritance. Pay off the debt and use the monthly cash flow savings to build a future stream of retirement income.
Steve Garganis, mortgage broker and editor of CanadaMortgageNews.ca:
This is a good example of bad debt versus good debt. I would recommend paying off all the debts and the mortgage, too, if possible. Then, I would refinance the house and use the funds to invest, as you requested. You just made the interest on your debts a tax deductible expense. However, I strongly suggest you speak to your accountant first to better understand how this tax-saving investment strategy works.
Steve Garganis is a mortgage broker at Mortgage Intelligence and editor of CanadaMortgageNews.ca.