“Should I pay off my debt on my primary residence or invest?”

The impact from rising interest rates has made this a common question for home owners and for good reason.

Pre-COVID, when interest rates were rock-bottom, investing often seemed like a compelling choice. The returns needed to beat the cost of debt were more achievable, so many leaned toward building their investment portfolios. But things have changed. With rising rates, the decision isn’t as clear-cut anymore.

In today’s environment, paying down debt has become a more attractive option. But, like many things in the finance world, there isn’t a one-size-fits-all solution — your personal financial circumstances play a huge role. However, with interest rates where they are, the case for reducing your debt, particularly your mortgage, has become much stronger.

So, with that in mind… if you have extra money, the big question is: Pay down debt or invest? While both options have their merits, paying off your mortgage can be a smart move, particularly if you’re in a high tax bracket.

Here’s why: Mortgage interest on your primary residence isn’t tax-deductible, so you’re paying it with after-tax dollars. As an example, if you’re in the top tax bracket (47%) and you are paying a 6.5% interest rate on your mortgage, you’d need to earn around 12.26% from investments (before taxes) just to break even with the cost of your mortgage. This is not easy to achieve, nor is it guaranteed. Remember that risk and return go hand in hand. To achieve that return, you’re likely putting your capital at risk.

By paying down your mortgage on your primary residence, you’re essentially locking in a guaranteed return equal to your mortgage rate. That’s a risk-free return that’s hard to beat. Some argue inflation diminishes both debt and investment returns. This may be true, but it also impacts the returns you get from paying down your mortgage. Even with inflation, the guaranteed return from debt repayment is still compelling, particularly in a high-rate environment.

While investing has its perks, the guaranteed return from paying off debt is hard to ignore, especially in today’s economic climate.

That said, your individual circumstances should guide your decision. For some, investing might still be the better option. It’s essential to weigh both sides and stay strategic about your next move. Speaking to an adviser can help provide some clarity when talking through these options.