4.6.12 Choosing to invest or pay debt

From: Financial Consumer Agency of Canada

If you have extra money, are you better off paying down your debt or investing the money? It depends on the cost of your loan compared with the return you can get from your investment.

Here is one example. Assume the following:

  • You are paying nine percent on your loan, compounded monthly.
  • Your loan is not tax-deductible.
  • Your marginal tax rate is 32 percent.
  • The marginal tax rate on your investment is 16 percent.

Using these figures, your break-even rate is 11.17 percent. The break-even rate is what your investment must earn to match the return from using your money to pay down your debt. If you don't think your investment can beat the break-even rate, it's normally better to pay off your loan.

You can use the Pay down debt or invest calculator from the Ontario Securities Commission to compare the benefit of paying off debt or investing.

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