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If at the end of the year, I have 10k in hand that I want to save/invest and these are my options:
1.Prepay into mortgage. Rate is 2.1%
2.Invest in stocks and I know I can get at least 7 % return.
Based on this, what other pieces of info should I consider to decide whether I should make a prepayment or if I should invest in stocks?
I strongly doubt your numbers, but lets switch the question around anyway.
Would you borrow 10k on your house to buy stocks on leverage? That's putting your house at risk to have the chance of a gain in the stock market (and nothing in the market is sure, especially in the short term), and I would really advise against it. The decision you're considering making resolves down to this one.
Note: It is always better to make any additional checks out as "for principal only", unless you will be missing a future payment.
what other pieces of info should I consider
If you don't have liquid case available for unexpected repairs, then you probably don't want to use this money for either option.
The 7% return on the stocks is absolutely not guaranteed. There is a good amount of risk involved with any stock investment. Paying down the mortgage, by contrast, has a much lower risk. In the case of the mortgage, you know you'll get a 2.1% annual return until it adjusts, and then you can put some constraints on the return you'll get after it adjusts. In the case of stocks, it's reasonable to guess that it will return more than 2.1% annually if you hold it long enough. But there will be huge swings from month to month and from year to year. The sooner you need it, the more guaranteed you will want the return to be.
If you have few or no stock (or bond)-like assets, then (nearly) all of your wealth is in your house, and that is independent of the remaining balance on your mortgage. If you are going to sell the house soon, then you will want to diversify your assets to protect you against a drop in home value. If you are going to stay in the house forever, then you will eventually need non-house assets to consume.
Ultimately, neither option is inherently better; it really depends on what you need.
In all likelihood, the best thing you can do, if these really are your only two options (ie no other debt at all), paying-down your mortgage will shorten the term of the mortgage, and mean you spend less on your house in the long run.
Investing is should be a long-term activity - so yes, the likelihood is that, given a modest investment, it will gain at historical averages over the life of the investment vehicle. However, that is not a guarantee, and is an inherent risk. Whereas paying-down a mortgage lowers your financial obligations and risk, investing increases your risk.
I want to know how you got a 2.1% interest rate on a mortgage, though - the lowest I've seen anywhere is 3.25%.
The short answer is to invest it since the rate of return is higher than your mortgage. (Assuming that you can withstand interest rate hikes, meet short term liquidity needs and don't need your $10K in the short or near term).
The long answer is if you're comfortable leveraging your house and can put that $10K away for the long term you can reduce your taxes via the Smith Manoeuvre:
Alternatively, if you have kids or grandkids and will help them through school, take the government's money by putting it away in an RESP.
