Mortgage Over Paying

Now that we have figured out how to track our Mortgage using this Mortgage Work Sheet with Excel , we can now start doing some interesting tricks to see what we can do with our Mortgages.

The Power of Overpaying

I have some dear friends who paid off the houses they lived in, very quickly each time they moved from house to house (as their family grew). They both had good paying jobs, so they set up a simple goal with their Mortgage, each Mortgage payment they made, they were going to “double up” (i.e. pay a double payment to the bank). They had chosen the type of Mortgage (so there were no penalties to make extra payments) and sure enough they paid off their houses incredibly quickly.

How quickly could this be? If we go back to the model I have been using all week, this is how fast our family could pay off their house if they doubled up on their payments.

Date Payment Interest Principal OverPayment Balance Total Interest
01-Jun-08 $0.00 $100,000.00 $0.00
1-Jul-08 $636.84 $489.80 $147.04 $636.84 $99,216.12 $489.80
1-Aug-08 $636.84 $485.96 $150.88 $636.84 $98,428.40 $975.75
1-Sep-08 $636.84 $482.10 $154.74 $636.84 $97,636.83 $1,457.85
1-Oct-08 $636.84 $478.22 $158.62 $636.84 $96,841.37 $1,936.07
1-Nov-08 $636.84 $474.33 $162.51 $636.84 $96,042.02 $2,410.40
1-Dec-08 $636.84 $470.41 $166.43 $636.84 $95,238.76 $2,880.81
1-Jan-09 $636.84 $466.48 $170.36 $636.84 $94,431.56 $3,347.29
1-Feb-09 $636.84 $462.52 $174.32 $636.84 $93,620.41 $3,809.81
1-Mar-09 $636.84 $458.55 $178.29 $636.84 $92,805.28 $4,268.36
1-Apr-09 $636.84 $454.56 $182.28 $636.84 $91,986.16 $4,722.92
1-May-09 $636.84 $450.55 $186.29 $636.84 $91,163.03 $5,173.46
1-Jun-09 $636.84 $446.51 $190.32 $636.84 $90,335.87 $5,619.97
And a lot of time passes
1-Jan-14 $636.84 $191.50 $445.34 $636.84 $38,015.14 $23,351.38
1-Feb-14 $636.84 $186.20 $450.64 $636.84 $36,927.66 $23,537.57
1-Mar-14 $636.84 $180.87 $455.97 $636.84 $35,834.86 $23,718.44
1-Apr-14 $636.84 $175.52 $461.32 $636.84 $34,736.70 $23,893.96
1-May-14 $636.84 $170.14 $466.70 $636.84 $33,633.17 $24,064.10
1-Jun-14 $636.84 $164.73 $472.10 $636.84 $32,524.22 $24,228.83
1-Jul-14 $636.84 $159.30 $477.54 $636.84 $31,409.85 $24,388.14
1-Aug-14 $636.84 $153.84 $482.99 $636.84 $30,290.02 $24,541.98
1-Sep-14 $636.84 $148.36 $488.48 $636.84 $29,164.70 $24,690.34
1-Oct-14 $636.84 $142.85 $493.99 $636.84 $28,033.88 $24,833.19
1-Nov-14 $636.84 $137.31 $499.53 $636.84 $26,897.51 $24,970.50
1-Dec-14 $636.84 $131.74 $505.09 $636.84 $25,755.58 $25,102.24
1-Jan-15 $636.84 $126.15 $510.69 $636.84 $24,608.05 $25,228.39
1-Feb-15 $636.84 $120.53 $516.31 $636.84 $23,454.91 $25,348.92
1-Mar-15 $636.84 $114.88 $521.96 $636.84 $22,296.11 $25,463.80
1-Apr-15 $636.84 $109.21 $527.63 $636.84 $21,131.64 $25,573.01
1-May-15 $636.84 $103.50 $533.34 $636.84 $19,961.47 $25,676.51
1-Jun-15 $636.84 $97.77 $539.07 $636.84 $18,785.57 $25,774.28
1-Jul-15 $636.84 $92.01 $544.83 $636.84 $17,603.90 $25,866.29
1-Aug-15 $636.84 $86.22 $550.61 $636.84 $16,416.45 $25,952.51
1-Sep-15 $636.84 $80.41 $556.43 $636.84 $15,223.18 $26,032.92
1-Oct-15 $636.84 $74.56 $562.27 $636.84 $14,024.07 $26,107.48
1-Nov-15 $636.84 $68.69 $568.15 $636.84 $12,819.08 $26,176.17
1-Dec-15 $636.84 $62.79 $574.05 $636.84 $11,608.20 $26,238.96
1-Jan-16 $636.84 $56.86 $579.98 $636.84 $10,391.38 $26,295.82
1-Feb-16 $636.84 $50.90 $585.94 $636.84 $9,168.60 $26,346.71
1-Mar-16 $636.84 $44.91 $591.93 $636.84 $7,939.83 $26,391.62
1-Apr-16 $636.84 $38.89 $597.95 $636.84 $6,705.05 $26,430.51
1-May-16 $636.84 $32.84 $604.00 $636.84 $5,464.21 $26,463.35
1-Jun-16 $636.84 $26.76 $610.07 $636.84 $4,217.30 $26,490.11
1-Jul-16 $636.84 $20.66 $616.18 $636.84 $2,964.28 $26,510.77
1-Aug-16 $636.84 $14.52 $622.32 $636.84 $1,705.13 $26,525.29
1-Sep-16 $636.84 $8.35 $628.49 $636.84 $439.80 $26,533.64

That’s amazing, you pay off the house in 8 years (give or take a month or two). Can most people do this? Not very likely, but it is something to think about and play with. Can you pay off your house early if you give up going out as much, and instead pay your Mortgage down? That is the question to ask.

More Mortgage Fun

With this worksheet you can explore the following interesting scenarios:

  • Interest rate changes and what that might do to your pay back capabilities
  • What happens if you take your tax refund and put it on your Mortgage, instead of into savings.
    • This is an interesting scenario, where you put money in your RRSP, you get money back from your taxes and then put that money on your Mortgage, a Win-Win proposal!
  • And other interesting fun games.

Use this worksheet as a tool, and learn about what you can and cannot do when you buy your house.

{ 4 comments }

{ 4 comments… add one }

  • DAvid June 6, 2008, 6:26 PM

    Gordonzo,
    I think David Ingram sums it up nicely in this document: http://www.centa.com/CEN-TAPEDE/2003/expert/expert119-01.html
    and although it references RRSP, I think it also applies to your question. Basically, every $1000 you put on your 6% mortgage saves $60 after taxes in perpetuity. In my case, I would have to earn about $120 before taxes to pay that $60, so the payout of the mortgage becomes a bargain.

    Your suggestion to build an investment portfolio, though sound, has been discussed in the light of the Smith Manoeuvre, and most of the discussions there both for and against, address your question.

    In simple terms a $200,000 mortgage at 6% for 25 years would be paid in 15 years if you applied an extra $200 each month. This saves you $40,754 in post-tax dollars (i.e. it is money you never have to spend). If you invested the $200 and had a return of 7% over 15 years in a fully tax efficient portfolio, you would earn $26,221 in your portfolio, and still have to pay taxes on withdrawal. So, even if you can manage your monthly $200 investment cost free, have no losses due to trading, have a low enough marginal tax rate, etc, you still do lot better with the mortgage paydown. In fact, you would have to earn 9.5% AFTER taxes in your portfolio to match the mortgage option. I know very few who would suggest the possibility of maintaining an average 9.5% in a portfolio, let alone 9.5% after taxes.

    I have not added the equity you may have gained in the house over the 15 years

    DAvid

    Reply
  • Gordonzo June 6, 2008, 11:08 AM

    It would probably be beneficial to compare mortgage paydown against investing the extra paydown as I believe that the “lost opportunity costs” on tax deferral and the potential risks associated with giving the bank control in the event of job loss or disability would be of interest. Meaning, if you don’t have much saved up and all your equity is in your house, the bank will not be eager to lend money to you, should you need money due to unemployment or disability. Plus, since the power of compound interest needs over 20 years to really take off, delaying your savings might have a huge Lost Opportunity Cost in the end. Just a thought.

    Reply
  • DAvid June 6, 2008, 10:06 AM

    You don’t have to double up on all the payments to enjoy this effect. Our mortgage allows us to double up, annually add a lump sum equal to 10% of the original mortgage amount, and increase our payments by 10% each year. Through a combination of double ups in the early years, and increasing our bi-weekly payments as my pay increased, we will pay our 25 year mortgage in less than 15 years. If I recall, we made fewer than 10 double ups, and the payment increases just meant we did not have extra ‘play’ money from my paycheque. Mortgage paydown was a useful landing spot for any tax returns as well, as we could immediately see the difference it made in our financial plan.

    DAvid

    Reply
  • bigcajunman June 6, 2008, 10:16 AM

    Precisely, ANY overpayment early on in a mortgage is a good thing, and in my estimation that is the best place to put your found moneys.

    Reply

Leave a Comment

*