Comments on: Mortgage Over Paying http://www.canajunfinances.com/2008/06/06/mortgage-over-paying/ Personal Finances and Consumer Concerns, essays, stories, examples and how to articles with a distinctly Canadian Point of View Wed, 19 Nov 2008 16:12:46 +0000 http://wordpress.org/?v=2.6.3 By: Canadian Personal Finance Blog » Blog Archive » RRSP or Mortgage http://www.canajunfinances.com/2008/06/06/mortgage-over-paying/#comment-1694 Canadian Personal Finance Blog » Blog Archive » RRSP or Mortgage Mon, 09 Jun 2008 11:50:58 +0000 http://www.canajunfinances.com/?p=914#comment-1694 [...] or Mortgage After last week’s “show and tell” about Mortgage worksheet calculators, the next question to ask yourself is which is more important to pay into your Retirement Fund [...] [...] or Mortgage After last week’s “show and tell” about Mortgage worksheet calculators, the next question to ask yourself is which is more important to pay into your Retirement Fund [...]

]]> By: DAvid http://www.canajunfinances.com/2008/06/06/mortgage-over-paying/#comment-1690 DAvid Fri, 06 Jun 2008 23:26:05 +0000 http://www.canajunfinances.com/?p=914#comment-1690 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 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

]]> By: Personal Money Tips http://www.canajunfinances.com/2008/06/06/mortgage-over-paying/#comment-1688 Personal Money Tips Fri, 06 Jun 2008 18:55:12 +0000 http://www.canajunfinances.com/?p=914#comment-1688 Two things we have done with our mortgage is to make weekly payments and increase our payments when we get pay raises. On a 25 year mortgage at 5.15%, making weekly payments cuts your mortgage term to 21.4 years. If you get annual raises of 3% every year and you increase your payments by 3% exvery year you'll reduce your mortgage term to 16.5 years. http://blog.personal-money-tips.com/simple-strategies-to-pay-off-your-mortgage/ Two things we have done with our mortgage is to make weekly payments and increase our payments when we get pay raises.

On a 25 year mortgage at 5.15%, making weekly payments cuts your mortgage term to 21.4 years.

If you get annual raises of 3% every year and you increase your payments by 3% exvery year you’ll reduce your mortgage term to 16.5 years.

http://blog.personal-money-tips.com/simple-strategies-to-pay-off-your-mortgage/

]]> By: Gordonzo http://www.canajunfinances.com/2008/06/06/mortgage-over-paying/#comment-1686 Gordonzo Fri, 06 Jun 2008 16:08:46 +0000 http://www.canajunfinances.com/?p=914#comment-1686 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. 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.

]]> By: bigcajunman http://www.canajunfinances.com/2008/06/06/mortgage-over-paying/#comment-1685 bigcajunman Fri, 06 Jun 2008 15:16:28 +0000 http://www.canajunfinances.com/?p=914#comment-1685 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. 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.

]]> By: DAvid http://www.canajunfinances.com/2008/06/06/mortgage-over-paying/#comment-1684 DAvid Fri, 06 Jun 2008 15:06:58 +0000 http://www.canajunfinances.com/?p=914#comment-1684 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 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

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