These are the two most common questions I have come across when even I had a discussion around paying down the mortgage faster.
1. Would I not pay a lot more interest on my mortgage if I don't pay it down?
Very valid question. Yes you will pay more interest on your mortgage than what you will pay if you pay it down faster. However, consider this: You pay down mortgage with your after tax income.
The cost of paying down your mortgage is 33 to 45% tax and the long term growth. It is much cheaper to keep your mortgage and save the tax and have tax sheltered growth. If you don't have any other debts than the mortgage, you may use the tax refund to pay it down. I invite you to take an opportunity to understand the real cost of paying down your mortgage so that you could take an informed decisions. You could post your questions on this forum or call me at 416 840 5943.
2. What is the other situation when paying down your mortgage is not advisable?
For most people, it is very common to have a borrowing of some sort, in form of loans credit lines and credit cards. Interest rates on these accounts are typically higher than your mortgage and in some cases as high as 20 to 25%. One can save a huge amount or interest and monthly cash obligation if any excess cash is directed to this debt.
Remember, mortgage is still our cheapest debt. In certain cases, it is cheaper to even increase your mortgage to pay off these debts. As I had mentioned before, I would love answer specific questions from anybody who would like to take the time out to understand his or her debts get a better handle on monthly payments.
Wednesday, February 3, 2010
Monday, February 1, 2010
Mortgage vs. RRSP
Every other person is motivated to be debt free. In this pursuit, a question begs to be answered: Do I pay down my mortgage or save for my retirement?
Unfortunately there is a lot of noise on this issue leaving the population with a lot of fog and mist to navigate through.
We pay our mortgages with after tax income. A typical mortgage, now a days carries an interest rate of 2-5%. When we make extra principle payments, our saving is that interest rate. 2-5% !
Now, consider this: We typically pay 33-45% tax on our income and then apply it to save this above mentioned interest.
Paying 45% tax to save 5% rate does not go down well with any hard working prudent person.
Moreover, if invested in a moderate investment option, we can expect a long term tax sheltered returns of 6% or more.
Let us talk in numbers. A mortgage of $350,000 @ 3.5% will need extra $278/month to reduce amortization from 25 years to 20 years.
If this money is invested in retirement savings (RRSP) at 6%, it will amount to $193,600 by the end of 25 years. There will be additional $37,530 in tax refunds at marginal tax rate of 45% ($27,522 @33% tax rate).
All this by taking extra 5 years to pay down your mortgage!
It is time to recognize the friend we have in a mortgage, a leverage tool. Instead of getting rid of it, it is more valuable to consider in terms of where do I put my finite dollars for maximum benefit. Answer lies in assessing your personal situation and seeing what it costs us in terms of opportunity.
Unfortunately there is a lot of noise on this issue leaving the population with a lot of fog and mist to navigate through.
We pay our mortgages with after tax income. A typical mortgage, now a days carries an interest rate of 2-5%. When we make extra principle payments, our saving is that interest rate. 2-5% !
Now, consider this: We typically pay 33-45% tax on our income and then apply it to save this above mentioned interest.
Paying 45% tax to save 5% rate does not go down well with any hard working prudent person.
Moreover, if invested in a moderate investment option, we can expect a long term tax sheltered returns of 6% or more.
Let us talk in numbers. A mortgage of $350,000 @ 3.5% will need extra $278/month to reduce amortization from 25 years to 20 years.
If this money is invested in retirement savings (RRSP) at 6%, it will amount to $193,600 by the end of 25 years. There will be additional $37,530 in tax refunds at marginal tax rate of 45% ($27,522 @33% tax rate).
All this by taking extra 5 years to pay down your mortgage!
It is time to recognize the friend we have in a mortgage, a leverage tool. Instead of getting rid of it, it is more valuable to consider in terms of where do I put my finite dollars for maximum benefit. Answer lies in assessing your personal situation and seeing what it costs us in terms of opportunity.
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