Posted on: 21-10-08 14:54:37
5 years caculation without paydown:
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Mortgage $250,000
Amortization Period 25 years.
Total Interest paid in 5 years = $57,908.80
Remaining Principle - $221,094.80
5 years caculation with $1000/month paydown:
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Mortgage $250,000
Amortization Period 25 years.
Total Interest paid - $50,076.51
Remaining Principle - $153,262.51
Savings on Interest over 5 years = $8,000.00 app.., roughly this equals to $12,000 which can be distributed to 5 years at the rate of $2400 / year.
If I had invested the additional cash in funds, and the fund has grown by 10% every year, the profit would've been $20,000 in 5 years which distributes to $4000 year. At 5% expenses, it would be roughly $3800 / Year.
Factors that could influence the decision.
- Tangibility of profit earned.
- Financial volatility.
- Fees and expenses in maintaining investment.
- Continuous growth of the fund.
If you had not paid off your principle, your interest is supposed to remain high in successive years also, you should've found alternative investment which returns at leats 10% no matter what. Central bank rate is again another threat where you could win / lose.
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The cowards never started,
The weak died on the way,
Only the strong arrived.
http://www.youtube.com/watch?v=_yK1i9cLAMM
Those who have lived in North America during the 2000 - 2002 recession might tell you that not having mortgage payments is a big boon.
When the economy is in recession, there are job losses in every sector and your investments are tanking, the last thing you need is a mortgage payment and a principle that is larger than your investments and (in some cases) the equity in your home.
Do not be lulled into a state of complacency just because the markets have recovered 1,000 points this week.
It's still very volatile and it's possible that after a brief rally, we may enter another sustained bearish period.
And we are still over 5,000 points away from the highs of earlier this year.
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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."
-- Rhett Butler in "Gone with the Wind"
Quote:
Originally posted by JRF
If I had invested the additional cash in funds, and the fund has grown by 10% every year, the profit would've been $20,000 in 5 years which distributes to $4000 year. At 5% expenses, it would be roughly $3800 / Year.
What about capital gains tax?
Investments can give you any return (-50%, +50%) mortgage WILL save you money you OWE. Making/losing money from house prices going up/down is a different story
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Live and Let Live
Quote:
Originally posted by chittesh
Quote:
Originally posted by JRF
If I had invested the additional cash in funds, and the fund has grown by 10% every year, the profit would've been $20,000 in 5 years which distributes to $4000 year. At 5% expenses, it would be roughly $3800 / Year.
What about capital gains tax?
Investments can give you any return (-50%, +50%) mortgage WILL save you money you OWE. Making/losing money from house prices going up/down is a different story
Yes indeed, the tax has to be accounted on top of the profit you earn from the investments. The situation turns quite different for some one who could pay down additional $1000/month towards mortgage. This helps him shed the interest payment he will owe, number of years he will be committed to pay mortgage reduces which eventually relieves him to choose other investment avenue.
In case, the property on which you are paying the additional mortgage is his primary property (having no other property here), he shouldn’t be too worried as he needs to live in a place unless there are imminent plans to upgrade to a different unit (or at least in next 1-2 years). More over the Canadian Real estate market (especially in the 905 area) seem to be moderately relentless and I find nothing wrong to expect the price to remain either stead or shed no less than 10%. Having a primary property paid off provides equity to back one up in case of the other investments bite the dust, along the same lines having a equity and no mortgage payment provides much stronger leverage to probe risky investments which might come back with huge rewards and in case such avenues go belly up, he wouldn’t have still compromised his primary property other than some debt.
The interest you owe to the mortgage lender remains consistent, if you could manage to beat that up by paying extra, you are in a way getting a constant return unlike any other investment you could vouch for. More over, the investment world seem to have commenced to introspect the old style of wealth building where you stabilize your fundamentals before you jump into complex / influenced economical avenue to prosper. Needless to say, it is getting common to see one as an underdog when he / she is trying to get rid of the debts.
As conclusive remarks from my perspective, forecasting the next 3-4 years of financial market with my own limited abilities, I see there is edge towards paying down the mortgage (50% - 60% more on monthly due) than subscribing long term collective investment avenues. I understand it could be challenge but there isn’t any thing less compared to the above.
What is your view on this ?
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The cowards never started,
The weak died on the way,
Only the strong arrived.
http://www.youtube.com/watch?v=_yK1i9cLAMM
Interesting topic and different views.
What I have gather from this topic is person like me who dosent have much financial stability I should put more attention towards mortgage payment
If one should have house 220K just bought year ago with 4.7 variable rate then should invest more xtra money towards paying of mortgage or invest in mutual fund or other investment ?
Another factor I don't believe has been mentioned - it is current consumption vs future.
RRSP is for future (retirement) security and consumption.
Anything you put in RRSP cannot be touched until you are 71 (except in an emergency).
On the other hand, paying off mortgage sooner will free you up by putting more money for consumption in your hands much sooner.
If you keep putting in RRSP (or general, unregistered investment), and don't pay down your mortgage, you will always be on a shoe-string budget.
You will take ~ 20 years to pay off a typical mortgage.
It is true that you will have a very handsome retirement account (assuming your investments have consistently done well), but you may not have free cash left over for vacations, pursuing hobbies, better car, better lifestyle, etc. whatever your fancy is.
On the other hand, if you pay off mortgage sooner, you will automatically have extra cash equal to your old mortgage amount left-over at the end of the month.
You can then use it for anything you like - unregistered investments, catch up on RRSP, vacations, hobbies, etc.
However, it is quite possible that after paying off your current mortgage, you immediately turn around and buy a bigger house, and take on an even bigger mortgage 
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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."
-- Rhett Butler in "Gone with the Wind"
Quote:
Originally posted by pratickm
Anything you put in RRSP cannot be touched until you are 71 (except in an emergency). On the other hand, paying off mortgage sooner will free you up by putting more money for consumption in your hands much sooner.
I feel the same, What if one lives healthy all his life till 65 (and die all of a sudden as most of the people in a God blessed cardiac arrest) and doesn't have any kids who still rely on him and a spouse who is comfortable on his/her own earnings. Even one lives beyond that, they will need rely on periodical withdrawyal from the funds to avoid hefty tax.
Quote:
Originally posted by pratickm
It is true that you will have a very handsome retirement account (assuming your investments have consistently done well),
Consistent is going to be more of an oxymoron in financial future to come, What you are seeing the financial market is quite evident that some one else will always enjoy all your investments.
Quote:
Originally posted by pratickm
On the other hand, if you pay off mortgage sooner, you will automatically have extra cash equal to your old mortgage amount left-over at the end of the month.
This is the sad part, switching to a bigger house to show off (than the real need) is still less evil than switching to an ultra lavish lifestyle. Spending keeps the economy good but overspending will derail the prospects.
Quote:
Originally posted by pratickm
However, it is quite possible that after paying off your current mortgage, you immediately turn around and buy a bigger house, and take on an even bigger mortgage
After all, it puts me to feel skeptical when every bank teller, and few other I don't want to name is showing amazing level of interest for my comfortable retirement. Geeezzz When the hell all have become saints... I've seen Enron debacle in front my eyes. Its like a big Yikkes.. "this guy doesn't have any RRSP contribution, no RESP contirbution doesn't care about the life of his child" come on man...
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The cowards never started,
The weak died on the way,
Only the strong arrived.
http://www.youtube.com/watch?v=_yK1i9cLAMM
