Why I Won’t Pay Down My Mortgage

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Paying down your mortgage; for most, that’s the goal. Pile every spare dollar onto it and get it gone as soon as possible. I have to say that in today’s financial world, when mortgage rates are so low, I couldn’t disagree more.

I don’t consider my mortgage to be “debt”. I actually see my mortgage as a valuable tool for helping me increase my wealth! Using the equity in my mortgage to add to my nest egg is part of my long-term strategy for getting ahead.

The math is simple, really: My mortgage costs me 3% (or less, these days), but if that equity was invested, I could be making anywhere from 6% to 25% or more on it in the stock market.

I think the people who are opposed have this to say: “But once my mortgage is paid off, I can invest the amount of my mortgage payment each month instead.”

All right. Let’s run the numbers:

Using the following facts for each scenario:

  • a house worth $300,000
  • a fixed rate mortgage at 2.99% renewed every 5 years
  • a 20 year amortization
  • bi-weekly payments on the mortgage
  • 6% return on investments
  • Scenario A: you pay off your mortgage at 50 years old and thereafter invest your $765.94 bi-weekly for the next 15 years. You end up with about $480,000 in your investment account at 65 years old.
  • Scenario B: starting at 30 years old, you take the equity available to you each 5 years when you renew your mortgage (about $60,000 every 5 years) and invest it. You would have about $1.1 Million in your investment account at 65 years old. Go ahead at that point and pay off your mortgage all at once (about $240,000 owing), and you’ll still have about $860,000 invested.

Another opposition I hear is: “You shouldn’t retire with a mortgage still owing.”

Oh wait, I just solved that problem too.

Add to this the facts that:

  • In both scenarios you paid about the same amount out of your pocket over the 35 year period (in scenario A you pay the bi-weekly payment to the mortgage and then into your investments, and in scenario B you pay the bi-weekly payments into the mortgage for the entire 35 year period).
  • You and a spouse could almost put that entire $60,000 into TFSA’s ($5,500 each allowable per year), so now, when you withdraw the entire amount to pay the mortgage down when you’re 65, there are no tax implications.
  • In Canada, when you borrow for the purpose of investing, the interest on the loan is a tax deduction.
  • The value of your house will increase regularly, making the amount of equity available to you more and more each time you renew the mortgage.
  • Since you paid the mortgage down at 65, you now have an extra $765.94 bi-weekly burning a whole in your pocket from that point forward.

Of course, the fundamentals are what make this work; i.e: the fact that the amount of interest you can reasonably expect to make on investments is about twice what you’ll pay for a mortgage. When these stats change, so do the end results. But until then, I won’t be paying off my mortgage!

 

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The Numbers Don’t Lie

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Household finances are such a chore for most already, so some fun people have come up with some fun challenges to help you accumulate savings and have fun at the same time! Yippee! Except for one small detail…..if you don’t have the money that the challenge requires, then putting that money into savings is going to cause you problems….not fun.

Basically, in order to do anything financial, you have to do the math. Math is the only thing that’s going to tell you whether or not you can afford to do something. Ignoring the math will get you into trouble every time. So, sorry to burst your bubble, but unless you think math is fun (which I do, BTW), taking care of your money is not a super fun activity.

It is a super necessary activity though, so let’s find ways to get around the math, shall we? By using a spreadsheet or another kind of software that will do the math for you, you can get straight to the fun part of finances, which is seeing your debt disappear, your savings accumulate, and your investments multiply! Yippee (for real this time)!

So, you can’t just arbitrarily pick numbers out of thin air when you’re making financial decisions. Just because the experts say to save 10%, or whatever, of your money doesn’t mean you can afford to do that. Just plug the numbers into your budget software of choice and see what happens…..maybe you can afford to save more than 10%. But you won’t know until you do the math.

Same goes for retirement goals. You can’t just blindly follow advice, taking the numbers for granted.

Personal finance is just that; personal. The answers will be different for everybody. The good news is, a little math goes a looooong way.

The REAL Value of a Dollar

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The truth is, a dollar is worth exactly what you think it is. In other words, if you’re prone to saying, “It’s only $100.”, then the value of $100 gets reduced in your world. In my world, $100 is a lot of money!

If you’re guilty of reducing the value of your hard-earned money, then it’s time to re-adjust your attitude towards money. Start valuing money as if it were time. I guarantee you you’ll be more hesitant about spending 4 months of your salary on a car or 5 hours of your salary on one meal at a restaurant.

You worked hard for that money, sacrificing time with your family, so don’t sell yourself short! When you really value every dollar of your money you’ll start to naturally look for ways to save on things you buy. And I’m not talking about any huge, time-consuming efforts here, I just mean that you’ll start to notice things like:

  • a can of pop can cost $1.50, but you can get a whole case on sale for $3.99.
  • a new bicycle costs $100+, but you can pick up a 10 speed at a garage sale for $10 (we just did!)
  • take-out pizza can cost $20+, but the frozen ones go on sale for $5

You can gain a lot from a new outlook on the value of a dollar and those little savings add up over time!