How paying down your mortgage quickly could cost you 550,000$

In a previous post we looked at how investing just 103$/month while paying down your mortgage as slowly as possible could cancel out your mortgage interest, but today I’m going to show you how paying off your mortgage as quickly as possible could cost you over over 550,000$

Using the below assumptions:

• Mortgage

  • House price of 241,208

  • Loan of 90%: 223,817 (average mortgage loan for Q4 of 2016 as per CMHC report for Ottawa-Gatineau and Montreal)

  • 25 year mortgage (as 10% downpayment only qualifies for a max of 25 years)

  • 2.55% interest rate (lowest posted 5 year variable rate as per ratehub.ca)

  • 1,008$ monthly payment

• Investment

  • 9% rate of return (average historical stock market performance)

  • 2,000$ monthly contribution (average disposable income for Ontario and Quebec is 2,779$ as per Stats Canada 2016 survey)

• Inflation excluded in both mortgage rate and investment growth as future payments will be made with future money which already accounts for inflation.

• Does not account for house price either increasing or decreasing over time

Option 1 of paying off your mortgage as slowly as possible while contributing 2,000$/month to an investment account at 9% will leave you with assets worth nearly 2.5 million after 25 years. With a total outlay of 938,496 you end up with assets worth 2,488,797 (241,208 house + 2,247,589 investments). That’s $1.5 million more than you put in!

Looking at option 2, using the same funds of the 1,008 mortgage payment + 2,000 additional contribution, that gives you 3,008$/month to pay down your mortgage as quickly as possible without investing at the same time.

While your mortgage is paid off 19 years sooner and you save 59,896$ (82,865-22,969) in interest you also lose out on making 616,138$ (1,615,775-999,637) that you would have if you had invested alongside. So with the same outlay of 938,496 you end up with a portfolio worth 1.9 million (241,208 house + 1,691,348 investments) which even though this is 994,060$ more than you put in – the difference between the two options is 556,242$.

According to a Stats Canada 2016 survey the average after-tax income for Ontario and Quebec is 49,600$ so if you translate that into time, you would need to work an entire 11.2 YEARS of your life to have the same net worth if you pay off your mortgage quickly instead of investing at the same time as paying it off slowly. Or if you split it with your partner that’s 5.6 years more each that you could be spending together doing something you love.

Don’t have 2,000$ to spare? Check out this post to see what a difference just 352$/month can make.

What do you think? Would you consider lowering your mortgage payments and starting up an investment account based on the above? Feel free to leave a comment below.