Average Mortgage and Interest

According to the CMHC, in Q4 of 2016 the average mortgage loan size for Ottawa-Gatineau was 234,077 and Montreal was 213,574.  I’m being biased focusing in on these areas as they’re closest to home for me and my initial potential readers :). The lowest posted interest rate I could find was 2.55% for a 5 year variable on ratehub.ca. Taking an average of 223,826$, the total interest over 25 years would come to 82,865$.

Assuming a 10% downpayment, that means that on average homeowners are paying 324,073$ for a house worth 241,208$. That’s a big chunk of change!

Traditional Advice

When I took out my first mortgage I was told to make bi-weekly payments instead of monthly and to max out the mortgage and make lump sums as much as possible in order to reduce the interest and for a long time I believed this was the best way, until I did the math myself!

Going Against the Grain

What I found was: by taking the longest possible mortgage available to you (say 25 years) and making the absolute minimum payments you can make WHILE investing just 103$/month into a self-directed investment account at the same time at an interest rate of 9% (feel free to subscribe for future posts on how to achieve this :)), you can completely cancel out the 82,000$ in interest AND end up with a portfolio worth 364,370$ (241,208$ house, 39,950$ principal investment and 83,212$ in interest growth) with the assumption your house neither increases or decreases in value over that time.

I think most people should be able to scrounge together 103$/month per household (51.50$ per person in a couple) but if not, feel free to follow along for future money hacking posts as well as how I’m investing should you wish to see how my investments do before you take the plunge.

No Gain Without Risk

Now I know there is a psychological element here as well where people want to own their own home outright without owing the bank to hedge against future interest rate hikes, but if you are investing at the same time the interest in the investments usually rise with mortgage rates too. At the end of the day though you need to decide what you personally are comfortable with BUT I hope that this gives you something to consider should you wish to take a little risk in order to maximize your return on your hard earned cash!

Math Warning!

And now for the math for those that are interested. With a 25 year mortgage at 2.55% the monthly payments are about 1,008$ (annual totals detailed below in the column on the left). If you invest 103$/month or 1,236$/year at a rate of 9% (the historical annual stock market returns which I will demonstrate how to achieve later) – you will end up with interest which equals the interest paid on your mortgage over the 30 years.

So to compare: if you just pay off your mortgage without investing along side you would end up with an asset worth 241,000$ for which you paid 346,000$ vs. paying off the mortgage as slowly as possible while investing and ending up with an asset of 241,000 PLUS 104,000$ in principal investments where the interest of 83,000 has been cancelled out.

I did not account for inflation as both the mortgage payments and investment amounts will be with future money which will include inflation amounts on both sides.

What do you think? Would you consider lowering your mortgage payments and extending your timeframe in order to invest along side? Feel free to comment below.

Still not convinced? Read on to see how paying your mortgage off quickly before investing can end up costing 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.

In a previous post we looked at how investing just 127€/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 almost 6 years of your life.

Using the same assumptions:

• Mortgage

  • House price of 244,000

  • Loan of 90%: 219,600 (average mortgage loan as per 2017 Central Bank report)

  • 30 year mortgage

  • 3.15% interest rate (average rate as per 2018 Central Bank report)

  • 952€ monthly payment

• Investment

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

  • Growth calculations take into account 41% tax on growth every 8 years (deemed disposal)

  • 352€ monthly contribution (average disposable income for houses with mortgage in Ireland as per Central Stats Office 2015 survey)

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

As we saw in the previous post, option 1 of paying off your mortgage as slowly as possible while contributing 127€/month to an investment account will cancel out your mortgage interest and you end up with assets worth what you paid vs 123,000 less.

Looking at option 2, and increasing your investment amount to 352€ you not only cancel out your mortgage interest but also end up with a assets worth 712,917€ (244,000 house + 468,917 investments) or for an outlay of 493,840 you end up with assets worth 168,967€ more after 30 years.

Looking at option 3, using the same funds of the 952 mortgage payment + 352 additional contribution, that gives you 1,304€/month to pay down your mortgage as quickly as possible without investing at the same time. Let’s see how those figures play out.

While your mortgage is paid off 12 years sooner and you save 48,187€  in interest (123,040-74,843) you also lose out on making 217,154€ in net interest minus deemed disposals that you would have if you had invested alongside. So with the same outlay of 493,840 you end up with a portfolio worth 543,950 which is 168,967€ less than if you pay it off slowly and invest alongside.

Summary below:

If you convert that difference into time, which is after all the most precious of resources, using the central stats office’s 2015 household income survey’s average take-home of 29,880 – this equates to 5.65 years full salary. That means you would need to work an entire 5 years and 7.8 months MORE of your life to 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 nearly 2 years and 10 months more each that you could be spending together doing something you love.

Interested in how these numbers look with larger monthly investments? Check out this article.