Why Home Owners Should Stop Paying Biweekly
That’s a pretty bold statement to make to say “why homeowners should stop doing biweekly payments as soon as possible.” Well, it’s true. The biggest purchase you will make in your lifetime will probably be your home and it will probably be the largest loan you will ever take out in your lifetime as well. However, most people will pay it off wrong. I have stumbled onto something very interesting that I would like to share with you.
I started to notice something in my client base so profound that at first I had trouble agreeing with it; but the more I checked into it, the more it made sense. I started to do research on my client base, interviewing several clients, and a definite pattern emerged. Only a small percentage of people were actually managing their liabilities correctly, and the upside was that they were creating a lot more wealth in the process. Meanwhile, the lion’s share will be a slave to the bank that lent them the money for years to come.
What emerged were a few simple mathematical formulas that the families creating more wealth than everyone else were following, and the outcome was shocking. This small group had smaller mortgages because of it, and a lot more in their investments. Keep reading because I’m going to share the formulas with you.
Let’s get started! First, why do you think the banks tell you to do biweekly payments? Do you think it’s possible that you will have a credit card or a loan that is higher interest rate than your mortgage while you are doing biweekly payments. Of course there is. So, do you think the bank is winning the loan game?
Of course they are – you are throwing extra funds at your mortgage, while at the same time you have another loan at a higher interest rate. In the game of lending money, it’s the Bank 1 point, and you 0 and it gets worse.
Let’s analyze accelerating a mortgage. Let’s start off with a $350,000 mortgage at a 4% interest rate. The payment is $1841 a month. How about we throw an extra $500 a month at the mortgage? It will be paid for in 17-25 years with a total interest savings of $68,773. Sounds pretty good, right?
Now, let’s start saving that same amount of $1841plus $500, making it $2341 a month and put that $2341 into an RRSP for 8 years so we match up to the original 25 year time frame that we started on with the mortgage. In 8 years, assuming a 6% rate of return, the RRSP total would be $286,915. Sounds pretty good, right? Well, let’s take a look at a different scenario. How about we put the extra $500 a month into RRSP’s and take the tax refund from the RRSP deposit and apply it to the mortgage? So, by putting $500 a month into RRSP’s (or $6000 a year), and assuming a 40% tax bracket, you’ll get back $2400 in tax refunds, which we will apply towards the mortgage. In this scenario, the mortgage is paid for in 21.16 years.
Let’s see which case is going to win. In scenario #1, we put an extra $500 a month into the mortgage and when it was paid for we saved the equivalent of the mortgage payment of $2341 a month for the remaining 8 years. Once again assuming a 6% rate of return, the RRSP total was $286,915.
In scenario #2, we put the extra $500 a month into RRSP’s, then took the tax refund and applied it to the mortgage. Then, when the mortgage was paid for in 21.16 years, we invested the $2341 a month into an RRSP, assuming the same 6% rate of return, the balance was $439,428 vs. $286,915. I realize you paid more interest on the mortgage that way, and that extra cost was $33,927, but you have $152,513 more for retirement. Would you pay $33,927 more in interest so you could have $152,513 more in investments? I hope so!
So you see, accelerating your mortgage means you will have less money down the road and that you are shooting yourself in the financial foot. Your future wealth depends on you learning the simple formulas and they easy to use..
Contact me and I will calculate your TDS and best way to pay off your mortgage while gaining wealth for retirement!
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