For most clients, paying off their mortgage early is priority numero uno. Let’s face it, mortgages are big, long, expensive commitments so for most people, the sooner you can work down that principal, the happier you will be. With that in mind, we’re going to approach mortgage prepayments from a slightly different perspective & put some fuel on that fire to getting aggressive & paying down that mortgage early on.
Before we started, a disclaimer: I am not a tax professional, but there are some very basic truisms I’d like to share.
Unlike in the United States, mortgage interest in Canada is not tax-deductible on your primary residence. The monthly payments you make are with your after-tax income. (What we mean by after-tax income is the money you’ve earned & already paid tax on, also referred to as your net income). This makes it even more important to make prepayments on your mortgage early, as you will not only save dramatically on your long-term interest costs, but you’ll save from having to apply future after-tax dollars to your mortgage payments.
To keep this simple, let’s say your mortgage rate is 3%. That means that for every $1,000 of principal you reduce your debt by, you will save $30 in after-tax cash each year.
Approaching it from this angle, in an income tax bracket of, say, 40%, you need to earn $50 to pay the interest for every $1,000 of outstanding principal, so there is significant benefit to reducing this balance early.
Any extra payments – whether lump-sum, doubling up, or increasing your regular payments – are going to be applied directly towards reducing your outstanding balance. With a lower mortgage balance, each year you will save from having to pay interest on that amount so you are saving your future, after-tax dollars. Your return on investment for making prepayments is 5% before-tax & 3% after-tax, which is as good, if not better, than most fixed-term investments (bonds, GICs, etc.).
So, take that tax refund or bonus & make a lump sum payment on the mortgage, try to double up your payment twice a year & increase your regular payments with each raise. You will not only save tremendous amounts of interest, but you will save from not having to apply after-tax dollars to your mortgage down the road.
For more information on mortgage tax strategies, or to learn how you should be using your prepayment privileges, give me a call.
Ryan’s business is all about education. Every mortgage is different. Even though 2 products have the same rate, the total cost of each option can vary, a lot. By outlining how the elements of different mortgages can save or cost them money, Ryan helps clients find not only the best rate, but the best option suited for them. The lowest rate can save you hundreds. The wrong product can cost you thousands.
A self-proclaimed “Mountain Man” (despite questionable facial hair growth), Ryan was drawn to Vancouver many years ago in search of the perfect balance between natural beauty, accessibility & city living. An avid rower, casual runner & full time Oiler fan, Ryan loves the fitness, the outdoors & in the later case, heartbreak.
A mortgage is the biggest financial commitment of most of our lives. Being well informed is vital to being mortgage-free as quickly as possible. Give Ryan a call or drop by the office anytime to talk mortgages & hang with his beagle sidekick — Little Jerry Seinfeld.