Pay Like the (Not So) Olden Days

Money in the bankOne of the most common pieces of mortgage advice is to make prepayments. It’s almost cliché to call it a strategy.

Yet, occasionally we find a different spin on this overfamiliar technique. This week’s Globe column describes one such case, a method of exploiting cheap rates.

Interest rates have fallen by half since 2007. Yet, few even think to make the same higher mortgage payments they would have made just five years ago. And who can blame them, if they have greater-returning uses for their income.

But for risk averse mortgagors or those seeking an effective forced savings plan, optional payment increases work.

Yes, you can potentially find better nominal returns elsewhere, but higher risk-adjusted after tax returns don’t grow on trees. What’s more, prepayments accelerate your mortgage payoff day—the day you get the peace of mind of knowing a lender has no further claim on your shelter.

More: Pay your mortgage like it’s 2007…

  1. >> higher risk-adjusted after tax returns don’t grow on trees
    The tax and risk are the parts that many people fail to take into account. I always think of it this way: if the bank wasn’t making a lot of profit at that rate they wouldn’t be lending it to you.

  2. At same time nothing prevents you to benefit as a consumer by getting the best possible deal.
    Paying 2.1% interest on a mortgage is nothing short of a deal right now.
    Banks gain for sure, but that doesn’t make all consumers loosers.
    I personally would prefer everyone to pay same rate for their principal residence and that loan to be from the BoC directly.

  3. That is so true. I really think stock returns could stink for years. For me, there is no better investment than killing debt.

  4. From what I am seeing alot of my clients are accelerating their amortizations. I would say it is more the norm than the exception on renewing and refinancing clients leaving higher rates. The biggest struggle I have some days is trying to find a mortgage that will allow a shorter amortization and still have a fantastic rate.

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