According to a Scotiabank survey, 6 in 10 mortgage holders say they could add a little extra ($20) to their mortgage payment without impacting their finances.
It makes you wonder about the other 4 in 10 (but that’s another story).
The question here is, what would $20 extra per month mean to the average mortgage? The answer: It would save the typical borrower almost $2,800 in interest over 25 years and reduce his/her amortization by 10 months.*
If you’ve got nothing better to do with $240 a year (i.e., you have no high interest debt to pay down, no personal obligations, etc.), then prepaying a mortgage may be a good “investment.” But it boils down to your best alternative use of that cash.
Suppose, for example, you have a 2.99% mortgage rate and 31% marginal tax rate. On the face of it, you’d need better than a 4.33% pre-tax return elsewhere to beat knocking down your mortgage. But there’s more to consider, as these articles explain:
- RRSP, TFSA or mortgage?
The Takeaway: Factor in: (a) investment risk, and (b) your tax rate now vs. at retirement - RRSP vs. TFSA vs. mortgage vs. credit card debt
The Takeaway: Get rid of “bad debt” first. - The Unlikely Retirement Savings Strategy
The Takeaway: Your income level and family size impact the best course of action.
There are sometimes wiser uses for your extra loot than an RRSP, TFSA or mortgage prepayment — e.g., life insurance, unregistered savings, RESPs, etc. If you don’t want to figure it out alone, an independent unbiased fee-only financial advisor comes in handy for deciding how to allocate spare cash (assuming you have enough of it to justify the advice cost).
Other stats from Scotiabank’s survey:
- People’s living status:
- 35% of Canadians own a home with a mortgage
- 29% own a home without a mortgage
- 32% rent their home
- 4% say “other”
- 51% of mortgagors have spoken to their mortgage provider about how they can become mortgage-free faster
79% of mortgagors have taken steps to pay off their mortgage faster, such as:
- Increasing payment frequency (45%)
- Renegotiating into a lower rate (29%)
- Increasing regular payments (26%)
- Making lump-sum payments (26%)
- 21% of mortgage holders have not taken additional steps to pay down their mortgage quicker, for reasons like these:
- No funds available (49% of the 21%)
- Other payment priorities (27% of the 21%)
- Uncertainty over what steps to take (8% of the 21%).
* Assumes $175,000 average mortgage, a 2.99% fixed rate and 25-year amortization.
Rob McLister, CMT
Original amortization 40 years in 2007, 3 years remaining now.
Yeah, paying little over sometimes really helps.
All these surveys are the same in that they never define what it means to “impact your finances”. On the one hand the thought that 4 in 10 people can’t swing an extra $20 is disturbing, but what does that actually mean?
Strictly speaking, it doesn’t matter how much money you make, an extra $20 towards the mortage is an impact on your finances because that’s $20 less that you could invest otherwise.
So overall I don’t see what can be concluded from this survey.
The problem is not the extra $20, it is how people spend the extra $20. Some choose to spend it on the latest “toys” and other items. It is a matter of priorities. Some just get in over their heads and find themselves in financial hot water. Having no personal or mortgage debt is usually the best option.
I don’t think an explicit definition of “impact” matters. To most people, “Impact your finances” means “Impact your finances in a meaningful way.”
The significance here is that a lot of people claim to be living close to the edge. If a piddly $20 a month makes 40% of people answer yes to this question, that is surprising and worrisome.
Does that mean that 4 out of 10 people will have problems meeting a mortgage payment if it rises more then $20/month? And for the other 6 out of 10 is $20/month all they can afford? What happens when interest rates go up ?
Paying off a mortgage faster is only a good financial strategy when it is incorporated into an asset portfolio allocation mix strategy and no household debt.
no other debt part I agree with 100%,
the “asset portfolio allocation mix strategy” I have to google :)
“but what does that actually mean?”
It means a lot of people are swimming in the deep end with cement shoes.