A Little Extra

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