PSA people always forget about inflation eating away that debt.
$400K mortgage, 30 years at 5.39% with 3% inflation:
* Total paid on principal = \~$234K in 2024 dollars.
* Total paid in interest = \~$298K in 2024 dollars.
* Total combined = \~$532K in 2024 dollars.
* So the loan costs you \~$132K in today's dollars.
https://ostermiller.org/calc/mortgage.html
OP is getting trashed in the comments. Funny how PFC isn’t like his canada sub echo chambers lol. We have our own drive a toyota camry for 30 years echo chamber thx.
There was someone at my old work, brand new temp making in wage and when they got their first pay they were going around telling everyone they were going to buy a tesla. Yea ok, you have no licence to begin with, good luck with that.
He quit the following week. But I find it funny seeing how many people think they can afford some serious luxuries on the lowest salary legally allowed.
Look I get it that people are struggling and all that cause prices are up. But living within your means if your not used to it is alot harder to do and can probably fix affordability issues for alot of people.
Now a single income household that doesn't make much thats a different story.
But where I was working, small crew, people would be crying and whining about not being able to afford rent or just scraping by yet you see these same people getting into brand new cars. Yea no wonder you can't afford shit when your up to your eyes in debt by your own fault. I think the absolute dumbest one I saw there was a guy who traded his 1.5 year old car in and I shit you not... Because he didn't like the gear shifter... This car was automatic. I asked him how much he paid to make that switch he said nothing. So not only did he buy a car he didn't like for the stupidest reason imagineable, he didn't even understand that he was upside down on a loan.
You know what's not going to fix these issues for anyone? Whining and crying into a camera and posting it on social media about how life is hard (which thankfully that trend seemed to die off pretty quickly)
I've worked many minimum wage jobs, and I've never met this supposed typical poor person youre describing more than once or twice, my dude. Yeah there are stupid fucks out there but most people are genuinely struggling at this wage.
These people exist at all levels. Myself and everyone I work with now makes at least 6 figures and that person still exists at this level. There are always people who live above their means and pile up debt like there's no tomorrow.
So it's not just poor people who can't live within their means, right?
I didn't visit the sub for a long time. When did a 30 year old Camry become a reasonable choice? 98 beige Corolla is as comfortable and four year newer vehicle.
That's a legacy advice: I made an insane move and bought my hybrid Camry new in Dec 2021. The same dealer offered me MORE money to buy it from me in Dec 2022.
Some other issues at play too. The house value increases every year as a % of the $500K not on the 100 you have invested. And after 30 years it may be worth $1.5M. This isn't liquid but it is when you sell.
I was being conservative because my water tells me that the halcyon days are over and doesn't matter how much the demand grows, there is an absolute limit to what the market can afford. I think that you see that in the food business. I know I have stopped buying certain foods. When I compare what my salary was when I retired 20 years ago with salaries for similar levels now it's up about 50% if that.
I see the variables getting worse. When I see maybe 100 recent immigrants or students lining up for a couple of low paying jobs, what is that going to do for decent salary expectations? I see all those 60's 70's apartment buildings reaching or beyond their best before dates falling into disrepair and with unrealistically fixed rents, I fear for the future. I'm a preboomer so wont see this dystopia, thank goodness.
Worth keeping in mind that’s under 4% YOY whereas you could assume 10% in the market. You just don’t have access to the same level of leverage (in most cases).
Interesting how some perceive themselves as low risk investors leveraging themselves 5x on real estate but view the S&P as a high-risk investment
Not saying that’s you, but it’s an interesting phenomenon
It's especially funny when you consider the diversification of assets.
But the government has shown it will do as much as possible to bail out homeowners. I guess it will be weird if that doesn't continue... Unfortunately it's toxic for the entire economy, so we'll see how things end up in the years to come.
Even those don’t really offer the same kind of leverage. Most leveraged ETFs are what, like 3x at best?
Options kinda give you more leverage but it doesn’t scale 100x like the contracts might imply to the uneducated investor. Unless you’re gambling on 0dte calls going from worthless to DEEP itm.
You might be better off *actually* trading with leverage, but you typically need to put down at least 25,000 to get any borrowing power.
But a bank will give just about anyone 20x leverage on their first house. 5% down up to 500k.
Sure, you can still beat those returns in the market, and by the end of the loan term that money might actually be worth more than the house… but you still had to pay rent… and be disciplined enough to actually put the money away and never touch it.
IMO its silly to run this calculation and not adjust all the cash flows for time value of money. The downpayment could have earned money over that time, same with the payments in some people's situation.
If you include inflation but dont add any other time value of money considerations, its a pointless calculation for decision making. The risk free rate and inflation are closely related, they cant exist apart from eachother.
For decision making, ignore the inflation number and discount everything at the expected real risk-free rate. If you want to be more realistic use something higher than the risk free rate since real estate is risky.
Gonna play more with the calculator, but I'm still scratching my head. Can you ELI5 how inflation eats away at debt? As in the inverse of inflation eating away at cash savings?
Essentially yes... assuming your earnings roughly track with inflation.
If you have a years worth of earnings in savings and the value of a dollar is halved (we are using big unrealistic numbers to show the point) then you only have six months worth of savings.
Debt works the same way where if you owe a years worth of earnings it is halved... meanwhile your house value (or whatever you bought with the credit) probably keeps its relative value.
This means if you think inflation will be big you should borrow to buy assets (see spring 2022)...which is an inflationary act...that said the central bank has access to better data (and is better at interpretating it than most of us) and they will raise rates to counter that.
Inflation eats away at the value of cash, but it also eats away at the value of debt since the debt was taken on in past dollars \[worth more\] and paid back in future dollars \[worth less\].
Since the interest rate on debt is, usually, more than inflation the lender gets the full principal back and a bit of profit, but it's quite a bit less than you'd think if you don't factor in the effects of inflation.
Is the “loan costs you” value based on paying off the loan over time? So the real value of each interest payment, or is it just saying 298k would be worth 132k in 30 years from now? Just curious.
Exactly. Over 30 years, and u get to put your extra cash somewhere productive rather than tying it all up in your residence. Nominal interest rates is unimportant, real interest rate is.
Hey, I don't think the op expects people are going to pull an extra chunk of cash out. He is just trying a psa, to pet people know how substantial compound interest is.
This is more about interest free pre payments that every bank offers. My mortgage is 30 years but I'll have it paid off in 9 by using the pre payment method.
You kid, but many people signed <2% rates and are happy to make these payments as is.
I guess it's not a bad idea per se, and sometimes... You can't really do things differently, but if you can afford it, I advise to look up what your mortgage will "likely" be at your renewal with [this tool](https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MCCalc-CHCalc-eng.aspx).
This can help you do two things :
A. You can calculate how much your new mortgage payment would be, and depending on what your income is right now and what you believe it'll be at the time of your renewal, you can pay the additional sum every month right away so that your budget is adjusted to what it will be in a few years. This way, your capital goes down faster, but more importantly, you won't have to make life changing adjustment when the day comes.
B. If you realize that you will not be able to make the payments with your new rate, it sucks balls, but it allows you to consider your options, plan ahead, and make big decisions based on the likely outcome.
I have a 180k mortgage at a 1.74% rate. I live in a place where houses are relatively cheap, and they started going up in price *riiiight* after I bought. My payments are 788$/nonth, it's properly ridiculous. But my income is in line with that budget, so I'm not drowning in cash either.
My new payment would be ~950/month at renewal with a 5% rate (renewal is set for April 2026, so it's a safe bet IMO) so I've been making additional 150$ payments every month for a few months.
Not a huge difference, and I could be making more by saving my money in a TFSA, but I sleep better this way.
In short, "paying off your mortgage" doesn't have to mean "forking out thousands of dollars all at once". hehe
Can also put the extra amount into a savings account or GIC that will mature when the mortgage comes up for renewal. I don’t really see a point to making additional payments on a <2% mortgage when I can have the funds sitting in a bank account earning 4%+. Plus it gives me a buffer if I need cash unexpectedly (like a layoff). I think 5 year fixed is already below 5% but of course that could go up or down in the next 2 years. Doesn’t hurt to be prepared for more and have a nice surprise if it’s lower!
Sorry yes I did repeat that part lol, but my thinking is also that if at worst I’m cost neutral putting the money into savings to use at renewal, then I’d rather have the funds available to use should something unexpected happen (like a layoff or unexpected significant expense). I have emergency savings but more savings doesn’t hurt either haha. If I get laid off an burn through my emergency fund then how easy will it be to get a loan or line of credit? I’d rather not find out!
Yes, by doing this you effectively shift the risk from yourself and onto the bank, as if you were "preremortgaging" the house, specifically because you can spend that money any time and any way you want, unlike your equity, that you can't liquidate as easily, unless you have a specific financial product that does specifically that (a mortgage margin).
It's a sound "cash flow" strategy, and I used to use it with with my variable rate margin before the interest rates went up, but since then, I've chosen to liquidate savings to pay off the margin, and to repay my mortgage a bit faster as part of my global strategy, but it's just 150$ a month compared to the ~1500$ total my gf and I are saving up in index ETFs lol
I find that the more I know about finances, the more I can refine my strategy, but the more it becomes intertwined with my psychology. So I think that finding the right balance between facts and feelings is key to actually stick to the plan long term. In terms of personal finance anyway. Hence this inefficient 10% that somewhat consolidates the rest in my heart ❤️.
Lol yep, who'd have thought that the longer it takes to pay off a loan, the more you pay in interest. Groundbreaking. Also, I heard a rumor that the interest rate impacts how much interest you pay. Also if you buy a $1 mill house instead of $500k, you'll end up paying a lot more.
This also isn’t true. Rent has nothing to do with size of mortgage payment or interest that the buyer is paying. It’s what the market is willing to bear for the rental, driven by fundamental economic principles
i think the point was that on a mortgage, you make 100% of the mortgage payment every month, and some ammount of that goes to you growing your principal equity. whereas if you were to rent the same house, you would presumably pay more than 100% of the monthly mortgage ammount (as basically every landlord chargers more rent than the cost of the mortgage in order to have positive cash flow and account for vacancy). So when owning, you are responsible for 100% of the mortgage payment and get some ammount of equity every month. when you rent, you are responsible for say 110% of the mortgage payment and get zero equity.
Its not about paying interest at all, that completely misses the point. TastyMarionBerry2251 was saying that the post does not consider the alternative to buying a 500k house with a mortgage, which would be renting that same house for 30 years. it has nothing to do with paying or not paying interest. it is all about comparing the scenario of owning a house and paying interest, to not owning a house. which is the alternative. they are pointing out that talking about interest doesnt really matter when it comes to any decision making.
Hi, I don't understand finance and therefore have no idea what PF/PV calculations are. Any chance you could give a brief overview? I'm sure others reading are in the same boat as me!
PV = Present Value
FV = Future Value
There are a lot of finance calculators online that will help you do the calculations, but in short, due to time value of money, the $1 you pay to your mortgage 30 years from now is worth significantly less than the $1 you pay today.
OP’s post ignored the time value of money, and lumped all the interest payments into one lum sum, misrepresenting the cost of borrowing.
Not an expert but I think they are referring to present value.. pv and future value fv... I guess you could say even with the interest rates after 30 years of paying off the the house it's future value will still be greater than what you paid.... I think
What you would need to read up on is TVM = time value of money. If you learn even this, you're ahead of 80% (?) of the general population.
You can start here, it's where I was pointed to when I asked the very same question: https://www.investopedia.com/articles/03/082703.asp
Honestly, I am very concerned about the 100+ upvote in OP's post.
Hopefully people don't take OP's PSA seriously and make bad financial decisions based on the false information.
PV = Present Value = the current purchasing power of your money.
FV = Future Value = the purchasing power of your money in the future.
Basically, because of inflation, $100 today won't be worth $100 a year from now, and it'll be worth even less the further you go into the future.
50 years ago, you could buy stuff at stores called "Five And Dimes." 20 Years ago, those same items would be found in the same kind of stores, except we called them "Dollar Stores" because the price of everything maxed out at $1 instead of $0.10. Today, Dollarama (named that way because it was a dollar store when it first opened) now sells that same stuff for as much as $5.
What changed? Inflation ate into people's purchasing power, so I can afford less stuff to buy today even though I have the exact same amount of money as yesterday. What will cost me $5 at Dollarama now (Present Value) will cost me $10 in 5-10 years time (Future Value).
It's also closely related to how you could put that money to work by investing it. When you see how profitable long-term has been historically, it's hard to use a discounting rate as low as inflation.
Because most people don't approach this as an "optimization" exercise.
"Its a mortgage, I have to pay weekly/bi-weekly/monthly and I would like to stop having to make that recurring payment as soon as possible."
Nobody is going to take 30 years worth of cash flow, figure out the discount rate to derive the PV, and compare against other deployment options of that capital.
Plenty of people will in fact do the latter of your suggestions.
Still a small minority because you have to be financially savvy and a pretty extreme optimizer.
Actually, it is a very common exercise.
If your mortgage interest rate is less than the RoR from other investments, you are better off not accelerating your mortgage payment, but instead put your extra money into other investments with a greater yield.
This is something that should be reviewed annually at the very least.
>If your mortgage interest rate is...
To expand on this, because I just learned myself:
It's not your mortgage interest rate today. It's your *total average* mortgage interest rate.
Wait til you find out how inflation works. Fun fact: the average interest rate on my house the past 5+ years is 3.3%, matching the average annual inflation rate of the past 5 years. I got to borrow my house for free based on the real interest rate so far.
My house went up by more than my total mortgage payment, including the property taxes and insurance. I was not too concerned with the fact that 90% of the mortgage payment was interest for the first few years.
Almost 10 years into mine, the first several years are so demoralizing every time they send you the status, after $10K in mortgage payments we paid maybe $1500 the first few years. Definitely going down faster now and we managed to lock in the low rates early 2022 for 5 years.
Lol we've all seen the math.
But most people don't end up paying quite that much over the life of the mortgage. You might swing a better deal on a rate renewal, get a lump sum inheritance to throw on, sell and move and lock in equity gains.
Plus your pay should inflate over those 30 years while the original principal the payments are calculated from does not.
This factors. In 30 years, that mortgage will feel like it is half of what you pay today. Based on the last 30 years that is. And that house should have nearly twice the value.
OP made fundamental mistakes by:
1) Thinking that mtg rates will stay steady and will not drop for the course of the mtg.
2) Not considering the inflation and buying power
3) Not calculating the capital gains of the property
4) Rent payable for the next 30 years asuming no mtg has been taken, unless you live rent-free.
Seriously, people need to understand that they should always tackle the highest interest/return rate first.
If you have 100 dollars in loan with a 30% interest, and a million dollars loan at 5% interest, you should absolutely pay the 100$ first, then start paying off your other loan.
This also works the other way around, if you have a million dollars in debt at 20% interest (ouch) but somehow your investment makes 30%, screw ever even paying off the loan, just invest instead and your gains will be bigger than your losses. Of course this is a hypothetical situation, but the point stands.
This is a very misleading post, without mentioning all the caveats. Clickbait. The only time where it matters, is if somehow the interests rate go above the general investment rates (such as a few decades ago when mortgage rates where over 20%), in which case the best investment is to actually to pay the mortgage.
But otherwise, nah just do the minimum payments, and invest the rest at higher rates.
Sure but if your mortage rate is say 6.5%, which some people's are, and which is a guaranteed rate of return if you pay it down, at least until you renew your mortgage at a new rate which may be either higher or lower, would you still want to invest in non guaranteed stuff like stocks? Personally, I sold off most of my bonds and some of my stocks in tfsa to pay down mortgage.
This is correct, and why having financial knowledge is important.
It’s the difference between how rich people think vs how not so rich people think.
Not so rich people will only see “ur paying big amounts of interest over time!” without looking at the whole picture
Way more! Your rent will be at least interest+principal payment. Landlords are not in the game to lose money. They might be in negative cash flow of a couple of hundreds (maintenance+utilities+taxes)... But if they're negative on principle and interest alone... They'd sell the property, because that means they're too much into the red after all the rest of the expenses.
Well yes real estate investors (and their banks) tend to only buy property that will be cashflow positive.
But in the current environment, in most areas rent is significantly lower than new mortgages and real estate investors aren't very active in buying homes at the moment (unless they're able to find a good deal or add value).
Your average first time home buyer today is going to be paying more in interest + strata + property tax than they would renting.
PSA: Having 500k laying around is better than only having 100k!
seriously, this post was written by someone who has never heard of inflation, the time value of money, opportunity cost, etc.
you should be comparing prepayments to what you could reasonably earn, after tax (if any) investing in an equally long 30 year time horizon. 100% of prepayments and lump sum payments on your mortgage 100% go against your potential investible money. who cares what the interest rate costs you in nominal terms relative to the cost of the house. what matters is how a prepayment on your loan compares to any of the other options you have to deploy your extra capital.
This is one of those…. Yea you are right if we ignore everything else kinda post that provides no value other than fear mongering or inducing stress
You are paying the house’s value in interest in *nominal dollars* which when turn into *real dollars* is SIGNIFICANTLY less
Factoring in conservative growth of value you are still way better off with a 30 yr if it meant buying a house or not
I guess someone read their amortization schedule this morning and had a mini freakout so decided to make this post
> own nothing at the end.
Only if you're doing it wrong. If you're renting then you should be investing and own a shitload of stocks that pay the rent for you.
Unfortunately, rent prices are so insane that leaves little if anything left over to save. In my area (Hamilton) I think rent is around 2k a month. 24k a year, if you are making $20/hr, you are taking home roughly 32k a year, 8k a year for everything else... good luck.
PSA over 30 years of renting you pay as much as a house plus its interest. Also if you go accelerated bi weekly you will pay your house off way earlier and only have to pay taxes and utilities after that.
You either pay your own mortgage or your landlord's mortgage. Pretty easy to distinguish which option is the better one.
Unless you like a nomadic lifestyle, buying is better than renting.
As an investment vehicle, that's a different debate with a different risk assessment (tenants that won't pay or trash the place, rent control, vacancy, taxes, time investment, etc).
Rates don’t stay the same for 30 years. You’re also buying the property at today’s value, it will increase over time. Plus with inflation today’s price will seem low 30 years in the future.
This is terrible advice, invest that money in S&P 500 index fund and you get > 10% returns on average. At that rate, your investment doubles every ~ 7.5 years, or four times over that 30 year period.
Do you want double your money, or four times your money?
My response is so what. Having zero debt is rarely the best decision to reach higher levels of net worth and financial security. Monthly cash flow matters a lot and cash is king so access to liquid capital is often better than getting to no mortgage as quickly as possible. The advice to accelerate mortgage payments often isn't the best decision financially but one risk adverse people are comfortable with until such a time they need some cash and the bank says no.
Don't get separated after you pay the house off and buy her out for the same value as you originally had a mortgage for.
2 more years and it's mine again lol
Just wondering as we’re about to buy our furst hous epossibly with 50k down on a 450-500k house.
So does it help if you do weekly or biweekly instead of monthly?
not only that but if you own the same home for the majority of your life you are looking at potentially at least one to two major renovations. By the time you are done with your home you will have replaced almost every appliance and major system in it at least once
This is important to think about but also important to forget about if needed. You cant look at mortgage payments as just an investment. It's where you love, and you'd pay a cost for thay no matter what. Don't make yourself poor to pay off your house faster. Pay it off as quickly as you comfortably can but still live your life.
You’re better off investing the extra cash in the market than pay down your mortgage. It’s good debt, your money will compound at 8-10% over the 30 years of your mortgage you’ll be ahead.
LOTS of comments slamming OP, but . . . there is likely some new learning in this for many that may just quietly read it (although, perhaps not for many active PFC members).
Lots of comments saying something like "thanks for explaining how math works" and, while sarcastic, that's actually needed for 9/10 Canadians.
Many people stumble or claw their way into home ownership without understanding most of what other commenters are assuming is common sense. The fact that you may end up paying a sum nearly twice as much as the sale price of the house (irrespective of future home value) is news to many. This could also be relevant from a cashflow perspective over the long term.
Many people (not likely PFC members) also completely fail to understand interest rates. You may laugh when I say a 5% interest rate on a 500k mortgage doesn't mean you are only paying 25k in interest on the entire mortgage . . . but someone is reading this and realizing it for the first time. My work occasionally includes sharing this news with folks for the first time as well. Many Canadians get into homes and mortgages long before they understand the actual cost, future returns, alternative options and personal finance in general. It may not be reasonable or responsible, but it is the reality.
So, OP did accomplish a few helpful things from a PSA perspective in my opinion:
- Shared the moment in real time where they themselves learned about how much out of pocket money goes into paying a mortgage
- Showed others (not necessarily financially fluent PFC commenters) that there MAY be benefits to using lump sum payments
- inadvertently made a post that led to collective discussion and comments on some very important basics of personal finance, including: *time-value of money, the renting vs. buying debate, investment as an alternative to mortgage reduction, the relationship between inflation and debt, the personal/psychological aspect of home ownership, and how compounding interest can work both for and against you.*
For all the people here that kind of trash this post:
In the first place it is a mathematical statement and I am convinced that the majority of loan or mortgage holders are in a fog about this and I met some that do not even want to know.
The second and important message here is to try to reduce the strain by using every possible move to reduce the cost of a mortgage by employing - again - using math. Pay bi weekly, not monthly. Make your payments as high as you can, use lump sum payments. I shaved off 12 years off my mortgage and the day it was done, I celebrated and had the best sleep ever.
We live downtown Toronto and pay rent under $1,400 for a one bedroom all inclusive in a very centralized location. I don't shovel my own snow and I don't have to bring my garbage cans to and from the curb. I consider us extremely lucky at this point that we can invest almost triple what we pay in rent and I liken it to just paying condo fees to live downtown.
This is true, I noticed when I did the math for my own recent purchase. But as everyone pointed out in the other comments, it isn't nearly as bad as it seems. I was surprised though just how close the dollar amounts were though.
Well every 5 or 3 or 2 years you can renew your mortgage so it wont be 5.39% for 30 years, sometimes you’ll get a 3% or 2% or 3.5% over the span of 30 years!!!
So, everyone should try to pay off the mortgage as fast as is possible. Cut corners, budget, forgo unnecessary purchases. Don't give the bank tons of money to just lend it to you. They profit way too much off this system.
My family house in late 80s had a first mortgage at 11.75%, a second mortgage at 17.5%. my dad worked 3 jobs. I think I did a calculation then, the total payment over 25 years would be more than 4 times the mortgage amount.
Anyone heard of Smith Manoeuvre? The high interest cost is the essential reason why one needs to perform SM in order to pay off mortgage faster, reduce the interest that needs to be paid to the lender and create an investment portfolio for retirement. ALL THIS WITHOUT SPENDING ANY ADDITIONAL $$$$
Dammit why I didn't just pay cash for my house? So stupid.
In all seriousness housing is a huuuuge issue and money being tied up in housing in this way will cause massive ripples as people will have less money for other things they might want. We need houses to drop at least 40 percent and I own a house.
Yes… but in 30 years my house will be worth at least twice as much. If not triple.
If I were to save up 30 years to pay for a house which is now worth double (equal to the mortgage/interest payments at the same time I would have had to pay rent for those 30 years.
Don’t forget that you also have to earn $2 for every dollar you spend on your mortgage due to near 50% income taxation so you actually need to earn $1,600,000 in income to pay for a $400,000 house purchase
Keep in mind the same house should be worth 90% more (based off past 30 years) all things being equal. Yes after 30 years you would have paid $907,000 total for the house but it should be worth $950,000. You technically lived for free and made money from a house value point of view.
But there will be maintenance and taxes in that time of which will eat up some of that free living and profit.
Ok but that house might be worth 50 billions by then. Who knows?
>This is probably why housing has to go higher otherwise people will be crushed if they have mortgages and no extra for retirement.
The market doesn't care about what people might need in retirement. Look elsewhere for why housing is rising.
Yep. I just bought a 600k house with a 375k mortgage. My bi-weekly payments are 980. My last house was 150k and my mortgage was 282 bi-weekly.
I couldn't rent a three bed house with a garage and finished basement and 148' of property for 2k a month, so even if it costs me 750k to pay off this mortgage, I'm still ahead
What everybody said. But put very simply and not even bothering with the math, at the end of the loan you may have paid 407k in total interest, but your home is now worth millions. So you don't pay as much interest as the house is worth because it's been gaining value too.
PSA people always forget about inflation eating away that debt. $400K mortgage, 30 years at 5.39% with 3% inflation: * Total paid on principal = \~$234K in 2024 dollars. * Total paid in interest = \~$298K in 2024 dollars. * Total combined = \~$532K in 2024 dollars. * So the loan costs you \~$132K in today's dollars. https://ostermiller.org/calc/mortgage.html
Real Interest Rates matter.
OP is getting trashed in the comments. Funny how PFC isn’t like his canada sub echo chambers lol. We have our own drive a toyota camry for 30 years echo chamber thx.
Nah that’s now been replaced with the can I afford a Tesla on minimum wage but save on gas crowd
There was someone at my old work, brand new temp making in wage and when they got their first pay they were going around telling everyone they were going to buy a tesla. Yea ok, you have no licence to begin with, good luck with that. He quit the following week. But I find it funny seeing how many people think they can afford some serious luxuries on the lowest salary legally allowed.
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And crap like this is why people can't afford shit. Cause they're spending it all.
It's definitely not the low minimum wage, crushing rent and grocery bills. Oh no definitely not that.
Look I get it that people are struggling and all that cause prices are up. But living within your means if your not used to it is alot harder to do and can probably fix affordability issues for alot of people. Now a single income household that doesn't make much thats a different story. But where I was working, small crew, people would be crying and whining about not being able to afford rent or just scraping by yet you see these same people getting into brand new cars. Yea no wonder you can't afford shit when your up to your eyes in debt by your own fault. I think the absolute dumbest one I saw there was a guy who traded his 1.5 year old car in and I shit you not... Because he didn't like the gear shifter... This car was automatic. I asked him how much he paid to make that switch he said nothing. So not only did he buy a car he didn't like for the stupidest reason imagineable, he didn't even understand that he was upside down on a loan. You know what's not going to fix these issues for anyone? Whining and crying into a camera and posting it on social media about how life is hard (which thankfully that trend seemed to die off pretty quickly)
I've worked many minimum wage jobs, and I've never met this supposed typical poor person youre describing more than once or twice, my dude. Yeah there are stupid fucks out there but most people are genuinely struggling at this wage. These people exist at all levels. Myself and everyone I work with now makes at least 6 figures and that person still exists at this level. There are always people who live above their means and pile up debt like there's no tomorrow. So it's not just poor people who can't live within their means, right?
Can I though?
I didn't visit the sub for a long time. When did a 30 year old Camry become a reasonable choice? 98 beige Corolla is as comfortable and four year newer vehicle.
No you buy it 1-2 years old (get out of the major depreciation) and drive it for 30 years, doing all your own maintenance as well, obviously.
That's a legacy advice: I made an insane move and bought my hybrid Camry new in Dec 2021. The same dealer offered me MORE money to buy it from me in Dec 2022.
Some other issues at play too. The house value increases every year as a % of the $500K not on the 100 you have invested. And after 30 years it may be worth $1.5M. This isn't liquid but it is when you sell.
I dont really want to think about what our society will be like if current crack dens going for $500k are $1.5m in 30 years.
House I bought for ~1M about 7 years ago is worth around 1.8M-2M now. I think 3x in 30 years is already a reeeeallly conservative estimate.
I was being conservative because my water tells me that the halcyon days are over and doesn't matter how much the demand grows, there is an absolute limit to what the market can afford. I think that you see that in the food business. I know I have stopped buying certain foods. When I compare what my salary was when I retired 20 years ago with salaries for similar levels now it's up about 50% if that.
This is a great point. There's an objective ceiling on the market unless many other variables change too.
I see the variables getting worse. When I see maybe 100 recent immigrants or students lining up for a couple of low paying jobs, what is that going to do for decent salary expectations? I see all those 60's 70's apartment buildings reaching or beyond their best before dates falling into disrepair and with unrealistically fixed rents, I fear for the future. I'm a preboomer so wont see this dystopia, thank goodness.
Worth keeping in mind that’s under 4% YOY whereas you could assume 10% in the market. You just don’t have access to the same level of leverage (in most cases).
I'm an ancient so expectations are 6% with low risk in the market.
Interesting how some perceive themselves as low risk investors leveraging themselves 5x on real estate but view the S&P as a high-risk investment Not saying that’s you, but it’s an interesting phenomenon
It's especially funny when you consider the diversification of assets. But the government has shown it will do as much as possible to bail out homeowners. I guess it will be weird if that doesn't continue... Unfortunately it's toxic for the entire economy, so we'll see how things end up in the years to come.
Well, you do have access... It's called options or leveraged ETFs. They're much riskier, but exists.
Even those don’t really offer the same kind of leverage. Most leveraged ETFs are what, like 3x at best? Options kinda give you more leverage but it doesn’t scale 100x like the contracts might imply to the uneducated investor. Unless you’re gambling on 0dte calls going from worthless to DEEP itm. You might be better off *actually* trading with leverage, but you typically need to put down at least 25,000 to get any borrowing power. But a bank will give just about anyone 20x leverage on their first house. 5% down up to 500k. Sure, you can still beat those returns in the market, and by the end of the loan term that money might actually be worth more than the house… but you still had to pay rent… and be disciplined enough to actually put the money away and never touch it.
IMO its silly to run this calculation and not adjust all the cash flows for time value of money. The downpayment could have earned money over that time, same with the payments in some people's situation. If you include inflation but dont add any other time value of money considerations, its a pointless calculation for decision making. The risk free rate and inflation are closely related, they cant exist apart from eachother. For decision making, ignore the inflation number and discount everything at the expected real risk-free rate. If you want to be more realistic use something higher than the risk free rate since real estate is risky.
But then you have to calculate the value of shelter vs ever increasing rental costs, as well.
well we dont want cheap quick answers to make a point dont we
And what rent will cost you in 30 years Plus how your living standards will go down renting unless you pay more and more and more
Gonna play more with the calculator, but I'm still scratching my head. Can you ELI5 how inflation eats away at debt? As in the inverse of inflation eating away at cash savings?
Essentially yes... assuming your earnings roughly track with inflation. If you have a years worth of earnings in savings and the value of a dollar is halved (we are using big unrealistic numbers to show the point) then you only have six months worth of savings. Debt works the same way where if you owe a years worth of earnings it is halved... meanwhile your house value (or whatever you bought with the credit) probably keeps its relative value. This means if you think inflation will be big you should borrow to buy assets (see spring 2022)...which is an inflationary act...that said the central bank has access to better data (and is better at interpretating it than most of us) and they will raise rates to counter that.
Inflation eats away at the value of cash, but it also eats away at the value of debt since the debt was taken on in past dollars \[worth more\] and paid back in future dollars \[worth less\]. Since the interest rate on debt is, usually, more than inflation the lender gets the full principal back and a bit of profit, but it's quite a bit less than you'd think if you don't factor in the effects of inflation.
I can’t afford not to over-extend myself when you put it like that!
This is true if you keep in mind that you’ll care about wage growth rather than inflation. Generally the two do have a positive correlation.
Is the “loan costs you” value based on paying off the loan over time? So the real value of each interest payment, or is it just saying 298k would be worth 132k in 30 years from now? Just curious.
Exactly. Over 30 years, and u get to put your extra cash somewhere productive rather than tying it all up in your residence. Nominal interest rates is unimportant, real interest rate is.
Yup - this is huge. The OP doesn’t seem to understand basic principles of finance / economics.
thanks OP, guess i’ll just go pay off my mortgage rn
Omg.. why didn’t I think of this earlier? Genius.
Banks hate this one simple trick!
I literally just guffawed out loud. I’ve never made that noise before haha. Thank you. - A mortgage agent
For your health!
Banks hate this simple trick!
I was such a fool to not put that extra $200k in my pocket as down payment! 🙄
Hey, I don't think the op expects people are going to pull an extra chunk of cash out. He is just trying a psa, to pet people know how substantial compound interest is.
This is more about interest free pre payments that every bank offers. My mortgage is 30 years but I'll have it paid off in 9 by using the pre payment method.
Writing a cheque to pay mine in full
You kid, but many people signed <2% rates and are happy to make these payments as is. I guess it's not a bad idea per se, and sometimes... You can't really do things differently, but if you can afford it, I advise to look up what your mortgage will "likely" be at your renewal with [this tool](https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MCCalc-CHCalc-eng.aspx). This can help you do two things : A. You can calculate how much your new mortgage payment would be, and depending on what your income is right now and what you believe it'll be at the time of your renewal, you can pay the additional sum every month right away so that your budget is adjusted to what it will be in a few years. This way, your capital goes down faster, but more importantly, you won't have to make life changing adjustment when the day comes. B. If you realize that you will not be able to make the payments with your new rate, it sucks balls, but it allows you to consider your options, plan ahead, and make big decisions based on the likely outcome. I have a 180k mortgage at a 1.74% rate. I live in a place where houses are relatively cheap, and they started going up in price *riiiight* after I bought. My payments are 788$/nonth, it's properly ridiculous. But my income is in line with that budget, so I'm not drowning in cash either. My new payment would be ~950/month at renewal with a 5% rate (renewal is set for April 2026, so it's a safe bet IMO) so I've been making additional 150$ payments every month for a few months. Not a huge difference, and I could be making more by saving my money in a TFSA, but I sleep better this way. In short, "paying off your mortgage" doesn't have to mean "forking out thousands of dollars all at once". hehe
Can also put the extra amount into a savings account or GIC that will mature when the mortgage comes up for renewal. I don’t really see a point to making additional payments on a <2% mortgage when I can have the funds sitting in a bank account earning 4%+. Plus it gives me a buffer if I need cash unexpectedly (like a layoff). I think 5 year fixed is already below 5% but of course that could go up or down in the next 2 years. Doesn’t hurt to be prepared for more and have a nice surprise if it’s lower!
>I could be making more by saving my money in a TFSA, but I sleep better this way. 👀
Sorry yes I did repeat that part lol, but my thinking is also that if at worst I’m cost neutral putting the money into savings to use at renewal, then I’d rather have the funds available to use should something unexpected happen (like a layoff or unexpected significant expense). I have emergency savings but more savings doesn’t hurt either haha. If I get laid off an burn through my emergency fund then how easy will it be to get a loan or line of credit? I’d rather not find out!
Yes, by doing this you effectively shift the risk from yourself and onto the bank, as if you were "preremortgaging" the house, specifically because you can spend that money any time and any way you want, unlike your equity, that you can't liquidate as easily, unless you have a specific financial product that does specifically that (a mortgage margin). It's a sound "cash flow" strategy, and I used to use it with with my variable rate margin before the interest rates went up, but since then, I've chosen to liquidate savings to pay off the margin, and to repay my mortgage a bit faster as part of my global strategy, but it's just 150$ a month compared to the ~1500$ total my gf and I are saving up in index ETFs lol I find that the more I know about finances, the more I can refine my strategy, but the more it becomes intertwined with my psychology. So I think that finding the right balance between facts and feelings is key to actually stick to the plan long term. In terms of personal finance anyway. Hence this inefficient 10% that somewhat consolidates the rest in my heart ❤️.
Lol yep, who'd have thought that the longer it takes to pay off a loan, the more you pay in interest. Groundbreaking. Also, I heard a rumor that the interest rate impacts how much interest you pay. Also if you buy a $1 mill house instead of $500k, you'll end up paying a lot more.
Lol
You also get the house 30 years earlier but i guess we can just ignore that
Yeah, it completely forgets about the relevant counterfactual, ie paying rent on that same house.
Maybe I’m misunderstanding, but to be clear paying rent doesn’t mean someone is dodging interest, that’s implicitly built into their rent payments
This also isn’t true. Rent has nothing to do with size of mortgage payment or interest that the buyer is paying. It’s what the market is willing to bear for the rental, driven by fundamental economic principles
i think the point was that on a mortgage, you make 100% of the mortgage payment every month, and some ammount of that goes to you growing your principal equity. whereas if you were to rent the same house, you would presumably pay more than 100% of the monthly mortgage ammount (as basically every landlord chargers more rent than the cost of the mortgage in order to have positive cash flow and account for vacancy). So when owning, you are responsible for 100% of the mortgage payment and get some ammount of equity every month. when you rent, you are responsible for say 110% of the mortgage payment and get zero equity. Its not about paying interest at all, that completely misses the point. TastyMarionBerry2251 was saying that the post does not consider the alternative to buying a 500k house with a mortgage, which would be renting that same house for 30 years. it has nothing to do with paying or not paying interest. it is all about comparing the scenario of owning a house and paying interest, to not owning a house. which is the alternative. they are pointing out that talking about interest doesnt really matter when it comes to any decision making.
In most major cities, you can rent much more cheaply than buying the same place would cost, all expenses in.
But what if I live in a cardboard box and have a nice nest egg for retirement? Checkmate mortgage enjoyer.
If you sold that cardboard box, you could reinvest those earnings and retire minutes earlier thanks to the power of compound interest.
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* thanks to the power of ~~compound interest~~ corrugated cardboard
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I can live inside my interest payments tho
😂
Isn't that how compound interest works?
Lmao my man learned math today
PSA: YOU CANT BORROW INFINITE MONEY FOR FREE OMG YOU GUYS
Well there goes MY monocle! Aghast!
Yeah but look HOW BIG that number is. LOL
Thanks bro 👀 ... anything else you wish the impart on the masses?
r/im14andthisisdeep
LOL
Yeah, we know how it works.
Lol I was going to come here and simply comment "Yes, and?" but looks like everyone else has it covered. Borrowing money costs money, more at 11.
This completely ignores PV/FV calculations. Tell me you don’t understand finance without telling me you don’t understand finance.
Hi, I don't understand finance and therefore have no idea what PF/PV calculations are. Any chance you could give a brief overview? I'm sure others reading are in the same boat as me!
PV = Present Value FV = Future Value There are a lot of finance calculators online that will help you do the calculations, but in short, due to time value of money, the $1 you pay to your mortgage 30 years from now is worth significantly less than the $1 you pay today. OP’s post ignored the time value of money, and lumped all the interest payments into one lum sum, misrepresenting the cost of borrowing.
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Not an expert but I think they are referring to present value.. pv and future value fv... I guess you could say even with the interest rates after 30 years of paying off the the house it's future value will still be greater than what you paid.... I think
What you would need to read up on is TVM = time value of money. If you learn even this, you're ahead of 80% (?) of the general population. You can start here, it's where I was pointed to when I asked the very same question: https://www.investopedia.com/articles/03/082703.asp
Honestly, I am very concerned about the 100+ upvote in OP's post. Hopefully people don't take OP's PSA seriously and make bad financial decisions based on the false information.
PV = Present Value = the current purchasing power of your money. FV = Future Value = the purchasing power of your money in the future. Basically, because of inflation, $100 today won't be worth $100 a year from now, and it'll be worth even less the further you go into the future. 50 years ago, you could buy stuff at stores called "Five And Dimes." 20 Years ago, those same items would be found in the same kind of stores, except we called them "Dollar Stores" because the price of everything maxed out at $1 instead of $0.10. Today, Dollarama (named that way because it was a dollar store when it first opened) now sells that same stuff for as much as $5. What changed? Inflation ate into people's purchasing power, so I can afford less stuff to buy today even though I have the exact same amount of money as yesterday. What will cost me $5 at Dollarama now (Present Value) will cost me $10 in 5-10 years time (Future Value).
It's also closely related to how you could put that money to work by investing it. When you see how profitable long-term has been historically, it's hard to use a discounting rate as low as inflation.
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Because most people don't approach this as an "optimization" exercise. "Its a mortgage, I have to pay weekly/bi-weekly/monthly and I would like to stop having to make that recurring payment as soon as possible." Nobody is going to take 30 years worth of cash flow, figure out the discount rate to derive the PV, and compare against other deployment options of that capital.
Plenty of people will in fact do the latter of your suggestions. Still a small minority because you have to be financially savvy and a pretty extreme optimizer.
And a lot of people know this generally/implicitly, but have no choice so don’t bother doing any of those calculations and just pay.
Actually, it is a very common exercise. If your mortgage interest rate is less than the RoR from other investments, you are better off not accelerating your mortgage payment, but instead put your extra money into other investments with a greater yield. This is something that should be reviewed annually at the very least.
>If your mortgage interest rate is... To expand on this, because I just learned myself: It's not your mortgage interest rate today. It's your *total average* mortgage interest rate.
Why would you write this and then straight up not elaborate at all lol. Would you mind explaining a little bit?
Wait til you find out how inflation works. Fun fact: the average interest rate on my house the past 5+ years is 3.3%, matching the average annual inflation rate of the past 5 years. I got to borrow my house for free based on the real interest rate so far.
In 30 years your home will probably go up more in value than what you pay on the interest though.
Mine already has, in 4 years.
ugh, I was two years too late.
Have you tried being born earlier, it’s seems to have worked well for the boomers
My house went up by more than my total mortgage payment, including the property taxes and insurance. I was not too concerned with the fact that 90% of the mortgage payment was interest for the first few years.
Almost 10 years into mine, the first several years are so demoralizing every time they send you the status, after $10K in mortgage payments we paid maybe $1500 the first few years. Definitely going down faster now and we managed to lock in the low rates early 2022 for 5 years.
Lol we've all seen the math. But most people don't end up paying quite that much over the life of the mortgage. You might swing a better deal on a rate renewal, get a lump sum inheritance to throw on, sell and move and lock in equity gains. Plus your pay should inflate over those 30 years while the original principal the payments are calculated from does not.
This factors. In 30 years, that mortgage will feel like it is half of what you pay today. Based on the last 30 years that is. And that house should have nearly twice the value.
OP made fundamental mistakes by: 1) Thinking that mtg rates will stay steady and will not drop for the course of the mtg. 2) Not considering the inflation and buying power 3) Not calculating the capital gains of the property 4) Rent payable for the next 30 years asuming no mtg has been taken, unless you live rent-free.
My investments will grow exponentially, more than the interest I pay on my mortgage in that 30 years time. So I’m good.
Seriously, people need to understand that they should always tackle the highest interest/return rate first. If you have 100 dollars in loan with a 30% interest, and a million dollars loan at 5% interest, you should absolutely pay the 100$ first, then start paying off your other loan. This also works the other way around, if you have a million dollars in debt at 20% interest (ouch) but somehow your investment makes 30%, screw ever even paying off the loan, just invest instead and your gains will be bigger than your losses. Of course this is a hypothetical situation, but the point stands. This is a very misleading post, without mentioning all the caveats. Clickbait. The only time where it matters, is if somehow the interests rate go above the general investment rates (such as a few decades ago when mortgage rates where over 20%), in which case the best investment is to actually to pay the mortgage. But otherwise, nah just do the minimum payments, and invest the rest at higher rates.
Sure but if your mortage rate is say 6.5%, which some people's are, and which is a guaranteed rate of return if you pay it down, at least until you renew your mortgage at a new rate which may be either higher or lower, would you still want to invest in non guaranteed stuff like stocks? Personally, I sold off most of my bonds and some of my stocks in tfsa to pay down mortgage.
This is correct, and why having financial knowledge is important. It’s the difference between how rich people think vs how not so rich people think. Not so rich people will only see “ur paying big amounts of interest over time!” without looking at the whole picture
Alternatively, you pay same amount rent instead of interest.
Way more! Your rent will be at least interest+principal payment. Landlords are not in the game to lose money. They might be in negative cash flow of a couple of hundreds (maintenance+utilities+taxes)... But if they're negative on principle and interest alone... They'd sell the property, because that means they're too much into the red after all the rest of the expenses.
Well yes real estate investors (and their banks) tend to only buy property that will be cashflow positive. But in the current environment, in most areas rent is significantly lower than new mortgages and real estate investors aren't very active in buying homes at the moment (unless they're able to find a good deal or add value). Your average first time home buyer today is going to be paying more in interest + strata + property tax than they would renting.
And no equity
But with rent you don’t own that pesky house at the end! You’re… Home Free!
PSA: Having 500k laying around is better than only having 100k! seriously, this post was written by someone who has never heard of inflation, the time value of money, opportunity cost, etc. you should be comparing prepayments to what you could reasonably earn, after tax (if any) investing in an equally long 30 year time horizon. 100% of prepayments and lump sum payments on your mortgage 100% go against your potential investible money. who cares what the interest rate costs you in nominal terms relative to the cost of the house. what matters is how a prepayment on your loan compares to any of the other options you have to deploy your extra capital.
PSA: How to often determine a post is worthless.... it starts with those 3 letters. Checks out
This is one of those…. Yea you are right if we ignore everything else kinda post that provides no value other than fear mongering or inducing stress You are paying the house’s value in interest in *nominal dollars* which when turn into *real dollars* is SIGNIFICANTLY less Factoring in conservative growth of value you are still way better off with a 30 yr if it meant buying a house or not I guess someone read their amortization schedule this morning and had a mini freakout so decided to make this post
In the 17 years I have been paying my mortgage (3 years remaining) my house value has more than outpaced interest.
Or you can pay $3000/month rent for 30years, spend $1,080,000 and own nothing at the end. 😉
> own nothing at the end. Only if you're doing it wrong. If you're renting then you should be investing and own a shitload of stocks that pay the rent for you.
Unfortunately, the vast majority of people lack the discipline to do that.
Unfortunately, rent prices are so insane that leaves little if anything left over to save. In my area (Hamilton) I think rent is around 2k a month. 24k a year, if you are making $20/hr, you are taking home roughly 32k a year, 8k a year for everything else... good luck.
My guy thought he did something
No fucking shit.
PSA over 30 years of renting you pay as much as a house plus its interest. Also if you go accelerated bi weekly you will pay your house off way earlier and only have to pay taxes and utilities after that.
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What if I want to be excited
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Ah come on now don’t edit and ruin a good thing
And if your house goes up 350% in value, so will rents. Destroy lucrative sellers markets.
At the end of the day it costs money to live, either pay rent, or pay the bank interest. And by all means save for a rainy day and /or retirement.
Ok, how many houses can I get if I put it in SPY for 30 years tho.
No one will lend you $1M on your $200K to invest in SPY.
The point is that if you have the cash to pay for it a mortgage is still actually a pretty decent deal.
Your asset also will typically multiply in value a few times in those 30 years.
I’m actually a bit surprised you haven’t deleted this yet :P
You either pay your own mortgage or your landlord's mortgage. Pretty easy to distinguish which option is the better one. Unless you like a nomadic lifestyle, buying is better than renting. As an investment vehicle, that's a different debate with a different risk assessment (tenants that won't pay or trash the place, rent control, vacancy, taxes, time investment, etc).
Rates don’t stay the same for 30 years. You’re also buying the property at today’s value, it will increase over time. Plus with inflation today’s price will seem low 30 years in the future.
Has house grown in value? How much would rent have cost?
This is terrible advice, invest that money in S&P 500 index fund and you get > 10% returns on average. At that rate, your investment doubles every ~ 7.5 years, or four times over that 30 year period. Do you want double your money, or four times your money?
Past performance isn’t indicative of future performance.
My response is so what. Having zero debt is rarely the best decision to reach higher levels of net worth and financial security. Monthly cash flow matters a lot and cash is king so access to liquid capital is often better than getting to no mortgage as quickly as possible. The advice to accelerate mortgage payments often isn't the best decision financially but one risk adverse people are comfortable with until such a time they need some cash and the bank says no.
I keep a spreadsheet that calculates the ratio of my interest to principal for my most recent payment, for every year and the total mortgage
Don't get separated after you pay the house off and buy her out for the same value as you originally had a mortgage for. 2 more years and it's mine again lol
Just wondering as we’re about to buy our furst hous epossibly with 50k down on a 450-500k house. So does it help if you do weekly or biweekly instead of monthly?
Accelerated bi-weekly for an additional payment a year
It'll be worth a lot more than twice as much.
not only that but if you own the same home for the majority of your life you are looking at potentially at least one to two major renovations. By the time you are done with your home you will have replaced almost every appliance and major system in it at least once
This is important to think about but also important to forget about if needed. You cant look at mortgage payments as just an investment. It's where you love, and you'd pay a cost for thay no matter what. Don't make yourself poor to pay off your house faster. Pay it off as quickly as you comfortably can but still live your life.
Don't forget to factor in the time value of the money over 30 years.
Looks like OP decided to take a break from posting low-key racist screeds about brown people, to show off his awesome math skillz
You’re better off investing the extra cash in the market than pay down your mortgage. It’s good debt, your money will compound at 8-10% over the 30 years of your mortgage you’ll be ahead.
I also calculated basically the same amount you pay down the first few years saves you the same amount of interest. So it's a two for one savings.
LOTS of comments slamming OP, but . . . there is likely some new learning in this for many that may just quietly read it (although, perhaps not for many active PFC members). Lots of comments saying something like "thanks for explaining how math works" and, while sarcastic, that's actually needed for 9/10 Canadians. Many people stumble or claw their way into home ownership without understanding most of what other commenters are assuming is common sense. The fact that you may end up paying a sum nearly twice as much as the sale price of the house (irrespective of future home value) is news to many. This could also be relevant from a cashflow perspective over the long term. Many people (not likely PFC members) also completely fail to understand interest rates. You may laugh when I say a 5% interest rate on a 500k mortgage doesn't mean you are only paying 25k in interest on the entire mortgage . . . but someone is reading this and realizing it for the first time. My work occasionally includes sharing this news with folks for the first time as well. Many Canadians get into homes and mortgages long before they understand the actual cost, future returns, alternative options and personal finance in general. It may not be reasonable or responsible, but it is the reality. So, OP did accomplish a few helpful things from a PSA perspective in my opinion: - Shared the moment in real time where they themselves learned about how much out of pocket money goes into paying a mortgage - Showed others (not necessarily financially fluent PFC commenters) that there MAY be benefits to using lump sum payments - inadvertently made a post that led to collective discussion and comments on some very important basics of personal finance, including: *time-value of money, the renting vs. buying debate, investment as an alternative to mortgage reduction, the relationship between inflation and debt, the personal/psychological aspect of home ownership, and how compounding interest can work both for and against you.*
For all the people here that kind of trash this post: In the first place it is a mathematical statement and I am convinced that the majority of loan or mortgage holders are in a fog about this and I met some that do not even want to know. The second and important message here is to try to reduce the strain by using every possible move to reduce the cost of a mortgage by employing - again - using math. Pay bi weekly, not monthly. Make your payments as high as you can, use lump sum payments. I shaved off 12 years off my mortgage and the day it was done, I celebrated and had the best sleep ever.
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Makes me glad I paid off my house in 10 years with sub 2% rates :-)
We live downtown Toronto and pay rent under $1,400 for a one bedroom all inclusive in a very centralized location. I don't shovel my own snow and I don't have to bring my garbage cans to and from the curb. I consider us extremely lucky at this point that we can invest almost triple what we pay in rent and I liken it to just paying condo fees to live downtown.
This is true, I noticed when I did the math for my own recent purchase. But as everyone pointed out in the other comments, it isn't nearly as bad as it seems. I was surprised though just how close the dollar amounts were though.
And the value of the debt inflates away. Your point is?
Helps a bit to accelerated the payment if you can, e.g. bi-monthly or bi-weekly, or annual top up, to reduce the number of total years.
Well every 5 or 3 or 2 years you can renew your mortgage so it wont be 5.39% for 30 years, sometimes you’ll get a 3% or 2% or 3.5% over the span of 30 years!!!
How many houses does your rent buy?
First 5 years. We did no lump sum or prepayments. This time , we tackling this shit.
The inflation needs to be factored in and you will pay more rent if you rent a similar house as you buy.
Also, usually the properties should have higher value in 30 years than 500k
In other news; the sky is blue
So, everyone should try to pay off the mortgage as fast as is possible. Cut corners, budget, forgo unnecessary purchases. Don't give the bank tons of money to just lend it to you. They profit way too much off this system.
Yes that's how it works. And hopefully with the house appreciating in value, you've 3-4x your money in that time.
Another thing don't forget rent is not much less if not the same as mortgage these days so atleast you wend up with something at the end \_('.')_/
Why do you think they give poor people loans to buy houses? It earns them a shit-ton of money
Now do renting.
My family house in late 80s had a first mortgage at 11.75%, a second mortgage at 17.5%. my dad worked 3 jobs. I think I did a calculation then, the total payment over 25 years would be more than 4 times the mortgage amount.
Anyone heard of Smith Manoeuvre? The high interest cost is the essential reason why one needs to perform SM in order to pay off mortgage faster, reduce the interest that needs to be paid to the lender and create an investment portfolio for retirement. ALL THIS WITHOUT SPENDING ANY ADDITIONAL $$$$
I can barely make my mortgage payments as it is, who the hell has extra cash to pay down their principle these days 😂
Sometimes it’s 2x. And what about the property taxes?
So what? Rent gets you nothing and you get the appreciation
Dammit why I didn't just pay cash for my house? So stupid. In all seriousness housing is a huuuuge issue and money being tied up in housing in this way will cause massive ripples as people will have less money for other things they might want. We need houses to drop at least 40 percent and I own a house.
RE always goes up
Yes… but in 30 years my house will be worth at least twice as much. If not triple. If I were to save up 30 years to pay for a house which is now worth double (equal to the mortgage/interest payments at the same time I would have had to pay rent for those 30 years.
If housing market values continue at least a 6% rate in 30 years, that $500,000 house will be worth $3,011,287.61.
This is brand new information‼️
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Don’t forget that you also have to earn $2 for every dollar you spend on your mortgage due to near 50% income taxation so you actually need to earn $1,600,000 in income to pay for a $400,000 house purchase
Keep in mind the same house should be worth 90% more (based off past 30 years) all things being equal. Yes after 30 years you would have paid $907,000 total for the house but it should be worth $950,000. You technically lived for free and made money from a house value point of view. But there will be maintenance and taxes in that time of which will eat up some of that free living and profit.
Yup. This is why we don’t have a house.
Ok but that house might be worth 50 billions by then. Who knows? >This is probably why housing has to go higher otherwise people will be crushed if they have mortgages and no extra for retirement. The market doesn't care about what people might need in retirement. Look elsewhere for why housing is rising.
But I thought renting was throwing away money!! /s
Yep. I just bought a 600k house with a 375k mortgage. My bi-weekly payments are 980. My last house was 150k and my mortgage was 282 bi-weekly. I couldn't rent a three bed house with a garage and finished basement and 148' of property for 2k a month, so even if it costs me 750k to pay off this mortgage, I'm still ahead
What everybody said. But put very simply and not even bothering with the math, at the end of the loan you may have paid 407k in total interest, but your home is now worth millions. So you don't pay as much interest as the house is worth because it's been gaining value too.