Let’s talk about the upfront payment monthly versus the investment. Let’s take the same example: $200,000 downtown Toronto condo at 2.5% over 30 years. Let’s assume that this couple eventually works overtime, starts selling products, or manages to generate $2,000 more each month to pay off the mortgage early, or that they invest that $2,000 each month. If they did this, they would save $16,835 in interest on their mortgage because they would have paid it off very quickly. (More than 6.58 years).
Now, if they had borrowed the additional $2,000 at the 6% interest rate mentioned, they would have earned $84,487 in interest, and this amount would have brought the total balance to $186,911. This example ends after 6.58 years because the loan would then be paid off by the additional payments they make. So the balance ($186,911) is $18,955 higher than the balance of the loan at that point. So this is a smarter mathematical decision and an apples-to-apples comparison.
Then, we get to the next part of the reality of these numbers. The reality is that 6% is just an average. That’s typically what the stock market has returned year over year as an annual return over several decades. That ranges from 6% to 10% per year, depending on what you invest in. So that 6% is just an assumption, some years the market goes up, some years it goes down, you can get to the beginning of a bull market or the beginning of a bear market.
If we look at this 2.5%, remember this is the interest rate on our downtown toronto condos in this example in this article, paying that 2.5% is a guaranteed risk-free and tax-free interest rate.
For example, if you have a credit card with an annual percentage yield of 16%, that means that’s the amount you pay to borrow that money on the credit card. When you pay it back, you get a guaranteed, risk-free, tax-free return.
Click here to know more: What would you do if you had money?Pay off mortgage early or invest? Downtown Toronto Condos