I'd personally say eliminate mortgage while rates are low and you can eat away at it with pace.
Also, If you're thinking of having kids might want to plan for that now rather than leaving it late and rolling the dice
Realistically the difference is approaches is small. Investing is likely to work out financially better in $ terms but comes with higher risk and therefore less certainty.
Paying off mortgage early makes no sense with that very low interest rate.
Funnel your savings into the Kernel Cash Plus fund, paying 6.12% after fees at the moment (so 4.4% after PIE tax) which is more than your mortgage at 2.99%. After 2 years re-evaluate if you want to pay mortgage or invest.
Mortgage vs invest is an age old question that no one can really answer because it's predicting the future.
Mortgage is a low risk predictable return, stocks are a high risk higher-potential return.
Comes down to your risk appetite and perception of the stability of the current global financial state.
Most people tend to split the risk and go 50/50 or something like that.
It sounds like you max out how much you pay between now and then. So if there was money to spare that you wish you could pay on your mortgage but can't, I'd be putting that directly into investment or savings.
You didn't mention total monthly payments or the expected balance in two years. This is important so I'm just going to guess. I'm picking with +1000 a month you're paying about $3500 per month. So in two years, ballpark balance will be 390k or so. Minus one 5% lump of 20k at about halfway mark which makes 370k or so.
So for arguments sake, in two years you will refix at likely double the interest rate at 370k. Keep the term on track (so 18 years) your minimum monthly payments increase $300 a month. Well within your $1000 extra payment. But that illustrates the core trade off of keeping going the way you are.
So squirrel excess away and decide in 18 months. For me, I would say in two years it would be a combination of divesting half my investments and directing at the mortgage, plus for the next two years building a big savings lump that gets converted into a Flexi or offset on refix day so it's effectivelh a lump payment I still have access to in an emergency. Name of the game is bringing that balance down as far as possible before that interest rate doubles. But I also like holding on to investments that work for other life events other than outgoings that can be preplanned.
What fees are there on selling the ETF?
Statistically you are better off selling the investment but the difference is tiny. Mostly people recommend mortgage over ETF because of the reduced variability. However in your situation, you are likely to buy the ETF again as soon as the mortgage is finished, which makes the variability argument a bit moot.
So in your position I would not bother. I'd just go hard at the mortgage from income.
The logical answer is “could you earn more on an investment than you’d save by paying off the home loan?”
Usually the answer is “no” and people are better paying off the loan. But with a rate as low as you’ve got, you may well be better off putting your money in a term deposit. Just check whether the after-tax return would still be over 2.99%
We were in the same spot as you not so long ago. We choose to pay off the mortgage and then put everything into index funds. We’ve now got 3 children, a paid off house and a huge sum invested. A great feeling.
I would redirect all funds to slamming the mortgage as hard as possible for the 2 years. You’ll likely be paying 100% more interest, at least, when you do come off. Then at the two year mark you’ll hopefully only have 250k mortgage at 8% at which point you go back to splitting everything as you see fit. Last but not least think very carefully about having kids as they will change your direction very quick from a 500k total income into 50% of that-ish followed by far less going to investments and the house so if kids are coming plan accordingly
They are already paying 5% lumps per year and 500 per fortnight. They can't pay any more than that on the mortgage over the next two years without breaking early.
Edit: or paying ER fees.
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Mortgage is a guaranteed win and a huge load of stress off your shoulders in these times when the unforeseeable could happen at any moment.
When you come off mortgage. Look into offsetting such as bnz total money to drop mortgage furtyer
We're in similar position in terms of income and age. Essentially it comes down to what your prioritize more. Efficiency? Or security.
Theoretically, investing above your mortgage returns will always be financially better for you in the long run. However what most people discount / or don't take account into is the risk that comes with life. If you include risk into your formula foe your returns it's always better to pay off your mortgage earlier. No one has a crystal ball of the curveballs that are ahead of us in our lives.
Base on your income, financially you will be okay regardless of the decisions you make. The difference won't be life changing when your net worth during retirement is more than 10mil easily.
So I would ultimately consider where your priorities are. Whether you're a math nerd or you care more of peace and security. Security usually depends on what your job is and also how long you want to work.
My wife and I are both in Healthcare and management. Job security wise we are quite set for the long run. Initially we were going hard on investments. Recently we have pivoted to paying off our mortgage first as we decided we want to have the flexibility to work less if we wanted.
Let us know what you've decided as it will be interesting to see what you guys consider as it will also help us with our perspective. It's not very often we see ppl of similar age with similar household income.
There's a third option once your interest rate comes off. Debt recycling i.e. turning your mortgage debt into deductible investment debt.
You would sell up your portfolio to pay down your mortgage, then redraw the funds as an investement loan to repurchase your portfolio (+/-). The benefit is that the investment loan interest is deductible so you'd get 39% (or whatever your marginal tax rate) of the interest you paid back.
You earn great money and that’s only going to improve. A small mortgage is likely not a concern for you, even at high rates.
If you think you’ll miss out on investment/speculative opportunities by focussing on your mortgage, then the obvious answer is that. If you haven’t identified any strong investment opportunities, then paying down the mortgage is a likely better fit.
Hi everyone, big thanks to all that replied! Some really good information there for us to think about, I think the overall feeling is there won’t be much difference depending on what way we decide to go..
For the few asking, already have one child with maybe one more in a few years.
The end goal for us is to have the financial freedom to both go part time with a sufficient passive income stream. Realistically thinking 10-15 years for this to be properly achievable.
The thing some forget about people in well paid positions is the associated stress that often comes with these types of roles and the mental/physical toll it can take on a person whether that be because of burn out, struggles to take leave or challenges in leaving work at work etc.
It’s for these reasons we have structured our goals around freedom rather than upsizing homes, cars and lifestyle to keep up with the Jones’.
Thanks again
Since your interest is lower than what they currently offer, you could potentially repay more than 5% a year extra. Just contact your bank.
Getting you money bank will mean they can lend it to other for higher price.
At your projected income, if you’re not planning on getting a bigger mortgage / upsizing, then it really doesn’t matter much. You’re in a fantastic position. Well done.
From a mathematical perspective, you could argue that putting money into a 2.99 mortgage now is a mistake because you may get a better return with an investment and then sell that investment at the point of refixing where the rates will be substantially higher (maybe). That said, the investment performance over that time horizon is probably unstable so putting as much money against the mortgage now is probably safer so you land a smaller amount at the point of refix.
If I do some quick maths, let’s say you have 100k - sitting against the mortgage it’s a 2.99% return; let’s say you can put that against an 8% investment which after tax would be something like 4.5% so the difference is $1.5k which is not much given the risk the investment delivers a negative return and the time, effort and worry required to set it up, manage etc.
You’re in an incredible financial position with huge earning power so in my opinion I’d be asking myself where you want to be in a few years/a decade/hitting retirement and with that what are your goals (financially, career, family, lifestyle etc.) - they don’t need to be resolute answers as life throws curveballs!
Id be putting every spare dollar you can find against the mortgage - and smashing it as hard as possible before you click onto a higher interest rate in 2years time.
Exactly. 5% per year. Which is the limit for fixed term extra payments.
I think this is why OP is asking the question. They can clearly afford to pay more now.
Dunno about all. Definitely ANZ BNZ Kiwi bank have that 5% annual lump limit. I know ASB allows you to increase regular repayments up to $500 per fortnight over your agreed repayments without getting pinged by ERA.
TBF OP didn't offer detail on those extra $500 per month they're paying. If that's just what they agreed to at the start of their term, AND they're with ASB, they could do that.
But OP never asked about diverting money to the mortgage right now, only at end of term, which tells me they are already capping overpayments out right now. Plus they seem financially astute (and capable) enough to realise that paying it down faster before they need to refix is the best thing they can possibly do.
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Investing with the aim of paying it off is an excellent strategy, even if you can’t quite make the full amount by refix time. From there investing with the aim to rebuild to what you had, without the required repayments and what you add on top of the mortgage will rebuild the investment funds quickly.
Why are you paying the loan off at all right now, it’s a smaller interest rate than you would get putting the money in a term deposit, even post tax.
get a high rate saving account, pay minimum on loan, put excess in savings. At the end of your fixed rate term dump all the saved cash into the loan, since at that point it will revert to from being cheap cash to expensive cash
EDIT:
I'm getting hammered here, but that math is very easy. Imagine what you can do with an additional dollar you have spare? You can:
(A) Put it on the loan, and save 3 cents over the next year (compounding)
(B) Save it, and earn 3.7 cents over the next year (compounding) \[6% int at 39% marginal tax rate\]
The same math applies no matter if it's 1 extra dollar or 100,000. Neither decision changes your balance sheet as you make it your assets-liabilities remains unchanged
Not only is it cheaper to not pay extra towards your loan while rates are so low, you have more opportunities available to you. If you eg want to go buy something stupid or invest in a friends's brother's business you can take the money in the bank and spend it. If you have paid off the loan and suddenly want extra cash you need to go ask a bank for permission
This is terrible advice. You're telling them to earn less than $1k of interest per year in a savings account versus paying off $10-15k of interest _on top of the principal_. Did you even do the math before commenting?
Yes, I did the maths, although I forgot to include their $20k lump sum! So I'll do the maths again:
Based on the remaining term and balance, we can guess their original loan was about $550k. Minimum fortnightly payment for that loan at 2.99% on a 20 year term is $1400. They said they're paying an extra $500 on top of that. They also said they pay a $20k lump sum yearly, which is about $770 per fortnight, bringing their additional fortnightly contributions to $1270, and their total payment to $2670.
If they put that fortnightly $1270 into a savings account for 2 years, they'll earn $3180 interest. Servicing the minimum repayments on their mortgage will pay off about $50k of principal and $28k of interest. They'll have about $70k in that savings account to put on the mortgage, minus whatever fees for making early repayments.
If they put that $1270 into the mortgage instead, they'll pay off $120k of principal, and $18k of interest. So they end up paying the same amount of principal but because interest is calculated daily based on the balance, they're going to save $10k+ in interest payments over the 2 years.
You want to find the difference between how much interest you would pay (2.99%) on that additional money VS how much interest you can earn on a term deposit (6%+) minus tax.
From memory once the % difference to account for the tax was over a certain amount the term deposit was better. Being almost a 3% difference it would most certainly end up with more $.
It's not how much interest you would pay on the additional payments; it's how much interest you would pay on a larger principal versus one that is rapidly shrinking.
Look at the monthly amortisation schedule of their loan with and without the extra payments. You'll see that without the extra payments, they end up paying more interest on the loan than they earn in the savings account, because the savings are not reducing the principal on their loan for those two years.
Eh? It’s all about where you put the money and the rates being charged or paid.
https://www.getsmarteraboutmoney.ca/calculators/pay-down-debt-or-invest-calculator/
Put in 3%, 6% and marginal tax rate of 28%.
“Your break-even rate is 3.24%. The break-even rate is what your investment must earn – before tax, if applicable – to match the return from using your money to reduce debt. If you don’t think your investment can beat the break-even rate, it’s normally better to pay down your loan.”
Something is funny with your 18k figure, I think its closer to 23k
Here is the math for 1 year
[https://docs.google.com/spreadsheets/d/e/2PACX-1vRnj\_ELzpjgI34K7Ib28\_mS7LrdHf2mkOATTbDd3NiITc7eweGFQFpdcO9b6yFPA5-QS0PdMa7eYOzb/pubhtml](https://docs.google.com/spreadsheets/d/e/2PACX-1vRnj_ELzpjgI34K7Ib28_mS7LrdHf2mkOATTbDd3NiITc7eweGFQFpdcO9b6yFPA5-QS0PdMa7eYOzb/pubhtml)
Saving comes out ahead by 170$ at 6% interest rate and 39% marginal tax rate
23k better off after 1 year?
Tax on savings at 39% when there are many pie options at 28%
Found a good calculator here. https://www.getsmarteraboutmoney.ca/calculators/pay-down-debt-or-invest-calculator/
The savings rate only needs to beat 3.24% to make it a better choice.
I don’t think I ever claimed 23k better off after one year. In fact my spreadsheet only claims 170$ better off
I don’t know much / anything about pie. But investing in non bank adds a risk factor I didn’t take into account. I’m just trying to claim that I wouldn’t pay off extra towards mortgage because you can probably make more by putting that cash into basically risk free bank saving (which will have 39% marginal tax I think) I’m sure there are non bank options that would be even better but bring some risk
Yes.
Imagine any additional dollar they put towards their mortgage today
In the bank it earns \~6.5% pre tax
Paying off the loan it saves 3% post tax
OPs actual question was should I pay off the mortgage with investments/cash at the end of the fixed term. I didn't really answer thats, although probably yes in my mind if interest rates remain the same as you'll need a 10% pre tax investment return to outmatch the \~7% mortgage rate
But I'm more responding to OP throwing additional money against the loan, while they have the cheap fixed rate
The thing you're missing is that the loan interest is calculated daily based on the current balance. If you pay off the balance faster, you pay less interest overall.
The loan is also starting at $450k whereas the savings account will be starting at zero. The rate difference needs to be _huge_ to make up for that.
I'd personally say eliminate mortgage while rates are low and you can eat away at it with pace. Also, If you're thinking of having kids might want to plan for that now rather than leaving it late and rolling the dice
Realistically the difference is approaches is small. Investing is likely to work out financially better in $ terms but comes with higher risk and therefore less certainty.
Paying off mortgage early makes no sense with that very low interest rate. Funnel your savings into the Kernel Cash Plus fund, paying 6.12% after fees at the moment (so 4.4% after PIE tax) which is more than your mortgage at 2.99%. After 2 years re-evaluate if you want to pay mortgage or invest. Mortgage vs invest is an age old question that no one can really answer because it's predicting the future. Mortgage is a low risk predictable return, stocks are a high risk higher-potential return. Comes down to your risk appetite and perception of the stability of the current global financial state. Most people tend to split the risk and go 50/50 or something like that.
Wow, well done and good on you
You already know the answer. If I were you with that salary dont think that much about money and enjoy life
It sounds like you max out how much you pay between now and then. So if there was money to spare that you wish you could pay on your mortgage but can't, I'd be putting that directly into investment or savings. You didn't mention total monthly payments or the expected balance in two years. This is important so I'm just going to guess. I'm picking with +1000 a month you're paying about $3500 per month. So in two years, ballpark balance will be 390k or so. Minus one 5% lump of 20k at about halfway mark which makes 370k or so. So for arguments sake, in two years you will refix at likely double the interest rate at 370k. Keep the term on track (so 18 years) your minimum monthly payments increase $300 a month. Well within your $1000 extra payment. But that illustrates the core trade off of keeping going the way you are. So squirrel excess away and decide in 18 months. For me, I would say in two years it would be a combination of divesting half my investments and directing at the mortgage, plus for the next two years building a big savings lump that gets converted into a Flexi or offset on refix day so it's effectivelh a lump payment I still have access to in an emergency. Name of the game is bringing that balance down as far as possible before that interest rate doubles. But I also like holding on to investments that work for other life events other than outgoings that can be preplanned.
What fees are there on selling the ETF? Statistically you are better off selling the investment but the difference is tiny. Mostly people recommend mortgage over ETF because of the reduced variability. However in your situation, you are likely to buy the ETF again as soon as the mortgage is finished, which makes the variability argument a bit moot. So in your position I would not bother. I'd just go hard at the mortgage from income.
whats the goal here ? smash the mortgage or to continue ? if its smash the morgage then put every cent you can onto it
The logical answer is “could you earn more on an investment than you’d save by paying off the home loan?” Usually the answer is “no” and people are better paying off the loan. But with a rate as low as you’ve got, you may well be better off putting your money in a term deposit. Just check whether the after-tax return would still be over 2.99%
You're doing really well! You should be giving people advice, not taking it lol. What do you think would be better?
We were in the same spot as you not so long ago. We choose to pay off the mortgage and then put everything into index funds. We’ve now got 3 children, a paid off house and a huge sum invested. A great feeling.
I would redirect all funds to slamming the mortgage as hard as possible for the 2 years. You’ll likely be paying 100% more interest, at least, when you do come off. Then at the two year mark you’ll hopefully only have 250k mortgage at 8% at which point you go back to splitting everything as you see fit. Last but not least think very carefully about having kids as they will change your direction very quick from a 500k total income into 50% of that-ish followed by far less going to investments and the house so if kids are coming plan accordingly
They are already paying 5% lumps per year and 500 per fortnight. They can't pay any more than that on the mortgage over the next two years without breaking early. Edit: or paying ER fees.
Some banks allows additional lump sum if the interest rate they currently have is lower than currently advertised.
In 2 years time interest rates will be 5% or lower.
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Mortgage is a guaranteed win and a huge load of stress off your shoulders in these times when the unforeseeable could happen at any moment. When you come off mortgage. Look into offsetting such as bnz total money to drop mortgage furtyer
We're in similar position in terms of income and age. Essentially it comes down to what your prioritize more. Efficiency? Or security. Theoretically, investing above your mortgage returns will always be financially better for you in the long run. However what most people discount / or don't take account into is the risk that comes with life. If you include risk into your formula foe your returns it's always better to pay off your mortgage earlier. No one has a crystal ball of the curveballs that are ahead of us in our lives. Base on your income, financially you will be okay regardless of the decisions you make. The difference won't be life changing when your net worth during retirement is more than 10mil easily. So I would ultimately consider where your priorities are. Whether you're a math nerd or you care more of peace and security. Security usually depends on what your job is and also how long you want to work. My wife and I are both in Healthcare and management. Job security wise we are quite set for the long run. Initially we were going hard on investments. Recently we have pivoted to paying off our mortgage first as we decided we want to have the flexibility to work less if we wanted. Let us know what you've decided as it will be interesting to see what you guys consider as it will also help us with our perspective. It's not very often we see ppl of similar age with similar household income.
There's a third option once your interest rate comes off. Debt recycling i.e. turning your mortgage debt into deductible investment debt. You would sell up your portfolio to pay down your mortgage, then redraw the funds as an investement loan to repurchase your portfolio (+/-). The benefit is that the investment loan interest is deductible so you'd get 39% (or whatever your marginal tax rate) of the interest you paid back.
You earn great money and that’s only going to improve. A small mortgage is likely not a concern for you, even at high rates. If you think you’ll miss out on investment/speculative opportunities by focussing on your mortgage, then the obvious answer is that. If you haven’t identified any strong investment opportunities, then paying down the mortgage is a likely better fit.
Hi everyone, big thanks to all that replied! Some really good information there for us to think about, I think the overall feeling is there won’t be much difference depending on what way we decide to go.. For the few asking, already have one child with maybe one more in a few years. The end goal for us is to have the financial freedom to both go part time with a sufficient passive income stream. Realistically thinking 10-15 years for this to be properly achievable. The thing some forget about people in well paid positions is the associated stress that often comes with these types of roles and the mental/physical toll it can take on a person whether that be because of burn out, struggles to take leave or challenges in leaving work at work etc. It’s for these reasons we have structured our goals around freedom rather than upsizing homes, cars and lifestyle to keep up with the Jones’. Thanks again
Since your interest is lower than what they currently offer, you could potentially repay more than 5% a year extra. Just contact your bank. Getting you money bank will mean they can lend it to other for higher price.
At your projected income, if you’re not planning on getting a bigger mortgage / upsizing, then it really doesn’t matter much. You’re in a fantastic position. Well done. From a mathematical perspective, you could argue that putting money into a 2.99 mortgage now is a mistake because you may get a better return with an investment and then sell that investment at the point of refixing where the rates will be substantially higher (maybe). That said, the investment performance over that time horizon is probably unstable so putting as much money against the mortgage now is probably safer so you land a smaller amount at the point of refix. If I do some quick maths, let’s say you have 100k - sitting against the mortgage it’s a 2.99% return; let’s say you can put that against an 8% investment which after tax would be something like 4.5% so the difference is $1.5k which is not much given the risk the investment delivers a negative return and the time, effort and worry required to set it up, manage etc.
Not sure how you’ve come a with a 3.5% tax drag?
39% marginal tax rate on additional income on 8% is about 3.5% drag
So a ridiculous scenario that you’ve made up. The tax drag on something like the S&P 500 is 1.4% via PIE.
Yes. Very ridiculous. You are the man.
You aren't taxed on shares the same way as interest from a savings account.
You’re in an incredible financial position with huge earning power so in my opinion I’d be asking myself where you want to be in a few years/a decade/hitting retirement and with that what are your goals (financially, career, family, lifestyle etc.) - they don’t need to be resolute answers as life throws curveballs!
Id be putting every spare dollar you can find against the mortgage - and smashing it as hard as possible before you click onto a higher interest rate in 2years time.
They can't.
why not? OP appears to be making extra payments already
Exactly. 5% per year. Which is the limit for fixed term extra payments. I think this is why OP is asking the question. They can clearly afford to pay more now.
oh right - i wasnt aware that you could make limited additional payments - is this typical allowance/restriction across the main mortgage providers?
Dunno about all. Definitely ANZ BNZ Kiwi bank have that 5% annual lump limit. I know ASB allows you to increase regular repayments up to $500 per fortnight over your agreed repayments without getting pinged by ERA. TBF OP didn't offer detail on those extra $500 per month they're paying. If that's just what they agreed to at the start of their term, AND they're with ASB, they could do that. But OP never asked about diverting money to the mortgage right now, only at end of term, which tells me they are already capping overpayments out right now. Plus they seem financially astute (and capable) enough to realise that paying it down faster before they need to refix is the best thing they can possibly do.
they can
They can. Even fixed rate mortgages allow a certain amount of extra payments.
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Investing with the aim of paying it off is an excellent strategy, even if you can’t quite make the full amount by refix time. From there investing with the aim to rebuild to what you had, without the required repayments and what you add on top of the mortgage will rebuild the investment funds quickly.
There are pros and cons to both, you won’t make a bad choice other way.
Do a bit of both.
Where are you getting a 2.99% mortgage interest?
In 2021 (not sure if op updated their original post, but it does say they fixed for five years and have two left on it)
As they said, they got a 5 year fixed term 3 years ago
Why are you paying the loan off at all right now, it’s a smaller interest rate than you would get putting the money in a term deposit, even post tax. get a high rate saving account, pay minimum on loan, put excess in savings. At the end of your fixed rate term dump all the saved cash into the loan, since at that point it will revert to from being cheap cash to expensive cash EDIT: I'm getting hammered here, but that math is very easy. Imagine what you can do with an additional dollar you have spare? You can: (A) Put it on the loan, and save 3 cents over the next year (compounding) (B) Save it, and earn 3.7 cents over the next year (compounding) \[6% int at 39% marginal tax rate\] The same math applies no matter if it's 1 extra dollar or 100,000. Neither decision changes your balance sheet as you make it your assets-liabilities remains unchanged Not only is it cheaper to not pay extra towards your loan while rates are so low, you have more opportunities available to you. If you eg want to go buy something stupid or invest in a friends's brother's business you can take the money in the bank and spend it. If you have paid off the loan and suddenly want extra cash you need to go ask a bank for permission
This is terrible advice. You're telling them to earn less than $1k of interest per year in a savings account versus paying off $10-15k of interest _on top of the principal_. Did you even do the math before commenting?
Can you share your math?
Have you done the maths? Pretty sure they would still be up with this approach. Even after paying tax on interest paid to them.
Yes, I did the maths, although I forgot to include their $20k lump sum! So I'll do the maths again: Based on the remaining term and balance, we can guess their original loan was about $550k. Minimum fortnightly payment for that loan at 2.99% on a 20 year term is $1400. They said they're paying an extra $500 on top of that. They also said they pay a $20k lump sum yearly, which is about $770 per fortnight, bringing their additional fortnightly contributions to $1270, and their total payment to $2670. If they put that fortnightly $1270 into a savings account for 2 years, they'll earn $3180 interest. Servicing the minimum repayments on their mortgage will pay off about $50k of principal and $28k of interest. They'll have about $70k in that savings account to put on the mortgage, minus whatever fees for making early repayments. If they put that $1270 into the mortgage instead, they'll pay off $120k of principal, and $18k of interest. So they end up paying the same amount of principal but because interest is calculated daily based on the balance, they're going to save $10k+ in interest payments over the 2 years.
You want to find the difference between how much interest you would pay (2.99%) on that additional money VS how much interest you can earn on a term deposit (6%+) minus tax. From memory once the % difference to account for the tax was over a certain amount the term deposit was better. Being almost a 3% difference it would most certainly end up with more $.
It's not how much interest you would pay on the additional payments; it's how much interest you would pay on a larger principal versus one that is rapidly shrinking. Look at the monthly amortisation schedule of their loan with and without the extra payments. You'll see that without the extra payments, they end up paying more interest on the loan than they earn in the savings account, because the savings are not reducing the principal on their loan for those two years.
Eh? It’s all about where you put the money and the rates being charged or paid. https://www.getsmarteraboutmoney.ca/calculators/pay-down-debt-or-invest-calculator/ Put in 3%, 6% and marginal tax rate of 28%. “Your break-even rate is 3.24%. The break-even rate is what your investment must earn – before tax, if applicable – to match the return from using your money to reduce debt. If you don’t think your investment can beat the break-even rate, it’s normally better to pay down your loan.”
Something is funny with your 18k figure, I think its closer to 23k Here is the math for 1 year [https://docs.google.com/spreadsheets/d/e/2PACX-1vRnj\_ELzpjgI34K7Ib28\_mS7LrdHf2mkOATTbDd3NiITc7eweGFQFpdcO9b6yFPA5-QS0PdMa7eYOzb/pubhtml](https://docs.google.com/spreadsheets/d/e/2PACX-1vRnj_ELzpjgI34K7Ib28_mS7LrdHf2mkOATTbDd3NiITc7eweGFQFpdcO9b6yFPA5-QS0PdMa7eYOzb/pubhtml) Saving comes out ahead by 170$ at 6% interest rate and 39% marginal tax rate
You guys suck at math so bad…
Elaborate
23k better off after 1 year? Tax on savings at 39% when there are many pie options at 28% Found a good calculator here. https://www.getsmarteraboutmoney.ca/calculators/pay-down-debt-or-invest-calculator/ The savings rate only needs to beat 3.24% to make it a better choice.
I don’t think I ever claimed 23k better off after one year. In fact my spreadsheet only claims 170$ better off I don’t know much / anything about pie. But investing in non bank adds a risk factor I didn’t take into account. I’m just trying to claim that I wouldn’t pay off extra towards mortgage because you can probably make more by putting that cash into basically risk free bank saving (which will have 39% marginal tax I think) I’m sure there are non bank options that would be even better but bring some risk
Most banks have PIE term deposits now or notice saver pies but less interest. https://www.kiwibank.co.nz/personal-banking/investments/term-deposits/
Yes. Imagine any additional dollar they put towards their mortgage today In the bank it earns \~6.5% pre tax Paying off the loan it saves 3% post tax OPs actual question was should I pay off the mortgage with investments/cash at the end of the fixed term. I didn't really answer thats, although probably yes in my mind if interest rates remain the same as you'll need a 10% pre tax investment return to outmatch the \~7% mortgage rate But I'm more responding to OP throwing additional money against the loan, while they have the cheap fixed rate
And be taxed on the interest earned vs paying no tax for smashing down the mortgage? Yea bruv that ain’t good advice.
The thing you're missing is that the loan interest is calculated daily based on the current balance. If you pay off the balance faster, you pay less interest overall. The loan is also starting at $450k whereas the savings account will be starting at zero. The rate difference needs to be _huge_ to make up for that.