Quote:
Originally Posted by CroFlames
OK so does it make sense to start making lump sum payments now while I'm locked in for about 3 more years at a really low rate, or do I just enjoy this low interest holiday until I get bent over in 3 years?
Then start making lump payments when rates are high?
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It depends. It's up to you. IMO you have to look at it in 1-3 year terms as well as over the life of the mortgage. So not just until renewal, if you have 20 years mortgage, you'd have to think that way too IMO.
Most people only look at the short term differential. That doesn't consider the extra duration of the mortgage with compounding interest. I haven't run the numbers, but I think you'd save the few percent difference in safe investing over several years of compounding interest. However, lumpsum payments do create inflexibility and seemingly has less pros short terms and only pros really long term (ie: 5-10 years+).
But dumping it into the mortgage early also possibly means paying more to borrow for a rainy day (ie: HELOC or LOC). You'd lose the flexibility to cash out and use the cash for other things, but I guess it also means you're less likely to spend as much if it's not as easily accessible.
I've debated this personally as well. IMO if I'm going the safe route with GICs etc. I'm better off lump summing it into the mortgage instead to make up the difference via compound interest. But if I want to invest for a few years (ie: Canadian banks as an example) it's probably worth risking the principle in hopes that I will have more in a few years time to tackle more of the mortgage principle. Keep also in mind that there are often limits to paying down the principal of your mortgage (for me, it's around $80K) without penalty even at renewal. So combinations of regular paydowns, payment increases and investing are probably more likely to be the best option vs one side or the other.
In 3 years, I can't just dump $240K into the mortgage. So maybe I'm better off doing $50-80K per year and investing the "excess". Mortgage companies also don't like modifying payments. So if you up your payments, when you renew, they likely won't let you lower your payments without significant resistance.