Underscoring the major role that real estate now plays in the lives of Canadians, a case study of an Ontario couple provides a look at how mitigating mortgage costs can help pave the path towards a comfortable retirement.
In an analysis for the Financial Post
, personal finance writer Andrew Allentuck wrote about a couple named “Sam” (45 years old) and “Tess” (42 years old), earning $8,654 a month while raising two children (ages 3 and 5).
“We’d like $40,000 to $50,000 per child in RESPs by the time they are ready for university,” Allentuck quoted Sam as saying. “We need to save for that. We could pay down the mortgage faster, or add to our registered savings. What should we do?”
Analysis of the couple’s savings, taking into account the $488 in non-taxable Canada Child Benefit monthly cheques that they receive as well as their $9,000 in total after-tax monthly income, brings their stash to $21,800 per year along with an extra $9,000 in other savings annually.
“Their present payments of $1,645 a month for their 25-year mortgage with a present interest rate of 2.94 per cent will cost them about $116,000 in interest payments over the term of the loan. That’s assuming that interest rates do not rise,” Allentuck explained.
“The couple’s present mortgage allows up to $20,000 in annual pre-payments. If Sam and Tess add just $10,000 to their annual mortgage payments once a year, they will have the mortgage paid off in 13 years and save about $52,000 in interest over the remaining life of the mortgage. If they add $20,000 to their mortgage payments, they would have it paid in nine years and save $72,340 in interest,” the analysis added. “The interest that would have had to be paid would have been in after-tax dollars. The savings are thus worth, in that sense, 30 to 50 per cent more.”
All of these factors afford the couple the flexibility to adapt their strategy as needed, as well as possess a considerable post-employment cushion considering CPP benefits and Old Age Security, Allentuck stated.
“If Sam and Tess shift their high cost mutual funds with management fees of perhaps two per cent on average to an account managed at a portfolio management company for a fee as low as one per cent to 1.5 per cent per year, they can save a few thousand dollars a year in fees.”
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