Highlighting the major role real estate now plays in the lives of Canadians, a case study of an Ontario couple shows how mitigating mortgage costs can help pave the way for a comfortable retirement.
In an analysis for the Financial post, personal finance writer Andrew Allentuck wrote about a couple named “Sam” (45) and “Tess” (42), earning $ 8,654 per month while raising two children (ages 3 and 5) .
“We would like $ 40,000 to $ 50,000 per child in an RESP before they’re ready for college,” Allentuck said, quoting Sam. “We have to save for that. We could pay off the mortgage faster or increase our saved savings. What should we do? “
Analyzing the couple’s savings, taking into account the $ 488 in tax-free monthly Canada Child Benefit checks they receive as well as their total monthly after-tax income of $ 9,000, brings their reserve to $ 21,800 per month. year and additional $ 9000 in other annual savings.
“Their current payments of $ 1,645 per month on their 25-year mortgage with a current interest rate of 2.94 percent will cost them about $ 116,000 in interest payments over the life of the loan. This assumes that interest rates do not rise, ”Allentuck explained.
“The couple’s current mortgage allows for up to $ 20,000 in annual prepayments. If Sam and Tess only add $ 10,000 to their annual mortgage payments once a year, they will be paid off the mortgage in 13 years and save about $ 52,000 in interest over the remaining term of the mortgage. If they added $ 20,000 to their mortgage payments, they would pay it off in nine years and save $ 72,340 in interest, ”adds the analysis. “The interest that should have been paid would have been in after-tax dollars. The savings are therefore worth 30 to 50% more in this sense. “
All of these factors give the couple the flexibility to tailor their strategy as needed, as well as a considerable post-employment cushion given the CPP and Old Age Security benefits, Allentuck said.
“If Sam and Tess transfer their high-cost mutual funds with management fees of maybe 2% on average to a managed account at a portfolio management company for fees as low as 1% to 1.5 % per year, they can save a few thousand dollars per year in fees.
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