Jonathan Chevreau, writes in his blog about the single best investment that most people can make:
And it’s not Tim Horton’s or any individual stock. Instead, it’s an investment with a GUARANTEED high return and highly tax efficient. And it’s nothing fancy. It’s simply paying off your home mortgage as quickly as possible.
Mortgage pre-payment is especially important in the initial years when most of the mortgage goes towards interest. Take a hypothetical $200,000 mortgage on a fixed 5% interest rate amortized over 25 years. The monthly mortgage payment works out to $1,163.21 and after the first year the principal balance is still $195,845.49. After five years, the balance is still $177,015.00 or 88% of the original mortgage is still outstanding. In those five years, a total of $46,807.61 in after-tax dollars has been spent to carry the mortgage.
Now imagine that an extra $200 can be paid towards the mortgage principal. After the first year the principal owing is $193,390.30 and after five years it has shrunk to $163,431.59. The loan period will be 6 years shorter and interest savings of $41,255.47 can be realized.
The beauty of prepaying the mortgage is that an extra payment reduces the mortgage balance and a little bit of every future mortgage payment that would otherwise have serviced the loan will now go towards reducing the loan. And over time every little bit adds up to a lot of money.
