Recently I was doing some rearranging of our storage space buried in the back corner of the garage when I came across a little red book of mortgage calculation tables. My first reaction was that this was a guide I no longer needed because of the easy availability of such calculations on the internet. My second reaction after taking a quick look was a smile of good humor; this little guide published in 1982 calculated mortgage payments with interest rates from 5% to 20%.

Interestingly as you might recall, 1982 was actually the year that many individuals found themselves facing mortgage rates above 20%, particularly when they sought mortgage renewals. These individuals will still let you know how tough this was. Hard working people with family responsibilities paid a very heavy price with lots of unappreciated sacrifices. At the same time, inflation rates were also very high by today’s standards making just getting by a great deal more challenging. If you had no debt, well that was a lot better because returns on most fixed investments were over 10% with equities doing better than that.

This poor little red mortgage guide would not have been able to put numbers to those high mortgage rates. However, today, the guide would be equally challenged with standard fixed rates on mortgages well below that 5%. Whoever formatted the guide simply didn’t foresee such low interest rates – the inconceivable.

Some individuals might consider this an opportunity of a life time simply because with such low rates, the payment of principal on a mortgage each time you make a payment is much higher. For instance at a rate of 3% on a 25 year mortgage and ignoring insurance, property taxes and other fees that might be attached, the monthly payment is about $469 dollars a month per $100,000 owing. On the very first payment, approximately $247 goes to interest to service the mortgage and $223 goes to paying off the principal. As each payment goes by, this ratio slowly changes in favour of more money to principal and less to interest. At the 43^rd payment they will be equal and from that point on more will go toward actually paying the mortgage off than goes to interest.

If we look at 6%, the payment is approximately $638 per month -$169 more per month. In this case the interest payment has gone up to $380 and the payment against principal is $259. However, it is only at the 180^th month (payment) that less begins to be paid in interest than goes to paying off the principal; so a dramatic difference that simply means you will pay much more for your house over the term of the mortgage, over $50,000 for each $100,000 dollars you borrow.

I was much too afraid to look in the book and start calculating out what happens at 10, 12 or even 15%.

The simple lesson is that we must understand how to make our money work for us rather than someone else. Of course, this is part of the responsibility of your financial advisor. If you have questions about mortgages and how to address them efficiently in your financial portfolio, please contact me.