Why Prepay Mortgage
A few times I’ve been tempted to prepay our mortgage. We can do it as many times as we want, with no penalty. But even without crunching the numbers much, I see it doesn’t make sense for us to prepay.
1. We don’t plan on staying in the condo for more than 3 years (for a total of 5-6 years). Our current mortgage rate is 5.25%. We wouldn’t earn interest above that, in fact the most our money is making us is 4.01%, but the difference of 1.24% short term (3 years) wouldn’t affect our Net Worth in any signficant way.
2. Less cash, same taxes. Since none of the principal gets written off, by prepaying we would just reduce the amount of cash available and still have to pay tax on it. We write off a portion of the mortgage interest thanks to running the business mainly out of home. Tax advantage outweighs the slightly lower interest payment.
3. No significant savings. According to online calculators if we prepay $10,000 just once, we’d shave off about $1,200 of interest over the remaining 3 years. If we keep this $10,000 in a savings account or a GIC for 3 years, it would compound to $11248.64 (pre-tax interest $1,248.64). I’d rather have easy access to this cash and make about the same amount of money. Ok, it would be $936.48 after tax if locked up for 3 years. $250 seems is just too little savings for plunking down $10,000.
And on a somewhat unrelated but pleasant note – a condo on our floor, identical to ours is up on the market for $219,000. I’m going to watch how quickly it moves and how much of the asking price they get. Even if they only get 96%, which seems to be average for Toronto condos, that would still mean an appreciation of about 12% annually over the last 3 years! That would be fantastic, much better than 5% that I expected.