Canadian Money Forum banner

1 - 7 of 7 Posts

·
Banned
Joined
·
419 Posts
Discussion Starter #1
I ran 2 screens on Fraser's SM calculator and got 2 very different outcomes at the end.

Input1 was 135k mortgage @ 2.25% for 35 years @ 43% tax bracket with an additional 300/month cash redirect. Investment return was 8%, and the motgage was gone after 16.5 years.
Portfolio was 1.2 million after 16.5 years.

Input 2 was 135k mortgage @ 2.25% for 18 years (making monthly payment = input 1 mortgage payment + 300 redirect).
Mortgage was also gone after 16.5 years, BUT the portfolio was only worth 247k assuming the same 8% return.

The monthly payments were almost identical, but the interest costs were 1/2 with the initial shorter mortgage, thus giving me 74k LESS in tax deductions.
The principal with the 300 redirect was in linbe with the principal paydown with the shorter mortgage.

I am just having a hard time wrapping my head around an almost million dollars difference after 16.5 years.

How can this be explained? Can 74k in tax deductions make a million dollars of difference?

Cannon, if you are out there , you are a numbers guy. Maybe you could explain this a bit?

I am trying to figure out if I should divert a monthly RSP into a SM top up.

For the same monthly cash flow I would rather have 1.2 million than 247k.
 

·
Registered
Joined
·
9 Posts
The two cases are basically the same since you are paying down the capital at $512 a month.

Using 2.25% for your calculations over 35 years is very urealistic. Mark Carney, Governor of the Bank of Canada recently warned Canadians against doing this. It would make more sense to use a more average value of 6%.
 

·
Banned
Joined
·
419 Posts
Discussion Starter #3
I don't listen to anything my govt tells me, nor do I try to predict interest rates.
I always go variable and right now that is 2.25.

The question in my post was why is the longer mortgage with prepayment a million ahead of the shorter mortgage.
 

·
Registered
Joined
·
450 Posts
You didn't give us all the numbers, or a copy of/link to whatever "Fraser's SM calculator" is, but it looks like it's almost certainly a GIGO problem.

After all, there is no way that you can pay off the same mortgage principal at the same rate over the same number of years, and be off by 50% in the interest paid.

So, somewhere along the way you either double-counted some money, or you got the time horizons wrong, or your starting investment sizes were different, or your tax rates/RoRs were different.

It looks like you're starting with a $135k investment, and a corresponding $135k loan (at 2.5%). You're assuming your investment return is 8%. With a tax rate of 43% (so you keep 57%), your 5.5% net investment return becomes 3.135% after tax; as the loan is paid down, the returns should improve over time, to 4.56% when there is no interest cost (8% - 43% tax). A handy CAGR calculator shows us that after 16 years of compounding at the median rate (3.84%), $135k will turn into $247k, so that seems pretty close to your second scenario. At least, I think that's what you're trying to model.

Now, the 1.2M figure is harder to decipher where it came from. One way to get there is to give yourself 35 years, assume a steady 5.5% rate of return (i.e. full tax deferral), and additionally contribute $300/mo to the investment. Is that what you were doing? Another way is to use the same 3.84% CAGR over 16.5 years, but start with $644k. Did you do that?

Assuming there isn't a problem in the calculator, I'd just try again, being careful of your inputs. That, or just estimate it yourself with excel .
 

·
Banned
Joined
·
419 Posts
Discussion Starter #5
There is no link to the calulator. You can buy it when you buy the book.

Basically my monthly payment remained the same in both calculations but I got very different results.

Perhaps an error on the calculator?

I will scan my results and post.
 

·
Registered
Joined
·
7,252 Posts
There is no link to the calulator. You can buy it when you buy the book.
Perhaps an error on the calculator?
Oh wait, so you have to pay for this so-called calculator?
If so, why are you not asking this question to the person who wrote the calculator (and the book) and got your money?
This question should first be asked to that person.
 
1 - 7 of 7 Posts
Top