Paying down mortgage usually good move
Posted in Finance on November 16th, 2009 by Sacha PeterIt is strange how the president of a company that stands to make money with outstanding mortgage debt is expressing concerns at mortgage leverage of ordinary people.
For consumers with 35-year amortizations, which ING sells, he advises that they accelerate their payments.
“That way if you have a $300,000 mortgage, instead of owing $280,000, maybe you only owe $200,000 when rates are higher. It prepares you for difficult times,” said Aceto.
Right now a variable rate mortgage at ING Direct is given at the prime rate. Presently that is 2.25%. If you had a decision between banking cash in a GIC (earning 1.25%) versus putting it into the mortgage, it is a superior decision to put it in the mortgage, especially when one considers that the GIC interest is taxed. A potentially superior financial option is to earn a higher return than 2.25% and then pay off the mortgage with surplus capital when rates rise.
Alternatively, one can structure their mortgage to be interest deductible – there is a ton of literature available on this topic (such as the Smith Maneuver). Doing the math on a 2.25% variable rate loan and putting it into some tax-favoured preferred shares earning 6% a year yields a compelling story.
The interests of the bank president are somewhat aligned to what he is preaching – the concern for banks should be return of capital, not return on capital. If they had all their clients paying back their mortgages, they would be in fairly good shape.
Those 35 year am mortgages he’s talking about are almost all 100% government guaranteed so ING is not all that much at risk – although just because credit losses are covered by the government doesn’t mean there wouldn’t be headaches for the bank from a whole pile of defaults.
My interpretation is that he was simply offering some honest advice (rare, on the topic of real estate and the housing market, but it still happens every now and then).