The Mortgage Advice You Didn’t See Coming

A different perspective on taking a longer amortization period.

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I think this video is going to surprise you. The following sentence is not what you would expect from me. I’m sometimes not opposed to home buyers selecting a 30-year-amortization period when they get their mortgage. “Dave, you’re an idiot! Obviously, the borrower will now have to pay more interest charges with a 30-year amortization than with a 25-year.

How can you not see that?” Hey, hey, slow down — let’s talk it through. Let’s calmly take a closer look. Let’s go a different direction for a second here. Say mortgage rates were 20%… shocking. Would it be wise to pay off that debt as quickly as possible? Of course. But what if rates were 1%? Hmm. I know we all love the thought of being mortgage free as soon as possible. But does it really make sense to put an extra payment down on a 1% debt?

What about putting that money in your TFSA container instead and investing in an index-fund ETF? Don’t the odds greatly favour that being a much better move over the long term? Okay, so what about at current rates of 4-ish percent? Hey, I never get upset when people pay down their mortgages. Decent after-tax rate of return. Reduces stress. Frees up cash-flow. You can’t screw it up.

Builds pride in ownership. That’s a lot of positives. But again, if instead, someone elected to contribute to a TFSA and invest for the long term with an index fund, the odds favour that being a better call. Again, over the very long term. Well, the thinking is really the same when you choose a 30-year amortization over a 25-year. Yes, you’re extending your payment period.

Yes, you’re paying more in total interest. Basic math. But your monthly payment is also lower and, if you take the difference in those payments and put it in your TFSA or RRSP, whichever container’s better for you, and invest it prudently for long-term growth, you should come out ahead. Some years, some long stretches, you’ll wish you hadn’t gone that route,

but over the very long term, history has taught us that probabilities heavily favour this being the right move. Now, if on the other hand, you select a 30-year amortization and spend the difference in payments, throw all that out the window. You should have gone with the 25-year amortization in that case,

obviously. I know from discussing this on stage that some viewers are gonna say, “No way! Always get rid of your mortgage ASAP!” Hey, don’t yell at me in the comments. Again, I understand that opinion, and I’ll admit that I don’t run into people who say, “Geez, I wish I wouldn’t have paid off that mortgage so quickly!”

But I just wanted to share there is a different way of thinking about all of this.

Remember, you could always take the 30-year amortization — and for some buyers, that lower payment could be key to them qualifying for the mortgage in the first place, but then still pay it off over 25 years if you decide, or even earlier, through pre-payments. There’s some flexibility here. Anyway, this subject always creates a lot of interest.

Get it? Creates a lot of interest. Not good.