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Dale Jackson

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Advice that stands the test of time

Dale Jackson

It was a typical Saturday morning adventure through the Globe and Mail Report on Business back in 1991. In his regular column, Terence Corcoran made a compelling argument for paying down a mortgage. It won him the magnet-to-fridge award in our house and it put us on a course to lifelong financial security.

Paying down your mortgage allows you to invest your cash without paying a cent to the financial industry. It's risk-free and has no negative tax implications. Each dollar becomes appreciable equity in your house over the long term.

It also pays a sort of reverse dividend in that the investor saves the interest on that dollar over the amortization period. That's not just the annual mortgage rate — it's the compound interest on that dollar over 15 or 20 years.

There's another kind of dividend that comes with investing in a house. You can't live in a stock or bond. When investing in your house you are also paying your living expenses. It's like paying rent and getting the principle, plus appreciation, back.

Now, back in 1991 ten per cent was a decent mortgage rate and $100,000 was a fair sized mortgage (at least for us) but Mr. Corcoran's advice stands the test of time through any economic condition. We know because we followed it — and it worked.

By following his advice we managed to pay our 18-year mortgage off in 10 years. We saved an estimated $40,000 in interest payments and walked away debt-free. To illustrate in the simplest terms, the numbers have been rounded off but you can adjust the formula to your own financial situation.

We purchased our home with a fairly hefty down payment and managed to bring the total mortgage to $90,000. Our initial payments were $420 semi-monthly for 18 years, bringing the total principal-plus-interest cost to $181,440. The average interest rate throughout the life of the mortgage was about 9 per cent.

The mortgage holder, Canada Trust at the time, allowed only one annual payment increase of 15 per cent -- something we took advantage of for the first three years of the mortgage. In the first year we increased our payments to $483, in the second to $555, and in the third to $639.

The trick is increasing the payments in the early years of the mortgage to get the maximum interest savings. It took discipline but we barely noticed. By the 10th year the mortgage was paid off at a total principal-plus-interest cost of $142,316. We saved $39,124 in interest and owned our house outright eight years early.

We were young and money was tight so there wasn't a lot to contribute to our registered retirement savings plans. That was alright though because we were in our lower income years and the deduction room came in handy when the tax savings were greater.

For two care-free years we lived mortgage free — topping up our RRSPs and saving for our dream house. When we found a house we liked our offer was spiced up by excluding the condition that we sell our current house because the bank loved us so much they offered bridge financing if necessary.

In fact the bank — now TD Canada Trust - loves us so much they've boosted our credit rating and now offer us the best rate available for residential mortgages. Isn't love wonderful?

Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.

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