Hi,
I always considered the return from reducing my mortgage was the same as the interest rate on my mortgage i.e. 2.3%. But I never paid much attention to the cashflow benefit (if you leave the term the same).
The calculations below, indicate after paying 10k on a 20 year 2.3% Mortgage, I get 624 Euro / 6.2% back per year.
How do I explain this illusory return?
Calculations (from drjeacle calculator)
100k mortgage, 20 years, 2.3% = 520.21 per month repayment
90k mortgage, 20 years, 2.3% = 468.18 per month repayment
If I 'invest' 10k in mortgage repayments, I gain 52.03 per month (520.21-468.18), 624.36 per year.
624.36*100/10,000 = 6.2436% Return p.a.
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I edited this post to add the answer here - As this turned into a long thread, and brendan was concerned people might get mislead
The answer:
My financial return is 2.3%, but the series of cashflows that give me this return are different.
e.g. I think it is easier to understand this if you pretend you are the bank, e.g. imagine you were the bank and you loaned me 10k, I could pay it back it to you in two different ways:
230 euros per year for 20 years, and then the 10k back at the end (deposit account/interest only mortgage style)
624 euros per year for 20 years, and 0 extra back at the end (typical mortgage style - try Karl Jeacle mortgage calculator 10k loan, 20 years, 2.3%).
the cashflows you would get are very different, but the interest rate is still 2.3%
You can visualise/understand the higher cashflow as getting back some of your capital each year, instead of getting it all back at the end.
If you put your 10k in a hypothetical 2.3% after tax deposit a/c for 20 years, You get the former series of cashflows, if you pay off your mortgage you get the latter series of cashflows.
Nit: For me to end up with a similar sum from both cases at the end of 20 years, I would need to re-invest the additional cashflow at 2.3%
I always considered the return from reducing my mortgage was the same as the interest rate on my mortgage i.e. 2.3%. But I never paid much attention to the cashflow benefit (if you leave the term the same).
The calculations below, indicate after paying 10k on a 20 year 2.3% Mortgage, I get 624 Euro / 6.2% back per year.
How do I explain this illusory return?
Calculations (from drjeacle calculator)
100k mortgage, 20 years, 2.3% = 520.21 per month repayment
90k mortgage, 20 years, 2.3% = 468.18 per month repayment
If I 'invest' 10k in mortgage repayments, I gain 52.03 per month (520.21-468.18), 624.36 per year.
624.36*100/10,000 = 6.2436% Return p.a.
==============================
I edited this post to add the answer here - As this turned into a long thread, and brendan was concerned people might get mislead
The answer:
My financial return is 2.3%, but the series of cashflows that give me this return are different.
e.g. I think it is easier to understand this if you pretend you are the bank, e.g. imagine you were the bank and you loaned me 10k, I could pay it back it to you in two different ways:
230 euros per year for 20 years, and then the 10k back at the end (deposit account/interest only mortgage style)
624 euros per year for 20 years, and 0 extra back at the end (typical mortgage style - try Karl Jeacle mortgage calculator 10k loan, 20 years, 2.3%).
the cashflows you would get are very different, but the interest rate is still 2.3%
You can visualise/understand the higher cashflow as getting back some of your capital each year, instead of getting it all back at the end.
If you put your 10k in a hypothetical 2.3% after tax deposit a/c for 20 years, You get the former series of cashflows, if you pay off your mortgage you get the latter series of cashflows.
Nit: For me to end up with a similar sum from both cases at the end of 20 years, I would need to re-invest the additional cashflow at 2.3%
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