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?

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.

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,

624 euros per year for 20 years,

the cashflows you would get are very different, but the interest rate is still 2.3%

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)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==============================

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: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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