You Should Spend 250 Hours Learning About Mortgage Interest
People have a very casual attitude to one of the most consequential financial decisions of their lives, their mortgage interest.
Let’s assume you are buying the median Canadian home for the median Canadian family income. Median house is $531,000. Median family income is $92,700.
Putting 20% down, you have a mortgage of $424,800.
Let’s consider two scenarios. A 1.99% interest rate (generally what you can get right now if you compare providers) and a 2.25% interest rate (what people on this subreddit seem to be getting). We will assume a 5 year term and a 25 year amortization.
At 1.99%, you will pay $38,787.28 in your first 5 year term.
At 2.25%, you will pay $43,944.17 in your first 5 year term.
The difference in interest paid is $5,156.89, just over the first term. The lifetime difference is $130,344.06 – $114,231.48 = 16,112.58.
Assuming that the $92,700 is a dual income family, let’s assume it is $75,000 after taxes from two people working a total of 70 hours a week. 70 * 52 = 3640. Thats $20.60 an hour after tax. That is what Mr. and Ms. Median value their time in the workforce.
5156.89/20.60 = 250 hours. 4 * 70 is 280, so it is just about equivalent to a month of work.
The difference between 1.99% and 2.25% is a month of salary for a median family.
This is not to say that you should buy exclusively based on the rate as things like portability and prepayment certainly matter, but it is worth spending a large chunk of time sitting down and figuring out mortgages inside and out.
From an effort perspective, you should theoretically be willing to spend the equivalent of 250 hours (a month of full time work) understanding your mortgage and getting a lower rate.
Would you make 10 phone calls to get $5000? Would you scour the internet for hours to get $5000? Would you aggressively negotiate to get $5000? Would you spend time reading a book for a $5000 bonus at work?
As that is what is at stake. 0.25% seems so tiny and harmless. It looks like a small number, but it isn’t.