The miracle of compound interest can make you rich. A house is the biggest asset you will own in your lifetime. If you pay off your mortgage quickly using the miracle of compound interest, then you will be privileged with an impressive net worth.
Take the example of Penny Morepayment. If Penny buys her first home for $375,000 at the age of 30 and takes out a mortgage of $300,000, she’ll end up with a monthly mortgage payment of $1,419.74 amortized over 25 years (at 3.0%). By the time she’s 55 she’ll have a free and clear home worth over $785,000 (assuming real estate appreciates at a rate of 3% per year). That’s not a bad outcome, especially considering the alternative of paying an equal amount in rent over those 25 years and having nothing to show for it.
Now assume that Penny decides to leverage the miracle of compound interest to work in her favor. With 3 painless moves Penny can reduce her amortization by 9 1/2 years. These moves consist of making one extra monthly payment per year, taking a bi-weekly accelerated payment plan, and by increasing her payments each year by only 3%. Now at the ripe young age of 45 Penny finds herself mortgage free! With a keen eye on her retirement, Penny decides to continue with the same payment plan as if she had a mortgage, but instead of paying a debt she invests in a conservative RRSP returning just 2% per year. Her RRSP balance on her 45th birthday would be close to $230,000. Not a bad position to be in at just 55 years old. A millionaire with a free and clear $785,000 home and $230,000 in the bank.
If you’ve already celebrated your 30th birthday, there’s no need to panic. Starting this regimen at 40 just means you’ll finish at 65, normal retirement age. Of course the important thing here is to have a financial plan, and to make sure you take your mortgage into account. Taking advantage of the pre-payment privileges in your mortgage will allow you to get make the miracle of compound interest working in your favor.