Sulumits Retsambew : For years, banks and financial advisors have recommended that the additional costs on your mortgage to reduce the huge amount of interest and reduce the period during which you repay the loan.

For example, if you borrow 200 000 over 30 years at a rate of 5, your monthly repayment would be around 1074. More than 30 years, paying 1074 x 360 (months), which is 386 640.

If I could find an extra $ 246 per month, and pay 1320 per month on your mortgage, you cut 10 years of repayment period of the loan is paid in full in 20 years. In addition, total payments would be 316 664, 69 756 saving!

The failure of this method is that it ignores the time value of money.

Everyone knows that money is worth less today than it was when they were younger. If you take the repayment of the mortgage at 1074, for example, 30 years ago when the last payment is due, it would be worth 437 in cash today.

A dollar is still better than a dollar in a year or 10 years.

How the time value of money affect our example?

You can not simply subtract the amount of mortgage interest for the 20 years of interest on a mortgage for 30 years. What we must do is to calculate the present value of each mortgage.

The present value of a 30-year mortgage repayments in 1074 to 5 interest rate is 200 066.

The present value of a 20-year mortgage repayments in 1320 to 5 interest rate is 200 066.

The two repayment schemes are exactly equal.

69 756 “savings” in the interest rate is actually the effect of adding 246 more per month in payments – in fact, adding a 246 to 59 040 month more than 20 years.

And if you had 246 per month and investment, for example, mutual funds?

If you can get a yield of 10 per year after 20 years, there would be 186 804. With inflation at 3, with a value of 102 597 in money today.

Why encourage the banks to quickly pay your mortgage? Undoubtedly, the most difficult on income, better?

Banks like to be able to demonstrate that its recommendations “to save money.” But in reality, banks do not include the time value of money. They know the real value of an additional month 246 you give now, not in the future. And the shorter the time it takes to pay the mortgage, the greater their risk, and faster than the money is handed to them.

There are arguments for paying your mortgage back quickly for one thing, the sooner you pay, the faster your capital grows. But you must understand that every dollar you give to the bank today is a dollar that can not be reversed.

Give your money to the bank to avoid paying an interest of 5% means that you can not use this money to earn 10 or 12 or 15 elsewhere.