Episode 102: The Million Dollar Mistake Most Canadians Are Making [Secret Sauce Ep19]

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Are you making the million-dollar mistake of paying off your mortgage too soon, missing out on greater wealth opportunities?

In this episode, Kyle Pearce reveals a common financial misstep that many homeowners make: paying off their mortgage too aggressively. While it may seem like the smart choice to get rid of debt quickly, you could be locking away valuable funds in your home that could otherwise be used to grow your wealth. 

Instead of simply focusing on reducing interest payments, Kyle explains why keeping a mortgage for longer and reinvesting your extra cash could lead to much greater financial freedom.

This strategy is especially crucial in today’s economic climate, where inflation and interest rates fluctuate unpredictably. Whether you’re preparing for retirement or looking to build long-term financial security, this episode breaks down how you can leverage your mortgage as a tool for growing your wealth, rather than seeing it as a burden to eliminate.

Listen in: 

• Learn how stretching your mortgage term can give you greater liquidity and financial flexibility.
• Discover how to invest extra cash instead of paying off your mortgage faster, boosting your net worth in the long run.
• Understand why liquid assets are more valuable than home equity when it comes to long-term financial planning.

Don’t miss out on maximizing your wealth—listen to this episode now to learn how to make smarter financial decisions with your mortgage!

Resources:

• Like this short, “Wealth Secret Sauce” Episode? Tell us in your rating and review on Apple Podcasts. 
• Dig into our Ultimate Investment Book List
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you take the next step in your Canadian Wealth Building Journey!
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX.

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting corporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

In this episode, we explore whether paying off your mortgage early or investing is the smarter financial move, especially in the context of rising interest rates. We discuss leveraging tools like a HELOC for real estate investing and how strategies like Canadian investing, infinite banking, and bank on yourself through participating whole life insurance, permanent life insurance, or universal life insurance can help grow your wealth while minimizing income taxes and enhancing estate planning.

Watch Now!

Transcript:

Hey, Canadian wealth secret seekers. It’s Kyle back with another secret sauce episode here. And, we’re going to bang through a conversation that has come up before on the podcast, but I really want to map this out for you. I want to make this as clear as possible because this is the million dollar mistake that so many Canadians and folks in the U S and other parts of the world make quite often.

And if you haven’t guessed it yet, it is the, I pay my mortgage off sooner? Mistake. And why I say it’s a mistake is because there’s so many better things that we could be doing with those funds than say, socking them into our home, right? We’re literally taking this money and we’re sucking it and we’re storing it in the walls of our home, under the mattress, in the safe, in the basement.

And the crazy part is, that every dollar that I pay into that home, sure, we’ll save interest over time, but it will not do anything else. It’ll actually make me less liquid and actually hold me back from reaching that financial freedom number sooner. The average Canadian has been taught to buy a home and essentially pay off a mortgage sooner so that they can

build on the equity and that has worked for many people. But with the caveat that eventually at some point in the future, it’s likely that they’re going to have to actually downsize, which is a decumulation strategy in order to be able to benefit from the equity that they have built. Now, the interesting part is someone who stretches out their mortgage longer or maybe even refinances in order to buy other assets is put in a very different position.

because they’re given options. And what we’re going to be doing today is we’re going to look at some of the things that maybe you might not be realizing when you put extra dollars into your home mortgage. Now, again, I understand we will be paying less interest by doing that, but I’m going to compare two scenarios here today. It’s going to be a bit of a case study and I’m going to go ahead and share the spreadsheet that I have for you here.

For those who can’t see the spreadsheet, can head to YouTube and you can check out this episode. It’s episode 102 and the title is likely going to be the million dollar mistake that most Canadians make. So go ahead and Google it, add it, like it, subscribe, do all of that wonderful stuff and you can follow along here. Now, by no means do I believe that my spreadsheet creating is beautiful. I do love a good spreadsheet. I do love a good formula, but

I don’t spend too much time making them look pretty. So I’ve done this one specifically around a case study. We’re going to look at a million dollar home. Now, why a million? Because it’s very easily scalable. And we’re going to make the mortgage $500,000. Now the value of the home here is not going to make an incredible difference. We can move that number up or down and we’ll play with that in this episode a little bit here. But what is

interesting is say the mortgage amount. So the mortgage amount is $500,000. For some people, you have a mortgage that’s higher than this amount. For some people, maybe you are lucky enough to have a mortgage that is lower than that amount. What we’re going to be looking at is comparing two things. We’re going to look at a 30-year amortization. So that means that your mortgage is designed, it’s actually constructed. The amortization table basically unpacks exactly how much principal

and interest you’re going to pay in each year of this mortgage, each month of this mortgage over time, shifting from paying more interest in the early years to paying more principal in the later years. And we’re going to use the same interest rate. We’re going to pick 5%. Right now, that might be reasonable for some people who we know we’re coming out of what we’ll call a bit of an interest rate spike coming out of the COVID.

You know, the COVID period where we saw lots of inflation. So rates go up to tame that those inflation rates. So we’re going to pick 5%. It’s a nice, easy number. But again, you can play with other numbers too and say 3%, whatever the interest rate might be in your home. Obviously, the lower the interest rate in your home, the more dramatic the results are going to be of this particular experiment. OK, so keep that in mind. If you have a lower interest rate, then this matters even more to you. OK.

This is very, important for you to know. So we’re gonna look at a 30 year amortization. You’ll see here in column E, we have $500,000 owing in the first year or in year zero, we’re gonna call it. And we’re gonna look at a 15 year amortization, which is over here. So basically what we’re gonna do is take the same property, the same mortgage, but we’re going to have one amortization table that’s going to pay this thing off in 30 years.

And we have this other one that’s going to pay it off in 15. Now the equivalent to this 15 year amortization would be paying a certain amount more than what your 30 year amortization or your 25 year amortization is expecting of you. Now I know for most people they pick a number that they can afford and they just put it down and then they see what happens over time. But essentially what you’re doing is you’re changing the amortization of your mortgage. You’re like fast forwarding to get done quicker.

So the same result is gonna be happening here. So here we’re looking at paying off your mortgage over 30 years or paying it in half the amount of time in 15 years. One thing we know for certain, you’re gonna pay less interest. That is not up for discussion here. That is great. Paying less interest, love it. But what I don’t love is taking money and actually locking it in the walls of my home when the home is going to appreciate regardless. You’ll notice here in column D, we have this.

million dollar home. can change the number to a $500,000 home if you want, right? It would change accordingly. I’ve got a million dollar home and I’m going to be conservative and say the appreciation rate is 2%. Now at minimum you would expect that real estate is going to go up with inflation. The average rate of inflation over the last 62-ish years is about 4 % in Canada. Now there are those really high interest rate 80s that are kind of dragging that number up.

The Bank of Canada wants 2 % for inflation, right? We never seem to get there, right? We never seem to get there, but that’s always the goal, which means that the Bank of Canada is actually wanting to deflate our currency a little bit, okay? Now, if it’s 2%, that’s under control, but the reality is that means that your income should have to go up by at least 2 % in order to keep up. The reality, though, is that we tend to see numbers that are higher, right? When we look at inflation rates,

and the real inflation rate, right? When we actually look around us and actually pick our own basket of, you know, of goods and services instead of allowing the government to do so, you’ll see that it’s, it’s usually much, much higher. All right. So that’s what we’re going to look at for appreciation rate. This home is going to go up in value regardless of whether we pay off our, our mortgage sooner or later. What I want to compare here today and the 30 year amortization mortgage, we have it at 5%. That would give you a

down or sorry, a mortgage payment of about $2,684 per month. Okay, those on YouTube can see this in the sheet here in E1. $2,684. So we’ll call it $2,700 per month. That’s about $32,000 per year going towards mortgage payments. if you actually look at like today, we’re not going to look at how much interest because I actually don’t care. I don’t care who gets this money. All I care about is do I get more of it?

That’s what we’re gonna explore here and that’s really the thing that matters here most. And we’re gonna look at a couple scenarios. So this 32,000 is gonna help to pay down this mortgage and you’ll see by year 30, we’ll be left with nothing on that balance. We’re gonna look at the 15 year amortization mortgage. Now in order to pay off the 30 year mortgage in 15 years, instead of paying 26 or $2,700 per month, you’re gonna have to pay 3950.

All right, almost $4,000 a month in order to get it paid off in 15 years. And again, you’re gonna save interest. Awesome, amazing, that’s great. But what are we missing out on here? All right, so that means you’re gonna put in about $47,500 towards your home instead of $32,200. Those numbers are big when you really think about it, right? Depending on your household income, if you got a $200,000, maybe it’s a $300,000 income.

That takes a big stab or a big amount out of your pocket. If your mortgage is a million dollars, and obviously you’re going to see these numbers jump quite a bit. All right. But what we’re going to look at is we’re going to look at the difference if we were to take the difference between the 2,700 on the 30 year amortization mortgage. And if we take that with the $4,000 you have to pay off on the 15 year amortization mortgage, that’s going to give you a difference of about

$1,300 per month or $15,000 per year. All right, so I want you to think about that for a second. we’re not gonna like this $4,000. If you were contemplating doing this, this $4,000 exists in your life. I’m just gonna say let’s do something different with it and let’s look at what happens. So here we’re looking at a 5 % mortgage.

And we’re going to start here, assuming we take that $15,000 a year, instead of paying down the mortgage more aggressively, we’re actually going to just put it into investments. We’re not going to worry about tax today. We’re just going to talk about growing this money. All right, it could be your tax-free savings. Now you can’t get all $15,000 into a tax-free savings account. You could be in an RRSP, or it could just be in an unregistered account. I actually don’t care at this point.

We just want to show some differences here before we even think about taxes. What you’re going to see is that every year that 15,000 is going to grow and we’re going to grow it only at 5%. So you’ll notice here mortgage rates five. The investments five. All right, that’s where we’re to start this this discussion off and you’ll notice here over 15 years and I’ll take myself off the screen here over 15 years. My mortgage on the 30 year amortization after 15 years. I’m still going to owe about two or $340,000.

Not so fun, but I have a bucket of $345,000 in investments that are only earning 5%. All right, only earning 5%. That is not a very good rate of return in comparison to what you really want to be doing here. Basically, what this is showing, it’s like, hey, listen, you took this money and you put it into an insurance policy, basically, 15,000 a year, and then you did nothing else with it. You didn’t leverage it. You didn’t do anything else with it.

All right, now it’s a good start because hey, listen, if I can get that interest rate with an insurance policy, a high cash value insurance policy, have it there and basically be able to leverage this amount in order to pay off my mortgage in one hit, I’m all for it. Now, of course, if we’re putting it in a policy first, I wanna take that and I wanna reinvest it in something else. I wanna leverage it, reinvest it in something else. That would be my plan, all right?

Now, if we look at the difference though, and we look at the 15 year am mortgage, now there’s no money owing on this mortgage, but you’re also gonna notice in the table that you also don’t have this extra bucket of investment money, right? Again, don’t care where you put it. If you put in a high cash value insurance policy, this person doesn’t have that. What they have is a home.

and they have a fully paid off home. The home is now worth one that 1.34 or $1.35 million, according to our appreciation rate of 2%. And their net worth ends up being about, well, look at that. It’s the exact same amount as the home because that’s the only investment that they have. But here’s the crazy part. If that’s the investment, the problem is, is they can’t really utilize any of that money until they downsize or they sell this home.

This home still grew for the person who was paying down the mortgage slowly and investing at the same time. That person has a bucket of investments at a super conservative investment rate that they could immediately take and just slap down on the mortgage if they needed to, like if they ran into trouble or anything like that. In the meantime, they have access to liquidity for other investments. Maybe they’ve been putting it in something very, very conservative, and then a great opportunity arises.

The person that paid off in 15 years has nothing. They have nothing available to them except for a paid off home that they can continue paying taxes and property insurance on and all of these things on. That’s all they’ve got. OK, in this particular scenario. All right. Now, it doesn’t mean they don’t have other money they’re putting into investments. But again, the net result here by doing this payoff sooner leaves you illiquid. OK, you do not have liquidity and you do not have flexibility.

And here’s the crazy part, is that from there, if you pay off your home and then you don’t keep on taking that $4,000 and then putting it into an investment bucket, you’re going to be well behind. So right now, if we look at year 15, I’m just going to pull this up to the side, you’ll see when you’re investing at 5%, which again, not a great return, you’re not getting a great return, you’re not going to be that far ahead. You’re going to be ahead by like $5,800.

pretty decent considering you’ve got liquidity on your side. Now, if we kept going and that person started investing the $4,000 every year and we kept the 5 % the same, you’re going to notice that that person eventually is going to win in the end because they are saving on all that interest over time. And now they’re investing a larger amount without paying any interest at all. Okay. So if they’re going to stay at 5 % then hey,

maybe they’re onto something. Like maybe they’re okay, they’re fine with no liquidity for the first 15 years and then they just start investing from there. Now, if you’re 41 listening to this like I am, that puts me at 57 before I start taking this $4,000 and start putting it into these investments, which I don’t know about you, doesn’t feel super, super safe. So it’s like, we’ll end up in the same spot, but at the end of the day, guess what?

I’ve got to now invest all of that money and I’m still doing it conservatively at 5%. Now, I want to boost these numbers up a little bit because let’s put it this way, if you’re putting it into an investment, if there’s any sort of risk associated with it, if it wasn’t an insurance policy with a high cash value, then 5 % is like, my gosh, not a really great move. Go for the insurance policy, get a major death benefit. Guess what? The death benefit will help you pay off that 30-year amortization and all of that wonderful stuff.

But let’s look at actual investments here. Let’s look at an investment at 7 % per year. And now you’ll see that the tables start tipping. Now by year 15, while I still owe one four or sorry, three 40 ish on the 30 year amortization mortgage, I have four nine about four 10 in investments at that 7 % rate. Whereas my friend over here paying off his mortgage more.

quickly at 15 year amortization numbers. They’ll be paid off by year 15. They’ll have $0 invested, right? So they have no liquidity. And you’ll notice that they are $70,000 behind by year 15. And as we keep going, you’ll notice they keep getting further and further behind. Now that the investment rate of return is 7%, you know, by year 30,

There’ll be about $264,000 behind when it comes to net worth. And when we actually look at the difference in liquidity, right, they’re going to be left with a bucket of about 1.275 million, about just short of 1.3 million. Whereas the person who dragged out the 30 year amortization mortgage also remember paying more interest.

is left with $1.55 million. So they are net ahead. That $264,000, the only real difference here is the investment bucket. That’s different because it’s the same home and they’re both paid off. So we are looking at this and going, my gosh, can this get worse? And yes, it can because if you’re going to be in, let’s say, equity ETFs, like if you’re an S &P 500, Paul Beneteau,

If you’re investing in those types of equity indexes, you’re going to be up at more like 9 or 10%. Now, I’m not going to stretch it to 12%, like Dave Ramsey. Remember, this isn’t every single year, right? It’s going to be up a lot, and some years it’s going to be negative. there are, you know, we can’t forget that, that we can’t like predict it’s going to be 9 or 10 % each and every year. But on average, if we use that number, like I’m going to put 10 % here, just to show how dramatic this is. If this like,

Like I want you to think about this for a second. If you were putting these extra payments into your home, you know that’s a long-term investment because it’s stuck in the walls. You don’t have access to it. You put that money there, you cannot get it back. So to put it into what we’ll call a growth-like equity type investment fund to earn or aim to earn around 9 or 10 % shouldn’t seem unreasonable because

You were putting it into your walls. You can’t get it back until you sell your home or refinance, but you didn’t want mortgage, you know, a mortgage interest payments or anything like that. So it’s probably not you anyway. So take it and put it in something that is a long-term investment type equity fund. And what you’re going to get here by 15 years is about half a million dollars in a, in a liquid investment bucket. You still owe 340 on the mortgage. I know that’s hard.

on people like they don’t like debt. But I’m telling you, debt is not a bad thing here, especially if you’re being smart about things. What is smart is growing your net worth, growing your liquid capital instead of locking it all in your property. If you ran into trouble in year 13 or 14 and you’ve been sucking away all your money into the walls of your home, guess what? You might have to sell your home.

because the bank isn’t going to give you any money when you run into trouble is when you need liquidity and the bank doesn’t give you liquidity when there’s trouble. They give you liquidity when you don’t need it. So when we look in this case, after 15 years at 10 % investing or investing 10 % on average, you’re going to be by year 15, about 193,000 of additional net worth compared to the person who’s paying off the mortgage. Remember that’s the difference between

the equity they’ve built in their home and the investment bucket that this 30 year amortization person has built. And if we keep going at that rate, that person might start to invest the $4,000 in year 16 and beyond, $4,000 per month that is, in year 16 and beyond. But guess what? By year 30, you are $1.1 million behind the eight ball. I’m going to get my

big head off the screen here so you can see it for those who are on YouTube, $1.1 million behind plus a person with the 30 year amortization mortgage had had a mortgage. It’s now fully paid off after 30 years. They have $2.75 million of investments and the person who started in year 16 to redirect those

high mortgage payments towards investments is at $2.15 or $2.16 million. So again, they’re not like it’s not the end of the world for that particular individual, but they are very illiquid for the first 15 years and they end up behind the eight ball the entire way along as well as into the future. So when you think about this from a safety perspective, a lot of people want to pay off a mortgage because they’re uncertain of what’s going to happen in the future. So they

They’re like, I want to get this mortgage paid off just in case I don’t have as much money. I’ve lost my job by this, by that. I want to retire and I don’t want to have that burden. The reality is, is that if we’re actually smarter planners about this and we actually look at things from a more holistic view, what you’ll recognize is keeping more liquid available capital is going to be much more helpful than trying to pay off a mortgage aggressively and putting yourself in a position where you may need that money.

and you can’t get it back because they’re stuck in the walls of your home. So that is a big secret sauce here for today. And I want to give you one bonus secret sauce to think about. After 15 years, when I drag out for the first 15 years, I owe $340,000 on this mortgage. The other individual owes nothing. That seems amazing. But here’s the difference, though. My $340,000 when we take inflation into account,

is not worth $340,000 in 2039. If we use a 2 % inflation rate, which we do not have, Bank of Canada will not get to anytime soon, that number is really like $252 in today’s dollars. So imagine this. If you know you’re going to owe $340 in 15 years, but that $340, if you in today’s dollars can think of it as $252, you’re like, that’s not nearly as much.

Plus, I have this big bucket of cash sitting next to it that can help me to deal with that if I need to. If we look at an inflation rate of 3 % on average, that $340,000 is only worth $217,000. And if we look at the $340,000, assuming an average rate of inflation of 4 % per year over the next 15 years, that $340,000 is only worth $188,467.

in terms of today’s dollars. So inflation is also working invisibly in the background here. When you stretch out your mortgage and instead take the same money that you were using to pay down that mortgage more aggressively and put it somewhere else, you will be better off unless, unless you’re taking all of that extra money and you’re just sucking them into GICs or into high cash value insurance and doing nothing else with it. Now,

If that is you and you’re super conservative, you’re still better off to sock it away in those two vehicles because while you’ll be at about the same place at year 15 as we saw, you will have liquidity should something unforeseen come up in your life. So that is today’s secret sauce episode is thinking about the million dollars that you might be leaving on the table when you’re trying to pay off that 30 year mortgage in 15 years or less.

You are leaving a lot of opportunity on the table. And this is one of our many episodes that we’re going to be using to try to help people shift their mindset around debt and thinking about debt as good debt versus bad debt. And in this particular example today, you saw an example of good debt. Your mortgage is good debt if you stretch it out long enough and if you reinvest the difference. We are not encouraging you to go out and take

big mortgages so you can live a bigger lifestyle. That is not what we are saying here. But if you already have a mortgage and you are comfortable with that mortgage payment and you’re even thinking about paying more dollars on that mortgage to pay it off sooner, we’re going to say, rethink that thought and put it into asset accumulation instead. You will thank me in 15, 30, and many years beyond. If you like what you’ve heard here today,

Do us a favor, leave us a rating and review on Apple podcasts. And remember for those incorporated business owners that are looking for their financial plan to pay less taxes at a personal side and they want to grow their net worth while maintaining their current lifestyles, meaning they don’t have to interrupt the lifestyle cashflow that they’ve been used to and keep, and they want to keep living throughout their life. But

They want to make sure that they have enough into retirement and beyond. Reach out to us at CanadianWealthSecrets.com forward slash discovery. We’ll hop on a discovery call and we’ll talk about the retained earnings tax problem that you’re dealing with, whether you realize it or not, and get you set up with a plan so that you can maximize the corporate earnings that you have and keep more in your personal pocket. We’ll see you next time, my friends. Take care.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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