Pension withdrawals under the Government’s coronavirus emergency withdrawal plan have the potential to greatly contribute to the real estate industry, and thereby the economy as a whole, if they are invested wisely. They also have the potential to ease one of the biggest financial burdens an individual will face during their lifetime: the cost of buying a home.
Pension withdrawals can be used for a variety of bigger purchases such as a vehicle or furniture, but the reality is these are depreciating assets. Real estate, on the other hand, is almost always an appreciating asset, and if you invest in it you almost certainly cannot go wrong, especially if your investment is also your home.
Using a pension payout to pay off part or all of a mortgage could make a huge difference to anyone’s financial situation and should be an important consideration when the funds come into anyone’s bank account. I thought a look at the numbers themselves might convince readers of the benefits of a one-off extra mortgage payment to someone’s financial situation.
Using Butterfield’s mortgage calculator as a reference point (http://www.bm.butterfieldgroup.com/Personal/Financial_Calculators/mortgage/Pages/default.aspx) let’s assume a 4% interest rate and mortgage payments are made monthly. Over an average mortgage period of 25 years, someone borrowing CI$200,000 can expect to pay monthly mortgage payments of CI$1,055.67. Paying off a sizeable amount of that mortgage with a CI$50,000 pension payment could see those monthly costs reduce down to just CI$791.76 a month. Or, if you want to reduce the length of time it takes to pay off a mortgage and still continue with the same monthly outlay of CI$1,055.67, the period is cut down to 16.1 years. That cuts a mortgage by just less than nine years, which could make someone mortgage-free far quicker than usual. If an individual has a CI$300,000 mortgage and a CI$100,000 pension payment that they wish to use to reduce their mortgage, the figures are even more impressive. CI$300,000 borrowed over 25 years means monthly payments of CI$1,583.51. These reduce to CI$1.055.67 if the mortgage amount is reduced to CI$200,000 or an incredible 13.8 years if the same monthly costs are kept, knocking just over 11 years off the total time an individual has a mortgage. If someone took their mortgage out at 35 and used their pension payment (perhaps in conjunction with their spouse), they would be mortgage-free by age 46, an incredible achievement at a relatively young age.
The benefits of either reducing your monthly mortgage payment or reducing the length of time you are in debt are huge. I believe an important financial goal of any individual is to be debt free as early in life as possible, with the aim of paying off a mortgage as soon as possible. Once you have paid off your mortgage, I don’t believe a person should leverage against their home in the future because, as I see it, your home is your safety net, something that nobody can take away from you. Your home is never at risk once you are mortgage-free, which means you always have a roof over your head. In the real estate industry, we are in the business of providing shelter, which is one of the three main basic necessities of life (the others being water and food) and so the idea of having a property that is mortgage free particularly resonates with me. Pressure lifts from a person once their mortgage is paid off and it’s definitely a comfortable place which is within all of our grasp, should we invest our pension payouts wisely.