Should you restructure your mortgage?

Should you restructure your mortgage, refinance, or stay put? Let’s crunch the numbers!

If you’ve been thinking about your mortgage, you’ve probably wondered, “how do I reduce my payments to free up cash flow, or should I keep payments the same and build more equity”? This question becomes even more compelling when considering what to do with the extra cash flow—pay down the mortgage faster or invest that money elsewhere, such as in property or other investments. 

At MyFuture, we have many clients who face this exact decision. Whether you're looking to restructure your loan for a better rate, refinance for a more suitable structure, or stay put, we'll help you make the best choice for both short-term financial relief and long-term wealth creation.

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The Cash Flow Dilemma: Pay Down the Mortgage or Invest?

When you refinance to a lower interest rate or restructure your mortgage to free up cash flow, the resulting reduction in monthly payments gives you a powerful opportunity. Here are the two primary paths you could take:

1. Use Extra Cash Flow to Pay Down the Mortgage Faster - By keeping your monthly payments at their current level, even though you’ve secured a lower interest rate, you can accelerate your loan repayment and reduce the overall interest paid over the life of the mortgage.‍

Pros:

• Build Equity Faster: Every extra dollar goes toward reducing the principal, building your ownership stake in the property.
• Save on Interest: You’ll reduce the total interest paid over the life of the loan, possibly saving tens of thousands of dollars.
• Financial Security: Paying off your mortgage faster provides long-term peace of mind and sets you up for a more secure retirement.‍

Cons:

• Opportunity Cost: The money you’re putting toward paying off the mortgage could potentially earn a higher return if invested elsewhere.

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2. Invest Extra Cash Flow in Property or Other Investments - Instead of paying down your mortgage faster, you could use the extra cash flow to invest. Whether it’s expanding your property portfolio or investing in shares, this option could lead to significant wealth creation.‍

Pros:

• Higher Potential Returns: Over time, investments such as stocks or additional property could outperform the savings from paying off your mortgage early.
• Diversification: Instead of having all your money tied up in your home, investing allows you to spread your risk across different asset classes.
• Leverage: In the case of property investment, you can use borrowed money (through a mortgage) to invest, magnifying your returns.

Cons:

• Risk: Investments like property or stocks come with risks, and returns are not guaranteed.
• Slower Equity Growth: By choosing to invest, you’re not reducing your mortgage balance as quickly, meaning you’ll pay more interest over time (but for the purpose of building wealth)

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Scenario 1: Refinance from 7% to 5.5% on a $1,000,000 Mortgage

Let’s take a closer look at the numbers with an example to illustrate the potential savings and opportunities.

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Initial Mortgage Details:

• Loan Amount: $1,000,000
• Current Interest Rate: 7.00%
• Loan Term: 30 years
• Monthly Payments: $6,653

Now, imagine you refinance that mortgage to 5.5%. Here’s how that changes your situation.

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New Mortgage Details After Refinancing:

• New Interest Rate: 5.50%
• New Monthly Payments: $5,678
• Monthly Savings: $975

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Scenario 1A: Pay Down the Mortgage Faster

If you keep your monthly payments at the original $6,653 (instead of lowering them to $5,678), the extra $975 you’re putting toward the mortgage will help you pay it off faster.

• Original Term: 30 years
• New Payoff Time: 21.25 years (you pay off the mortgage 8.75 years earlier!)
• Total Interest Saved: Approximately $698,565

By putting the extra $975 a month back into the mortgage, you shave years off your repayment time and save a significant amount on interest, all while building equity much faster.

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Scenario 1B: Invest the $975 Monthly Savings

Alternatively, if you choose to invest the $975 per month, let's assume an average return of 7% per year in a diversified portfolio (a common target for long-term investment growth).

• Monthly Investment: $975
• Annual Return on Investment (Assumed): 7%
• Investment Period: 30 years
• Total Value After 30 Years: $1,189,000

In this scenario, by investing your monthly savings, you could potentially grow that amount into almost $1.2 million over 30 years, thanks to the power of compound interest. This investment strategy could provide substantial long-term wealth outside of your home equity.

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Scenario 2: Use Extra Cash Flow to Invest in a $500,000 Investment Property

Now, let’s explore a third scenario: using the savings from your mortgage refinance to help invest in property. You could use the freed-up cash flow to acquire an investment property, leveraging your equity and additional borrowing to grow your wealth.

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Investment Property Scenario

Let’s assume you purchase a $500,000 investment property with 100% finance. The $975 in savings from your refinanced mortgage can be used to top up this investment, supporting either the mortgage or ongoing costs associated with the property.

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Assumptions

• Investment Property Value: $500,000
• Interest Rate on Investment Property Loan: 7.00% 
• Loan Term: 30 years
• Monthly Interest Cost for Investment Property: $3,327
• Monthly Other Costs for Investment Property: $541
• Monthly Rental Income for Investment Property: $2,600
• Monthly Top-Up Needed (Using Your Extra Cash Flow): $1,268

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Projected Returns

Let’s assume the property grows in value at a modest 4% per year (a conservative estimate based on historical property growth trends). Here’s what your property portfolio could look like over the next 30 years:

• Investment Property Value in 30 Years: Approximately $1.6 million
• Equity Built (Assuming No Debt Repayment): $1.18 million 
• Rental Income (increasing gradually over 30 years): This could further enhance your return, as rental rates tend to increase with inflation and demand.

By using your mortgage savings to help invest in an investment property, you could build a second income stream through rent and benefit from long-term capital appreciation. Over time, this investment property could generate wealth both through value growth and passive income.

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Which Option is Best for You?

Choosing between paying down your mortgage faster, investing in other assets, or purchasing an investment property depends on your financial goals and comfort with risk:

• If you want guaranteed returns and long-term security, paying down your mortgage faster is a great choice.
• If you want to diversify your wealth creation and can handle some risk, investing in stocks, funds, or property could provide higher returns over time.
• If you want to expand your property portfolio, using your extra cash flow to support an investment property could generate substantial wealth through both capital growth and rental income.

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Ready to Crunch the Numbers? Let’s Talk!

At MyFuture, we’re here to help you make the smartest decision for your mortgage and your financial future. Whether you want to reduce your payments for immediate cash flow, pay down your mortgage faster, or explore investment opportunities, we can work together to create a plan tailored to your needs. Book your FREE, no-obligation discovery call today, and we’ll explore the best options for you. Let’s build a plan that works for your financial future!

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