Peter and a guest break down a $400,000 mortgage at 2.92% over 25 years. Monthly payment is $1,880.24, but you'll pay roughly $164,000 in total interest, about 40% of the original loan. Most of that interest hits early.
Questions this video answers
$400,000
25 years
2.92%
$1,880.24
$164,000
Chapters
Do not focus on the rate, focus on the interest volume that you're going to pay, because that is the real amount of dollar that you're going to pay on the transaction.
In this video, we're going to talk to you about interest rates versus interest volume. We're going to provide clarity over interest rates and the actual amount of interest paid. So stay tuned to the end to see the difference. And now we're going to go through example of a house with a $400,000 mortgage. Starblow. Let's dive into this example.
Let's dive in, Peter. Now, just before we get started with the example, I want to just have a discussion regarding the essence of becoming your own banker. Now, Peter, let's just assume in this example that you're the one purchasing the house for $14,000, meaning you need to get $14,000 financed as mortgage. Now, what are the steps in financing, Peter? So the first thing is you have to qualify for the loan. Right. And the next step is you have to put a deposit as a down payment for the loan. So would you agree that you are the first one into the relationship with that deposit money?
Yeah. You initiate the relationship, you get the qualification, and you're actually the one who has to put the money in to start that. Yeah.
And then the bank will release the funds once they see a deposit from you. Now, if your deposit is less than a certain percentage of the loan, do you have to buy and pay CMHC insurance?
Yeah. That's an additional cost on top of this. Yeah. Yeah.
And you're doing that to protect who?
At the end of the day, you're protecting the loan which is serviced through the bank. Yeah.
Then do you have to buy home insurance and pay for the premium on home insurance?
Right. And that's another protection for the bank.
To protect the bank. No. When you sell the house, you decide when to sell the house. But when you sell the house, who gets paid first?
It's got to be the bank.
It's got to be the bank. So is there anything wrong, based on the discussion that we had, is there anything wrong in being the bank now?
No. It sounds pretty good to me.
Sounds pretty good, right? So as you're watching this video and you haven't watched the video on becoming your own banker, make sure that you check out that video on our the Bankers Vault YouTube channel. You're going to find a masterclass on becoming a banker. All right, let's dive into this example. So the example is we want to talk about difference between interest rate and interest Volume. And to demonstrate that, we're going to use an example of a house that we're purchasing. The value of house is $400,000 and the amortization is 25 years. The interest rate on the loan is 2.92%. So, Peter, I'm going to use my annotator here and let me know if you can see what. What I'm annotating. So can you see the red arrow?
I can.
Perfect. So this is our mortgage balance, $400,000. It's going to be amortized over 25 years. The interest rate is 2.92%. Now, I know we may be able to get lower interest rate based on today's market rates, but the question is not going to be about the rate. It's going to be about the volume and velocity of the interest. Now, so if we borrow $400,000 from a bank and the amortization is 25 years, the interest rate is 2.92%. Based on that, a monthly payment to the bank is going to be 1880 and 24 cents. Peter, are you okay with the math so far?
So far all looks good.
Right. Now, the monthly payment, it's a combination of two things, right? Principal and interest.
Now, in the first month, we pay 90691 as principal and 973 and 33 cents as interest. We add these together, that is our monthly payment of 1880 and 24 cents.
Peter, would you agree the math makes sense so far?
It does, yes.
Now, the interest rate on the mortgage is how much?
2.92.
2.92. Now, the ratio between principal and interest is. What is it? 2.92%.
It doesn't look like that interest is.
More than the principal.
It's more than 50%. Yeah, yeah.
Now, when we go get a mortgage or we get a loan, there are two things we focus on. One is the interest rate.
And the other is a monthly payment. If we can lower our interest rate, our monthly payment comes down. That is what we focused on without really realizing what the volume of interest is going to be. The difference between principal and interest or the relationship between principal and interest is quite high. It's not 2.92%. Interest is not 2.92% of the principal. It's more than the principal that you're going to pay in the first month. So the rate and interest volume are just two different things. Right. So as, as a banker, the banker is not interested in the rate of the interest. The banker is focused on the volume of interest. That's going to come back to them because that is how they make profit. Peter, does it make sense so far?
It does.
Now, if you're in the house for year one. Now, in year one, the principal amount that we're paying now is 931 and the interest is 948. It's still not 2.92% the difference between principal and interest. We're still paying an equal amount in interest as we'll be paying in the principal. Now, we've sent the bank 22,562 in total payments, out of which $11,000 is the principal principal amount. And difference between these two numbers is what I call the interest volume.
The interest volume, as you can see, is not 2.92%. It's much more than 2.92%. Right. And interest is just extra money that's going to come in for the bank. And what do they do when they earn profit on money that they lend out?
They're going to lend it out again.
They're going to lend it out again multiple times. Banks keep money in motion to make more money. They do not let the money sit still. Now, if you stay in the house for five years, this is the principal that we are now paying on the mortgage. 10:46. This is the interest that we're paying on the mortgage. Now, the difference between principal interest is again, the correlation is not 2.92%. The interest is still a big chunk of the monthly payment. Right. So again, you may be hearing me and Peter repeat myself many times during this example, but it's so important to understand the difference between interest rate and interest volume. Now, when year five comes, Peter, what do most Canadians do with their mortgage?
Well, at the end of term. So they're going to go back and.
Get it remortgaged.
Yeah. So some people would renew their term and some may refinance their mortgage. Maybe they build up equity in the house and they want to take that equity and they want to buy a boat. Or maybe they want to take that equity and then they want to buy another asset. Perhaps. But the moment we refinance the mortgage, the whole interest is front loaded again because we restart the whole transaction again. We've worked hard to increase our principal payment to the bank, but the moment we refinance it, it just resets again from scratch. We are turning the wheels of banking by refinancing the mortgage because against the asset to the bank is the payment. And in that payment, the real asset is the interest that's going to come walking back in because that is just profit. And they use that money and they re lend it again to make more profit. Now, if you stay in this house for 25 years, Peter, this is how much we borrow. $400,000. And this is how much we end up paying the bank. Total payment, principal and interest.
Out of that, 164,000 is the interest that we're going to pay the bank. We borrow 400,000, we pay back 164,000. You take $164,000, which is the total interest paid over 25 years, and you divide into what you borrowed from the bank to begin with. That's almost what.
40% in interest volume paid over 25 years. Do you see 2.92% anywhere?
I don't.
2.92% is an amortized rate. That is what the bank charge on remaining balance. It's not the volume of interest. What you're going to pay. The volume is much more than the rate. So when you're looking at these transactions, it doesn't apply to mortgages. It also applies to.
Your other loans, like your car loans and things like that. So do not focus on the rate, focus on the interest volume that you're going to pay, because that is the real amount of dollar that that you're going to pay on the transaction. Peter, any closing notes?
Oh, yeah. I think that was a great example just to take us through, really get the. Get a good view to what actual. The actual amount of volume of money that leaves us on a monthly basis when we're paying down, whether it's a mortgage or any type of loan. I would say if you haven't already got a copy, we go back to the essence of the book. I think you may have a copy as well. But become your own banker is really what we focus on, is the looking at the essence of infinite banking and how you can become your own banker.
Yep. And make sure that you check out our other videos on our YouTube channel, especially the one that speaks to you about the essence of becoming a banker. The Masterclass of Becoming a Banker, hosted by Jason Low.
