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Did you know that 60% of all statistics are made up? Okay so maybe I made that statistic up. But when it comes to the financial world, there are people out there who love to use many statistics and mathematical terms to confuse you, or at least, make their story more appealing!

One of the best examples is the selective use of highlighting fees as a percentage as opposed to the real ‘dollar’ cost. Financial institutions have always tried to use percentages when explaining fees as it ‘softens the blow’ compared to quoting real dollar value figures.

The use of percentages is also often misrepresented in the media. For example, when banks raise their interest rates by a nominal rate of 0.25%, the media may report it as ‘Interest rates went up today by 0.25%’. This is technically not correct. For example, if interest rates were at 2.5% and they moved up by an additional 0.25%, the percentage increase is 10%! A big difference on your mortgage bill.

To highlight these issues in more detail we have created two tables, one for investments and the other for mortgages.

The Real Cost of a 1% Fee on your Investment

Table 1 – Value of $100,000, earning 7% each year

Years

0% Fee

1% Fee

2% Fee

3% Fee

10

$196,715

$179,084

$162,889

$148,024

15

$275,903

$239,655

$207,892

$180,094

20

$386,968

$320,713

$265,329

$219,112

25

$542,743

$429,187

$338,635

$266,583

30

$761,225

$574,349

$432,194

$324,339

 

At the end of the 30 year term, the $100,000 investment would have grown to $761, 226 before fees. After a 1% fee, the value  is $574, 349. A difference of $186, 876 – The true cost of a 1% fee.

Now, you will need to pay fees so lets look at the difference between a fee of 1% and 2%.  After 30 years at a 1% fee, the $100,000 investment is now worth $574, 349. The investment at a 2% fee is only worth $432, 184. The true cost of this extra 1% fee is $142, 155.

You can see why institutions prefer to use percentages, 1% sounds a lot less than a fee exceeding your initial investment!

What should you do about your Investments?

As mentioned, fees will need to be paid when it comes to investing. Your goal is to ensure that you are getting the right value for the fees you are paying. Therefore, you should challenge every fee and ask the advisor to demonstrate where the value is being added. And of course, shop around.

The Investment Fee Comparison Calculator will show you how fees will impact your own investments for your time frame.

If you are looking for a financial planner (adviser), you will also find the Financial Planner Checklist – 8 Questions You Must Ask as a good resource

 

The Real Cost of 1% on your Mortgage

Table 2 – Yearly Repayments on a $400,000 Mortgage 

Term

4% Interest

5% Interest

6% Interest

7% Interest

10

$49,316

$51,802

$54,347

$56,951

15

$35,976

$38,537

$41,185

$43,918

20

$29,433

$32,097

$34,874

$37,757

25

$25,605

$28,381

$31,291

$34,324

30

$23,132

$26,021

$29,060

$32,235

 

The table shows that a yearly repayment over 30 years at 5% interest is $26,021, and at 6% the repayment is $29,060. The difference is $3,309, or an additional 11.7% – The true yearly cost of an additional 1%!

It should also be noted that at the end of 30 years, the loan at 5% requires total repayments of $780, 617 (30 X $26,021). The mortgage at 6% requires total repayments of $871, 787. A difference of $91, 170 which is the true cost of an additional 1% over 30 years.

What should you do about your mortgage?

Shop around for a great rate! Mortgage products can offer different features that may be beneficial but they normally come with additional costs, normally stated in percentage terms. These features may be worthwhile, but as you can see, when you know the true cost, you are in a better position to evaluate the features.

The Mortgage Loan Calculator will provide a detailed analysis of the effect of interest rates on your mortgage.

Time to review your loan? Quick and easy at humble savers

 

Image: FreeDigitalPhotos.net

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