tag:blogger.com,1999:blog-5465015914589377788.post7369303734063036366..comments2022-01-23T08:12:01.849-05:00Comments on Michael James on Money: Mortgage-GIC ArbitrageMichael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-5465015914589377788.post-67150019635659779392012-03-28T08:09:22.192-04:002012-03-28T08:09:22.192-04:00@Anonymous: You're right that the gains from ...@Anonymous: You're right that the gains from the arbitrage would be taxed. I didn't want to complicate the post too much, but you could deal with the cash flow issue by borrowing a little extra on the mortgage to cover the payments. However, this would cut into profits as well.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-73126853931604346482012-03-27T22:38:01.068-04:002012-03-27T22:38:01.068-04:00The 0.11% (or whatever difference) would be taxabl...The 0.11% (or whatever difference) would be taxable and depending on your marginal tax rate you might only get just over half that amount.<br /><br />Also, you would have to make mortgage payments while your GIC money would be tied up for the 5 years, so you would have to ensure you had the cash flow for that.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-38813621094794711452012-03-26T21:51:37.264-04:002012-03-26T21:51:37.264-04:00@Anonymous: The 0.11% per year is entirely free m...@Anonymous: The 0.11% per year is entirely free money (assuming that there is no default risk). You never have to put up any of your own money. So, comparing 0.11% to inflation is not the right comparison. The $275 you get each year might be worth a little less due to inflation, but that's about it.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-79549823057522287332012-03-26T21:06:13.148-04:002012-03-26T21:06:13.148-04:00I must be missing something...how is a .11 percent...I must be missing something...how is a .11 percent per year return supposed to keep up with inflation?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-52926297798156065272012-03-22T13:31:14.265-04:002012-03-22T13:31:14.265-04:00Multiply by 12, and that's exactly the formula...Multiply by 12, and that's exactly the formula I used to get 2.97% (except that I squared and took the 12th root, instead of simplifying to the 6th root).<br /><br />Thanks for this post. I learned something new about about mortgage interest (or at least an adjustment to the way I think of mortgage interest), and got to debate financial calculations to boot.<br /><br />It's win-win! :)Loonies And Sensehttps://www.blogger.com/profile/17745603458861731443noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-49798296229258242272012-03-22T13:14:58.800-04:002012-03-22T13:14:58.800-04:00@Loonies and Sense: Alternatively, you could ente...@Loonies and Sense: Alternatively, you could enter (1+0.0299/2)^(1/6)-1 as the rate in the pmt function in Excel.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-64007409432766107172012-03-22T12:53:28.748-04:002012-03-22T12:53:28.748-04:00@Michael James: Ahhh... I gotcha. The only reason ...@Michael James: Ahhh... I gotcha. The only reason your "effective" rate ends up below posted is the payments you're making, effectively reducing the amount of cash you have earning money in a GIC. For your arbitrage scenario, you're using the correct rate.<br /><br />In order to get Excel's PMT function to replicate the monthly payment amount of $2,363.66 for your example, you need to enter a monthly rate of 0.0297/12, as opposed to 0.0299/12.Loonies And Sensehttps://www.blogger.com/profile/17745603458861731443noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-55768108434937267502012-03-22T12:22:23.835-04:002012-03-22T12:22:23.835-04:00@Loonies and Sense: I just read your blog post. ...@Loonies and Sense: I just read your blog post. I was with yo until you said that the "true effective annual rate" for the 7% example was 6.90%. What you call the true effective annual rate is not what I mean when I calculate the yearly rate after taking into account compounding. In your example, if you make no payments for a year (and no penalties were charged), the amount you owe on your mortgage would rise by 7.1225%. This is what I call the annual rate after taking into account compounding.<br /><br />Many people seem to believe that the "real" yearly rate comes from multiplying the monthly rate by 12. We are charged compound interest, not simple interest; it makes no sense to report yearly rates that have little connection to how your debt grows.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-39407802192752495522012-03-22T12:11:17.183-04:002012-03-22T12:11:17.183-04:00@Loonies and Sense: Yup, I'm sure. I've ...@Loonies and Sense: Yup, I'm sure. I've confirmed this with every mortgage I've ever had, and just be be safe, I checked with BMO's online calculator:<br /><br />http://www.bmo.com/calculators/mortgagecalculator/index.jsp?lang=en<br /><br />For a $500,000 mortgage at 2.99% over 25 years, the calculator says the monthly payments are $2363.66. I repeated this calculation using my own formulas for 3 cases:<br /><br />Annual compounding: $2358.02<br />Semi-annual compounding: $2363.66<br />Monthly compounding: $2368.46<br /><br />It's clear that BMO is using semi-aanual compounding, which means that the actual yearly rate after compounding is (1+0.0299/2)^2-1 = 3.012%.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-60141625632950058232012-03-22T11:32:27.806-04:002012-03-22T11:32:27.806-04:00Are you sure about your "2.99% is really 3.01...Are you sure about your "2.99% is really 3.012%" interpretation of compounding mortgage interest? I was under the impression that the <b>posted</b> rate already took compounding into account, such that the <b>effective</b> rate paid by the borrower ends up being less than what is posted. I have an old blog post about this:<br /><br />http://looniesandsense.blogspot.ca/2007/07/demystifying-mortgage-rates.html<br /><br />With this interpretation, 2.99% would actually work out to 2.97% (if paid/compounded bi-weekly).Loonies And Sensehttps://www.blogger.com/profile/17745603458861731443noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-72326221208214896722012-03-20T07:50:27.958-04:002012-03-20T07:50:27.958-04:00@Andy R: That's another way to go, but I was ...@Andy R: That's another way to go, but I was looking for a riskless arbitrage.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-39109555829743521792012-03-20T02:39:26.764-04:002012-03-20T02:39:26.764-04:00Or what about investing in BMO stock, currently yi...Or what about investing in BMO stock, currently yielding a dividend of better than 4.5%Andy Rnoreply@blogger.com