Interest Paid Against Interest Earned: The Lifetime Total Nobody Adds Up

There is one number about a household’s financial life that nobody computes and nobody sends. Not the balance owed, which arrives every month. Not the payment, which is printed on everything. The total interest the household will pay, over all its borrowing, across a working life. No lender produces it, because no lender has any reason to. No statement shows it, because a statement covers a period and this figure spans decades. And so it is the largest single transfer most families ever make, and the only one they have never seen written down. This article does not assert what that number is for anybody. It cannot, and any page that tries is describing a household that does not exist. What it does instead is name the documents the figure is built from, say where on each one the input sits, and set out what the total is good for once it exists.

The number nobody prints

Consider how a mortgage is presented. There is a rate, there is a payment, there is a term, and there is an amortisation. Four numbers, all of them accurate, none of them the one a household would most want. The rate is a price per year on a shrinking balance. The payment is a monthly commitment. The term is how long the current agreement lasts. The amortisation is how long the whole thing takes. Nowhere in the set is the total cost.

This is not concealment. A lender that quoted a lifetime interest figure would be quoting a projection, and a projection depends on every future renewal, every rate at every renewal, every prepayment and every change of plan. No honest lender can print it, which is exactly why it is missing.

The same is true across every other kind of borrowing a household carries. A card agreement states a rate and a minimum payment; it does not state what revolving a balance for eleven years costs, because that depends on what the household does each month. A line of credit states a margin over a benchmark; it cannot state a total because it has no end date. Each document is complete and each one stops exactly where the interesting question begins.

But a household is in a different position from a lender. It does not need a projection. It needs the figure for what has ALREADY happened, and that figure is not a projection at all: it is history, and it is recorded, and it is sitting in a drawer.

Nothing below asks a reader to guess anything. Every input named is a number that was printed on a document and can be read off it.

Where the outgoing figures live

The annual mortgage statement is the anchor. Every Canadian mortgage lender issues one, and on it there is a line that separates the year’s payments into principal and interest. That interest line is the figure. One line per year, per property, added up.

A household that has moved, refinanced or switched lenders will have gaps. The gaps are recoverable: a lender will produce historical annual statements on request, and a discharge statement from a previous mortgage gives the closing position. Nobody needs to be precise to the dollar. A total that is close is worth infinitely more than a total that was never built because it could not be exact.

Then the smaller sources, which are smaller individually and frequently are not in aggregate. Vehicle loans carry an interest total in the financing agreement and in the payout statement. Credit card statements print the interest charged each month, and a year of statements gives a year of interest. A personal line of credit shows interest separately from principal on every statement. Student borrowing carries its own annual summary.

Four categories, one figure from each, added up across the years for which records exist. That is the outgoing side, and a household that has never done it will find the afternoon it takes to be the most informative afternoon it has spent on money.

The incoming side, and why it looks smaller than it feels

Now the other column. Interest EARNED, from savings balances, guaranteed investment certificates, term deposits and the interest component of any balanced holding.

The figures come from a tax slip, and the tax slip is the reason this side is easier to build than the first. A Canadian household receives a slip for investment income each year, and the interest figure is on it. Old returns carry old slips. A household that has kept its returns has the whole series without asking anybody for anything.

Two things usually surprise a reader who builds both columns for the first time. The first is how much smaller the incoming column is than expected, because interest is earned on balances that are held for weeks and paid on balances that are held for decades. The second is the tax treatment, and it is the subject of the next section.

There is a third thing, and it is structural rather than emotional. The incoming column is measured on money the household already had. The outgoing column is measured on money the household did not have and borrowed. The two sides are therefore not symmetrical in scale and were never going to be, which is why any sentence that invites a family to feel it can earn its way past its own borrowing costs by shopping for a better savings rate is a sentence to put down.

The asymmetry nobody mentions

In Canada, interest paid on a mortgage against a personal residence is not deductible, and neither is interest on ordinary consumer borrowing. That means the money used to pay it is money that has already been through the household’s tax return. Every dollar of interest on the family home is paid with after tax dollars, and the household had to earn considerably more than a dollar to have that dollar available.

On the other side, interest EARNED in a non registered account is taxed as ordinary income, at the household’s full marginal rate. Of the three kinds of investment income a Canadian household can receive, interest receives the least favourable treatment. Nothing is sheltered, nothing is discounted, and nothing is deferred.

Put the two sentences next to each other and the shape of the thing appears. The outgoing side is paid with dollars already taxed once. The incoming side is taxed again on arrival. A household that is paying interest and earning interest at the same time is standing on the wrong side of two tax rules simultaneously, and neither rule is hidden. They simply never appear on the same page.

The registered plans exist partly because of this. Inside a registered plan the second rule is suspended or deferred depending on the plan, which is why the question of which wrapper holds which kind of income is worth an afternoon of anybody’s attention. Registered against non registered works through the ordering.

Compounding runs in both directions

Everybody has been taught that compounding is a friend. It is, on the side where a household owns the balance. On the side where a household owes it, the same mathematics runs in the other direction and with a longer clock.

The reason a mortgage feels as though it never moves in its early years is that it does not, in the sense the household cares about. In the early years the payment is mostly interest, because interest is charged on the balance and the balance is at its largest. The principal portion grows slowly and then accelerates. Nobody hides this. The amortisation schedule states it exactly, and almost no household has ever asked to see one.

The clock is the part that deserves saying out loud. A twenty five year amortisation signed this year is still running in 2051. A household in its thirties signing that document is committing a portion of its income into a decade it has not thought about, at rates nobody can see, through renewals nobody can predict.

This is not an argument against a mortgage. Shelter has to come from somewhere and rent compounds against a household too, with nothing owned at the end of it. It is an argument for knowing the length of the clock before signing rather than afterwards.

What the total is actually for

A household that finishes the worksheet usually feels something before it thinks anything, and the feeling is not useful. Guilt changes nothing and past interest is not recoverable. What the total is for is narrower and more practical.

It sets a scale. A household that knows its own lifetime interest figure has a yardstick to measure every future decision against, and most decisions shrink beside it. A debate about an account fee looks different once the interest figure is on the same sheet of paper.

It identifies the order of operations. Interest paid at the highest cost is the first place any spare dollar does the most work, and the worksheet makes the ranking obvious without anybody arguing about it. That is arithmetic, not advice, and the household can do it without help.

It also settles arguments. Two people in a household frequently hold different beliefs about where the money goes, and both beliefs are usually wrong in different directions. A worksheet built from documents rather than from memory replaces two opinions with one record, and that alone is worth the afternoon even if nothing else changes.

And it makes the long horizon visible. A total built from twenty years of statements is the only honest preparation for thinking about the next twenty. A household that has seen where the outflow went is in a position to ask whether some part of its financing could happen inside arrangements it owns rather than outside them, which is a different conversation and a longer one.

Where this firm stops

This article does not tell anybody what to do about the number. It cannot, and the reason is worth stating plainly rather than burying: a recommendation can only follow an analysis of a household’s needs conducted with that household, by a licensed representative. A page has never met anybody.

It is also worth saying what this firm is and is not certificated to do with the answer. It is certificated in insurance of persons and in group insurance plans, which covers life insurance, critical illness, disability, long term care, segregated funds, annuities and the registered plans that sit alongside them, including an RRSP, a TFSA, an RESP, a RRIF, an RDSP and an FHSA. It is not a securities dealer, it does not manage portfolios, and it does not hold the reserved title that Quebec law attaches to a particular kind of advice.

A reader whose worksheet points toward the strategy of doing a family’s own financing through the values inside a permanent contract will find that subject set out in full at ibcfinancial.com, and in French at financierecbi.com. It is not compressed into a paragraph here, because compressing it is how it gets misunderstood.

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The companion piece is four ways a bank earns, which describes where the outgoing column goes and what it does when it arrives. Registered against non registered works through which wrapper holds which income. Compound interest takes the mathematics on its own. Transparency and compensation sets out what this firm earns and from whom.