18 Oct 2022

Is Compound Interest Good or Bad?

Fixed Rate or Variable Interest Rate

Mortgage brokers should have a clear understanding of the benefits and disadvantages of compound interest to successfully assist their clients through any questions or concerns that may arise. Compound interest can be both a good and bad thing for borrowers depending on their independent financial situation, capabilities, goals, and loan terms. 

Compound interest has a wide variety of potential benefits that a borrower has the opportunity to receive, including the following examples:

  • The ability to increase their funds quickly
  • The ability to reinvest returns made on investments or properties through the compound interest accumulated
  • The ability of a client to make money on an original deposit and the interest the account has accumulated

While compound interest has countless benefits for a borrower to potentially receive, there are also some disadvantages that clients should be aware of before proceeding with a compound interest account, including the following examples:

  • Has the potential of proving to be more expensive than a client originally thought
  • Has the potential of working with a low-interest rate which can hinder a client’s ability to quickly grow their funds

Compound interest can be a great way for clients to begin investing in and financially planning their retirement goals. However, a low-interest rate can place a client at a disadvantage due to the extended timeframe it can take to successfully grow their accounts funds. 

It is important for mortgage brokers to understand that their clients will have more luck with growing their funds through compound interest by starting their accounts as early as possible. This is because the longer a client has a compound interest, the more their funds will increase.

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