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Condo GICs: 0.25% = 19.53% – No, This Isn’t the “New” School Math

Rather, this equation demonstrates two well known financial concepts: compounding and leverage. Don’t let them fool you; even if the Bank has a “special” rate that is “only” 0.25% worse than one of Lambda’s 25+ Financial Institutions, Lambda’s extra 0.25% actually translates to 19.53% more interest through the power of compounding and leverage in the context of Condominiums. But how? Keep reading.

4.25% vs. 4.50% Interest Rate

Compound Interest

Interest Compounding is finance’s best ally. Imagine a $100,000 investment; at 4.25% in year-one this would generate interest of $4,250, whereas at 4.50%, this would generate $4,500 in interest, being “only” an extra of $250. But wait – that $250 extra interest is 5.88% greater than $4,250 – not 0.25%! For those scratching their heads or wanting to check the math: (4,500 – 4,250) / 4,250 = 5.88%.

Would you accept lower service from any other provider that cost 5.88% more? Probably not.

But it doesn’t stop there. Remember, in year-two the interest can then be reinvested, such that in the 4.25% and 4.50% scenarios there would be $104,250 and $104,500 to invest respectively in year-two. This would generate $4,431 and $4,703 in interest respectively, being an extra $272. $272 is 6.14% of $4,431! 

Reserve Fund Time Horizon

Condominium reserves and investments are there to replace long-lived assets: Buildings, roofs, windows, etc.; so, lets fast forward to Year 25. That 4.25% investment would be generating $11,540 interest in Year 25, whereas the 4.50% investment, through Interest Compounding, would be generating interest of $12,924, being an extra $1,402 or 12.15%!

If this were an infomercial, at this point there would be a pause, and a deep James Earl Jones type voice would say “But wait – there’s more!”: Leverage. Leverage in this context refers to the amount of reserves invested relative to the annual reserve contribution. Remember that buildings, roofs, windows, etc., and the reserve funds needed to replace them when needed are long-term assets. The reserves invested could be anywhere between 1-10x the annual contributions, depending on where the Condominium is in its life-cycle. To illustrate this, a somewhat-mature reserve fund may have $300,000 in investments with an annual reserve contribution of $30,000 – translating to 10x leverage.

Real-Life Condo Reserve Expenditures

Now, in fairness, reserve funds don’t just accumulate. Condominiums need to use the funds to replace the roofs, windows, etc. as needed. Using real-world Condominium reserve contributions and expenditures, and the 4.25% and 4.50% investment examples, by Year 30, through Interest Compounding the 4.25% Investment would be generating $16,701 in interest, whereas the 4.50% investment would be generating interest of $20,755, an extra $4,054, or you guessed it, 19.53%.

This is the true benefit Lambda brings to the table with “only” a rate difference of 0.25%, imagine if this rate difference was 1.20%, or even 2.00%. With some quick information, we can easily do this same transparent analysis for your Condominium. You can take that to the Bank… actually, after the analysis, I’m sure you won’t!

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