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Saturday, April 29, 2017

Killing the Mortgage

Posted by Tim Stobbs on May 27, 2009

So after getting a new mortgage I’ve been flirting with the idea of paying it off completely over the next five years.  That way I would be completely debt free by 36 and it would also mean I only had a mortgage for a total of ten years.

On the positive side of the debate:

  • Debt free has a nice ring to it, but it is also practical in the regards the freedom to change jobs since our spending drops off to under $2000 a month with no mortgage payment.
  • After it is paid off I end up with a huge cash flow to invest or even spend a part of it on ourselves.
  • Technically I do have the prepayment privileges to actually do this and have no penalties.

On the downside of the debate:

  • I’m putting most of my cash flow to one goal.  Paying off the mortgage would consume almost all of our cash extra cash flow over the next five years.  Basically I would only be investing in my pension and $200 a month to RRSP’s and then all the rest to the mortgage.
  • My net worth is even more tied to my house than it already is.  As pointed out at various times on this blog and others that limits my options.

Then there is the other thought running around in my head.  I could always do a Smith Manuveour to try and reduce those downsides.  I still haven’t decided anything yet as I have to discuss the idea with my wife a bit more.  So what else would you add to these lists?  What would you do in my place?

Comments

6 Responses to “Killing the Mortgage”
  1. I would consider some extreme ranges of future events. For example..the economy improves from here and the “bubble” continues on…or we see another 1929 type situation and the value of your house plunges.

    Suggestion: Search for Decision Analysis…look for Kepner Trego (spelling?) on the web. They developed a good method using Musts and Wants and putting numbers to each factor. It forces one to think things through and most important to consider…what if the worst happens? Am I OK with “this particular choice” under those circumstances. As meer mortals we tend to not what to look at the worse case scenario when making decisions.

  2. zeromoney says:

    I’ve had a similar thoughts (my mortgage payments are up enough to pay it off completely in 8 more years) however I’m continuing to aggressively contribute to my RRSP and max my TFSA. I plan on using the returns from my RRSP to further pay down my mortgage, or possibly contribute more to my RRSP for years where I didn’t have it maxed.

    I think it all comes down to, how and where can you make the most money? Will contributing those extra mortgage payments to your RRSP give you a good enough tax return, to re-invest that into your mortgage?

  3. George says:

    We’re considering doing pretty much the same thing – if we are aggressive, it’s possible for us to pay off the mortgage within 4 years (by age 35), or less aggressively within 6.5 years.

    For our situation, there aren’t a lot of negatives to an aggressive paydown. The house will always be a large part of our net worth, simply because we need a place to live. We like our home and want to stay there for the long term.

    We’re already maxing out our RRSPs and TFSAs, and contributing enough to the kids’ RESPs to get the maximum government grant. What this means is that our extra cash flow can be put into our mortgage, or into “lifestyle” spending. We’ve decided to take aim at the mortgage, primarily because having it fully paid off will give us tons more flexibility on the “lifestyle” end of things, after the payoff.

    We’re able to accomplish these goals because of two main reasons: we bought a reasonable house that was well below what the bank said we could “afford”, and our incomes have been high enough to cover basic expenses, savings, and enough lifestyle spending to keep us happy.

    As Dave Ramsey would say, we’re living like no one else, so that one day we can live like no one else.

  4. SmithMan says:

    Wondering if you could devote a few posts to the smith manoeuvre?

    With the lowering interest rates and having only a few grand left in a heloc on our primary residence we took the plunge and bought another place. We’re going to keep the older place as it’s located in an ideal rental location (schools, universities, groceries etc). Our financial advisor has us writing off the interest on the rental income as you would expect. In addition to that the recommendation is to regularly withdraw equity from the new principal house and invest it conservatively so that the new house mortgage is also tax deductible. As it stands both residences will mortgaged to the hilt while building an investment portfolio.

    My fear is that this sounds a little too good to be true and that I may be not be comprehending the risks accurately. Thoughts?

    Thanks,

  5. Canadian Dream says:

    CM,

    Interesting idea, thanks for the reference.

    Zeromoney,

    Good point. The mortgage isn’t a great % return right now. Yet that is partly why I’m considering paying it off, the rate is cheap so killing off the principle is easier.

    George,

    Thanks for the story. It helps a bit to hear what others have done.

    SmithMan,

    I generally consider the Smith Maneuver a bit of over done topic on PF blogs so that’s why I’ve generally avoid writing on it. Yet given I brought it up, I’m willing to do a post or two on it.

    Your adviser’s advice sounds a bit fishy to me. Your taking on a huge amount of risk by doing double SM’s. Basically you have no equity protection from a dropping home value and if interest rates go up too fast you could also find yourself on a very tight cash flow. I would personally just keep the rental as a rental. Yes as a small business you can write off the mortgage interest, that’s fine. I would be careful about using it’s equity as a SM.

    Also in general check your cash flow on how much money you borrow. Ideally you should be able to handle at least double the current interest rate on your loan. A SM looks easy now since rates are low, but if they go up you can get screwed.

    Tim

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