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Monday, March 27, 2017

Killing the Mortgage Demon

Posted by Tim Stobbs on May 26, 2010

Paying off your mortgage is rather unexciting as an investment, but in the long run can be hugely beneficial since having no mortgage is excellent for most retirement plans and often just a good investment depending on interest rates (since you are paying it in after tax dollars).  The only problem with paying it off is it feels like a marathon race to kill off that demon since your payback horizon is typically 25 years or greater.

So how can you speed up the death of your mortgage?  Well here is my handy guide.

  1. Get Less Mortgage – The ideal way to start off is to have a smaller mortgage in the first place.  So avoid taking on too much house, when in doubt go cheaper and upgrade as you need.  The ideal case is to keep you mortgage to less than two to three times your household pay.
  2. Get a Flexible Mortgage – When you are planning to pay off your mortgage faster than 25 year or 30 years you better to be sure to have some flexible options from your bank to get there.  So beyond shopping for an interest rate also compare lump sum prepayments (when and how much), double up payments, and increasing your regular payment.  I know when I renewed last year the breaking point for me was Scotiabank was offering a 15% lump sum payback during any point of the year, while Royal Bank was only offering a 10% lump sum (Guess who I picked?).  For maximum flexibility you might want to check out ING Direct who offers a stunning 25% lump sum option.
  3. Pay a Little More Often or Extra – Check out the difference of either making payments every two weeks instead of twice a month especially if you get paid that way.  You end up with an extra payment a year which helps a lot.  Or consider increasing your payment a little bit to drop your amortization down by five years.  Often the amount isn’t that much and can hugely save you interest.
  4. Even a Little Lump Sum is Good – People often grossly underestimate how much a few lump sum payments in your first five years of your mortgage can speed up its death.  In the world of compound interest on a mortgage the idea is to really put anything you can in that first five years and you will see your amortization period drop like a stone.  I know I didn’t put all that much on mind for the first few years, just the odd $1000 when I could spare it.  That was even enough to drop my amortization by four years.
  5. Get Over the Hump – Once you get to the point when over half your regular payment is going to principle rather than interest you are on the downward swing of your mortgage.  This is a exciting point to get to since you can really start to see your principle start dropping even without extra payments.  So if you add the odd extra payment you will really see the results.

It can be a long and lonely road to kill off our mortgage demon, but if you keep it up it will start to die.  I know I started working on my first mortgage just over six years ago.  Now we are working on the home stretch and potentially could be mortgage free in as little as two more years.  Even if I took my time we could still easily pay off in less than 10 years in total. Either way, it’s certainly a hell of a lot shorter than that first 25 year amortization I signed up for.

So how long did you take to pay off your mortgage? Or how long do you hope to have it paid off in?

Comments

14 Responses to “Killing the Mortgage Demon”
  1. Robert says:

    When we originally considered signing up with Manulife One, their online calculator suggested we could pay off our mortgage in 8 years. We have focused more on investing than in paying off debt, but I think we’ll still be done in 8 years. Apparently, that saves us tens (if not hundreds) of thousands of dollars in interest payments.

    Besides offering the ultimate flexibility (no min. or max. payments), we’ve greatly benefited from having a variable rate, as well. Interest rates have been low recently, which has allowed more money to go to principal, rather than interest.

  2. Adam says:

    In regards to your first recommendation, just keep in mind that the cost of upgrading is substantial. Selling\Buying\Moving costs. Obviously, buying with your future in mind is important as you don’t want to be upgrading to often – eroding away any capital gains with the costs involved in upgrading. It cost me nearly 25K to sell and upgrade 3 years ago.

  3. deegee says:

    I paid off my mortgage in 19 years after refinancing it after three years. My original loan was at 10.75% (5-year ARM) while the refinanced one was at 6% (1-year ARM). I recovered the closing costs on the refi in just under 2 years.

  4. Jon Snow says:

    For us, paying the mortgage off means that we can live very comfortably on a single income. So the spectre of one of us losing our jobs isn’t as scary as it was before. Dual incomes, coupled with no mortgage is the foundation of our early retirement plans. Just a year and a half until mortgage freedom – we will have paid it off in just 10 years.

  5. Canadian Dream says:

    @Adam,

    Yes there is an issue of upgrading too often and eating into your money. I suggest thinking about the next five years or so and buy for that. Anything longer is a of a waste since you might not need the house for what you thought.

    Tim

  6. Alf says:

    My wife and I made a decision back in the 80’s to pay off the mortgage before we had kids. We did this when interest rates were 15-20%. We paid lump sums and started out with a 10 year amortization, we paid off the mortgage in five years. Mind you we did not do much of anything else. It has been nice though to be mortgage free while raising kids.

  7. deegee says:

    Oops, I meant to write that I paid off my mortgage in NINE years, not 19.

  8. The Soup says:

    These are all great tips. The key is to keep focused. Anyone can slay a mortgage. You just need to keep paying anything extra that you can, as often as you can, towards it.

    We paid ours off in just over five years. A big motivator was calculating how much money we would otherwise be giving the bank in interest payments over the full term of a mortgage. We did not want to pay the banks anything more than I had to.

  9. JMK says:

    We’re making a threefold attack on the mortgage:
    1. Payments are made automatically every other week (not twice monthly), which means 2 full extra payments a year.
    2. When we signed up for our mortgage those payments were going to be some odd number like $743.29. Before we left the bank we had them increase the payment to an even $800 every 2 weeks. Without “finding” extra money we’re always paying and extra $55 every other week.
    3. Extra payments whenever possible, but at least once a month. Rather than accumulating the funds for many months we make an extra payment ASAP to get the principle down earlier to maximize the benefit. The other reason to do it quickly is that once the money’s been transfered we can’t have second thoughts and find something else to spend it on.

    By increasing the frequencey of the payments, rounding up the standard payment and making additional payments when ever possible we hope to finish off our mortgage in 9 years rather than the full 25 over which the load is amortized. We might have done it in 5yrs if we weren’t also maxing out our retirement accounts, saving for kids educations and trying to travel on a semiregular basis. Too many places for the money to go but at least paying down consumer debt for useless stuff isn’t one of them!

    By choice we live on a really barebones budget most of the time, spending ~55% of our take home pay. The rest goes to all the extra payments and savings listed above. Travelling now and still retiring early (~55) means we skip a lot of other stuff people consider standard spending. New cars, cable, eating in restaurants etc just aren’t our priorities so we don’t feel deprived.

  10. JMK says:

    Meant to say paying every two weeks means ONE extra payment per year.

  11. ghostryder says:

    I have a small quibble with #2. There is no point in having more generous prepayment options if you know you are unlikely to make use of them. If you are comparing 2 mortgages with the same rates, ok, then take the better payment options. But if one has a lower rate and the other has a higher rate with more generous options, options that you are unlikey to be able to make use of, you might as well take the lower rate.

  12. coffeeman says:

    What I see is #1 is extremely hard for most people since average income in some areas is about $50,000 – $75,000 and single family or starter homes are in the low $300,000’s. All some people or couples can do to get into these homes is save for their 5% down and amortize over 35 years.

    JMK makes some good points, and #2 makes huge money sense as “rounding” your payments take months off your mortgage. Even a basic $350,000 mortgage with payments of $800/bi-weekly and you increase 1% (or $8 more each payment) every year, you will save $45,800 in interest costs and reduce your mortgage by almost 6 years!

  13. Marilyn says:

    Our mortage will be paid off in 2 years, and we took out a 15 year mortage. We will be 50+ in that time, and we are looking forward to living with no rent or mortage at all, working until we are 60, so we can enjoy the next 10 years while we are still relatively young, and not seniors yet, and travel etc. And, the value of our home has double in the past 10 years, so if we sold it, we would make double what we paid for it! Exciting, except that we like the house we got! Security is very important, and we’ve both said we do not want to be seniors, living on a fixed income, and still paying off a mortgage or worse, renting. So pay off your mortgage as fast as you can; you really don’t know what’s in your future. At least you will have a roof over your head!

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