Posted by Dave on June 15, 2010
Has anyone ever told you that your house is the best investment you could ever make? I’ve heard this several times in my life and was always skeptical about it. For something that costs as much as it does, you’d hope that it would be a good investment, but to me it really isn’t.
I don’t look at my house as a great investment, or really as an investment of any kind. I look at the significant money it is costing me to pay down a mortgage as a prepayment for housing that will hopefully take me through the rest of my life. I have to live somewhere, whether it be some sort of rented room, an apartment or a box (which really isn’t an option if I want to live in Canada – unless it’s a really nice box). All of these housing options are going to cost me money. Renting a house or apartment will cost money forever – if I don’t pay my rent, I won’t be welcome to stay. From a cash-flow perspective, a large upfront cost is much more palatable to me than payments to perpetuity.
In the same vain, buying a house will cost money in the form of property taxes and maintenance, but once a house is paid off, these costs are fairly low. For me, monthly expenses would amount to approximately $300 per month (property tax and condo fees) to live.
My end goal is to have a house that is worth as much money as it cost me to attain it (up-front costs plus improvements and interest). Part of the reason I have accelerated the payments on my mortgage is to significantly reduce this cost of ownership. One year ago, I amortized my mortgage over 35 years, and so far have cut approximately 20% of these years out, with the intention of paying the entire house off in around 6 years. If I paid regular payments over the entire 35 year amortization for this place, I would have to pay for the house twice.
I understand that I could invest the almost $200,000 I’m going to end up spending on my house and be making a reasonable return, but I’d much rather be debt-free after 6 years than shackled with an enormous debt. Having no debt would provide a significant amount of freedom in my career and lifestyle that would not be afforded by having to pay my lender over a longer period of time.
With all this being said, after a year do I regret buying a house? From a spending perspective it’s pretty crappy to be allocating 25% of our spending to paying down the mortgage every month, but when I look at it that over the past year, I have pre-paid approximately 2-3 years of rent in my city.
I’m wondering how you look at your house? Do you utilize the tax-free capital gains afforded to your residence to gain on sales? Is your house your best investment?
Posted by Canadian Dream on June 10, 2010
I’m often amazed how some people feel they aren’t saving much of anything. Then I ask them about how much are they paying off in debt. That is often a big number, so I point out that debt repayment and saving both increase your net worth. So in some regards debt repayment is the same as savings.
For example, I’m focused on paying off my mortgage right now. I’m currently doing my regular payments plus lump sum payments just about every month. Does that mean I’m not saving anything in a month? I personally feel its the same, since having no mortgage is just as critical to my plan as having a good size pool of money invested. Yet on the other hand, are you really saving if you are just making the minimum payments on your credit card bill? In this case the increase of your net worth is minimal so you could potentially argue that it isn’t like saving.
Thus we can be into a interesting paradox where some debt repayment could be like savings, while other debt repayment may not be. So what debt repayment is like savings? At this point it might be easier to take a step back and determine one of the core tenets of personal finance: are you spending less than you earn? Yes? Good. Now are you still spending less than you earn if you consider interest payments as spending? Yes, good job. No, then you are not saving overall. In the end if your interest payments shove you over what you make in a month you are in a debt spiral. Your debt will continue to grow regardless of your ’savings’. So you would need to take drastic action to free up enough cash flow until you are spending less than you earn.
In the end, paying out debt might be like savings but in general I would say that only really applies if you are making significant payments towards the principle. Otherwise if 95% of your payment goes towards interest, calling it savings is deluding yourself. But what if it is tax deductible debt? The math gets more complicated to determine what you are paying in interest on a net basis, but ultimately the same idea applies.
So would you call debt repayment the same as savings? Also does it matter where the debt came from?
Posted by Canadian Dream 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.
- 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.
- 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.
- 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.
- 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.
- 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?
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Filed Under: Debt
