Killing the Mortgage Demon

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.

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?

Since When Did I Move to an Upscale Area?

Posted by Canadian Dream on April 29, 2010

I’m seeing lots of ‘for sale’ signs in the city lately, but apparently this is common right now.  What is some what weird is the huge variation on pricing I’m starting to see on some listings in Regina.  For example, there is a similar size house not to far from me listed for $380,000, then another house with about 100 extra sq ft going for $440,000.  Trust me when I say I looked at the pictures for both places and they are not that different inside.

So what the hell is going on?  I suspect we are hitting another housing fever similar to the spring of 2008 when my house value went through the roof and then crashed back down afterward.  If you are curious what that looked like go check out any net worth post with graphs you can see what the bubble of house value did to my net worth.  What gets me about this every time housing values get near the $400,000 range is I feel like I moved to an upscale area, but I didn’t leave my house.  I keep looking around and thinking ‘you paid WHAT for that?’ Even with adjusting for inflation 2% per year my house should only be worth about $205,000 from what I paid for it.

What’s really interesting to me about this is when I talk to any of the new neighbours they are not much different than us.  They make a decant living, but they are not rich.  So how are people paying for these over priced houses?  Good old fashion debt and lots of it.  This is then driving two interesting consequences: one we have a lot of people who are vulnerable to interest rate increases over a five year cycle and second that’s a lot of potential retirement savings being used to pay the mortgage.  No wonder retirement savings rates and balances are crap in Canada.  We are putting everything we have into our houses.

So is this the classic case of unintended consequences in action?  Perhaps the plan to encourage home ownership and boost economic activity, but over the long haul all the government has encouraged is making a mortgage payment instead of making an RRSP contribution.  The net result is we aren’t actually increasing the GDP, we are just moving future home ownership from the future to now and getting a short term boost. Over the long run the banks will do well on mortgages but everyone else won’t be doing much other than paying the mortgage.

At the end of the day I’m thankful for buying what I did when I did it.  That way I won’t be stuck paying off debt for the next decade or two.  I do feel sorry for anyone who is getting in right now since they are losing so much of their future freedom to just a mortgage payment.

In order to keep this from again causing a little bubble in my net worth I’m freezing my house valuation at the Feb. level.  If it goes down from there I’ll adjust it, but I won’t be taking it up.  I might remove the freeze after things settle down again.

So how’s the housing market in your part of the world?  Are they just as over priced as here or have you already seen your peak and are heading down?

Crossing Over

Posted by Canadian Dream on March 31, 2010

Ok, I normally only do net worth updates every second month, but this month is an exception.  I ran the numbers to confirm not my net worth, but rather what my investment net worth .  So in total my investment net worth is $108,300 which is now more than my mortgage balance $107,900.  So as you can see below I hit a cross over point of the yellow and blue lines (click image to see a larger version).

This cross over isn’t nearly exciting of a cross over as being financially independent, but it is exciting to me regardless.  Since it represents my mortgage is on such a decline I could sell every investment I own and nearly pay it off (I would be short the tax penalty from taking out of my RRSP’s).  I don’t plan on doing that, but it is merely an option.

In some regards this is meaningless number with just two lines crossing over on a graph.  Yet I’ve gave it meaning in order to keep me motivated on this path.  I’ve always found I do better with longer term goals is I have little steps on the way there.

So as I go into this long weekend I intend to celebrate a bit on making it to this point.  I’ve got a long way to go, but at least I’m getting there.  (By the way, no posts on Friday or next Monday I’m taking the weekend off.)