paying off a mortgage early (is likened) to giving yourself a forced savings account (Ben Keys)
People assume that owning a home can be a good way to build wealth. They hope that the price of their home will go up over time but they forget that paying off their mortgage early is one of the elements to building wealth through owning a home.
You might be thinking, who are these people who pay off their mortgages early? Actually there is a growing number of people starting to do this and I’m so proud to be part of this group! (https://www.moneysense.ca/spend/real-estate/mortgages/how-i-paid-off-our-320000-mortgage-in-just-six-years/)
Prior to 2014, I was just like everyone else, thinking that paying off my mortgage early was an impossible task that wasn’t realistic and not even on my radar. I’m not sure why no one ever told me that it was possible to pay off our mortgage early or just how much money it would save us over the long run. I estimated that by paying off our mortgage in 10 years instead of 20, 30 or even 40 years, we have saved approximately $20,000-150,000 in interest payments! Now, we are free to do whatever we want with this extra money!! I think most people assume that interest payments are similar to invisible money that they will never see anyway so they don’t even want to think about their interest payments. Sometimes, we view debt in percentages instead of actual dollar amounts.
Instead of just paying the bank money and not noticing how much it is actually costing you...SIT UP, PAY ATTENTION and DREAM of all the things that you could do with that extra $20,000-150,000!!
I think we have listened to the lie that assumes that you will always have mortgage payments for 20 years or longer, and that we have begun to believe this lie instead of doing the math and deciding for ourselves what is best for our situation. Instead of looking at the bottom line that you have a debt that you are making payments on, we tend to only ask "what is the minimum monthly amount that I can afford?" so that I can still continue to buy fun things. It's the childish have fun now, work later idea instead of the reverse work hard now while still having fun and save a bundle for the future with no REGRETS!
My husband and I are just your average middle class people with regular jobs. In fact, my husband went back to University full time to become a teacher during this process and we still put extra money onto our mortgage.
Now here is our story: originally when we first got into the housing market in 2005, we honestly just wandered into the bank because we wanted a line of credit (bad girl!) to purchase a vehicle. And when we wandered into the bank, we were asked if we wanted to see if we were pre-approved for a mortgage and we hesitantly thought “sure.” We weren’t really even thinking about buying a house. As Dave Ramsey surmises, we had been married for about 20 minutes and already we were pre-approved for buying a house.
We then proceeded to ask around about how much houses were selling for. We actually ended up buying a co-workers home for $211,000. Signed the papers in November 2005 and moved in April 2006, which is when we realized that we had accidentally gotten into a once in a lifetime opportunity during the Calgary Housing boom because the price of our home had already gone up $80,000! Initially, we had figured that we would stay in Calgary for a long time, but after realizing that we could get a much larger home for the same price out in the country, we caught the bigger is better fever and wanted more than our beautiful starter home. We wanted our dream home! Suddenly our beautiful home became too small for us. It was at that time, that we also became parents and decided that we wanted to be closer to cousins and extended family in a rural location.
We decided to build a home on an acreage because everyone dreams of an acreage, right!? We ended up purchasing a modular home and saved money by building the basement and attached garage ourselves. Building a new home and doing some of the work ourselves was definitely quite the undertaking!
We did not sell our home at the peak of real estate in Calgary but pretty close. We made a profit of roughly $130,000 in 2 years. Not bad for people who didn’t know what they were doing. This was like winning the lottery and is likely never to happen in my lifetime again!
However, I cringe when I think about how little progress we made on our mortgage principal in those first 2 years. It never even occurred to me to make extra mortgage payments until 2014. I just figured a 20 year mortgage is a 20 year mortgage.
Then in April 2010, we started our 18 year: $256,376 mortgage on our newly built home and completed our last mortgage payment on January 2020!
How did we pay off $256,000 in less than 10 years when we only started putting extra money onto our mortgage in 2014?
We PLANNED, WORKED and SACRIFICED hard the last 6 years! We budgeted! We saved! And we put almost every last dollar and income tax refund onto our mortgage. We were determined to pay it off because we wanted to have it paid off so that we could go on the Mercyship (https://www.financialresuscitationwithruthy.com/post/part-2-how-to-make-the-goal-your-priority) in 2021 and we had an END GOAL in mind.
We consistently put extra money in increments of $400/month to $16,000 another month, starting in 2014 and gradually over six years we were able to pay it off. We had payments of $16,000 because of grant money that my husband received towards going to University. (https://www.financialresuscitationwithruthy.com/post/how-we-got-my-husband-prepared-to-go-to-university-without-any-student-loan-debt)
However, before you even think about paying off your mortgage early, you need to ensure that you are debt free because other debts like credit card debt, student loans or car loans all have higher interest rates than a mortgage. "So, in terms of prioritization of debt obligations, your mortgage is usually your lowest cost and the one you should worry about the least. For people in the 25-35 year old bracket, prioritizing paying off high cost debts like credit cards, student loans, car loans, should be the primary focus." (Ben Keys)
Here are my top ten suggestions of how to make this possible in your life:
How you too, can SAVE INTEREST money on your mortgage:
1. Put any extra cash you have as lump sum money on your mortgage: even starting with just $50/month could take a week or two off your mortgage. For example, we made a lump sum payment of $400.00 which reduced the amount of interest by $800.
Sidenote: when we went to the bank to pay a lump sum payment onto our principal, only a few bank tellers knew how to process this transaction because it is such a rare occurrence. By paying off our mortgage 10 years earlier and ensuring a shorter amortization period, look at how much in interest payments we saved by not taking the usual approach:
Same mortgage of $256,376 with the same interest rate, I estimate that we would have paid: $82,000-105,000 in interest with a 25 year mortgage.
$68,250 to $82,000 in interest with a 20 year mortgage
compared to: we PAID: $47,000 in interest in just under 10 years.
Of course these are just estimates because it is difficult to account for varying interest rates and differing terms (https://www.daveramsey.com/blog/how-to-pay-off-mortgage-early).
Max out your lump sum payments onto your principal: we did this at least twice. This is usually a certain percentage of the original mortgage amount. In our case, we could pay up to $38,000 (15%) on the original mortgage amount without incurring a penalty. Just because it is a lump sum doesn't mean that you only have to do it once a year. You can contribute monthly, weekly or whenever you have extra cash. If you put more money onto the principal at the start of your mortgage, that is better because the bank collects the most interest money earlier in the amortization period because that is when your principal is the highest amount. Make sense? Being consistent is key!
2. Choose accelerated bi-weekly payments: this adds at least one extra payment per year to decrease your interest. We did this and honestly didn’t even notice any money missing from our spending budget. I get paid bi-weekly so I would just save my extra income payment towards that extra mortgage payment. Increase your original payments if you can. It seems like a stretch but you’ll end up saving interest money in the end.
We were so intense about paying off our mortgage that one year we even maxed out the lump sum payments for the year and then proceeded to increase our regular bi-weekly payments. We went from paying $654 bi-weekly to $868 bi-weekly
3. Put your income tax return money directly onto your mortgage. It’s not free money. It’s money that the government has been hanging onto that should have been in your pocket in the first place so be intentional about making your money work for you.
4. Keep investing: continue putting aside money towards RRSPs and your children's education funds. Don't forget to sign up for those employer matching RRSPs (free money). When you put your money into RRSPs, you will receive 20% of that amount back from the government in your income tax refund which you can also put onto your mortgage. Make good use of those precious early years of receiving compound interest on your investments, even if it is just a small amount. Remember that a mortgage is still a debt and there is no guarantee how much interest you will earn on your investments but you ARE paying interest on your mortgage to the tune of $40,000 or more on a $200,000 mortgage.
Your home shouldn’t be your only investment
Make sure that you are still investing in retirement because another guarantee in life is that you will retire! Your house is not always guaranteed as a great investment. There are many factors at play such as the location of your home and the volatility of the housing market when you do sell (https://www.debt.org/real-estate/mortgages/how-to-pay-30-year-mortgage-in-15-years/).
5. Use a Visual Motivational chart: watch your mortgage principal decrease. Make a chart to go on the fridge so that you can constantly be reminded of your progress!
We found it SO EXCITING to see the amount of principal and interest both go down at consistent amounts! The ACTION of paying off your mortgage early is MAINLY BEHAVIOURAL based not math based. Paying down your mortgage is about building good habits so that you can become financially savy!
6. Get a good Interest Rate: 4% mortgage interest rate sounds low especially compared to a 20% interest rate on a credit card. But remember that even a half a percent can still add $5,000 in interest to a five year term on a $250,000 mortgage. Be watching for good interest rates because you can renew your mortgage even up to 120 days before your mortgage comes due without paying a penalty. We did this once when renewing our mortgage when the bank contacted us about a good interest rate because they wanted to keep our business instead of having us shop around. It was a smart move on their part because it is a pain to switch banks but I would still do it to save $5,000. Be strategic when renewing your interest rate because it can save you thousands of dollars. Put the date in your planner of when your mortgage comes due and then mark a date 120 days prior to that to start looking and shopping around to get the best interest rate. Think about how long we spend shopping for a bargain on clothes to save $100. You might possibly be interested in bargain shopping to save $5,000!
7. Have a good credit history and score:
Something as simple as paying your bills on time, can impact your credit score. For some reason if your cell phone bill is tardy, it affects your credit score more than if your utility bill is late, so for goodness sake, pay your bills on time. Set up an online schedule that reminds you to pay your bills. I use the Cozi app to remind me. The bank offers you interest rates based on your credit score and credit history. If you have a low credit score, you are a riskier person to loan to so you are penalized with a higher interest rate. If you default on your payments, the bank will have received most of their interest money upfront. Remember your credit score is more of a reflection of your debt history combined with your payment history and is a moving target that you control with your actions. Be smart, pay your bills on time.
8. Be on the same page with your spouse: Every time you are tempted to spend money on something else, remember what your goal is. It’s to pay off the house sooner so that you can... (what is your dream?).
Being debt free isn't the ultimate goal, it's just the beginning of the freedom and flexibility to achieve your financial goals!
If money is really tight and someone in the home can get a side hustle, even $500-1000/month of extra money to put on the mortgage is significant.
9. Evaluate your NET Worth: is it increasing or decreasing? Just because you "own" a home with a mortgage, doesn't mean that you have positive net worth. Especially if you owe the bank more money than what you have currently paid on your home so far. For those that want that millionaire status, calculate your net worth. Having a paid off mortgage can help you accomplish this millionaire status faster.
10. Get your Kids on Board: many people shelter their children from learning about their finances. Kids need to learn about finances and how to plan and prioritize. How else will they understand unless they see it in action in your everyday lives. Throwing a book at them when they turn eighteen isn't going to stick. Giving them advice but not doing it yourself isn't going to stick. Show them what to do daily. Show them daily good habits and those will stick. Verbalize your financial goals to your kids and they will keep you accountable. People go on Instagram to find a community to keep them accountable, if they want to achieve a weight loss or a financial goal however your children will definitely keep you accountable and can point out YOUR inconsistencies from across the house!
Revel in the freedom of not having a house payment especially right now when many people are needing mortgage deferrals during the COVID pandemic. I’m thankful that I have that extra $1600 that I would normally be paying for my mortgage, to put towards savings.
So, back to our savings, we SAVED approximately a year’s take home pay that we won’t have to PAY over the next 10-15 years. Hooray!! For us this newfound freedom meant an extra $1600/month to USE on whatever we wanted plus the additional lump sum money that is also now in our pocket. We could have bought a fifth wheel trailer over these past couple months. We could have purchased a boat, or gone on a fancy holiday if COVID wasn’t happening. We could have purchased another vehicle. Instead, we have chosen to save up for a family trip of traveling and serving aboard the Mercyship in 2021. But that’s the bottom line: you can Save, Invest, Spend, do whatever you want because you are no longer tied down to your mortgage payments.
Now that you know that it is possible, I want you to dream about some financial goals to work towards. What could you do with an extra $1600/month?
Follow me on Instagram or Facebook as we save and work towards our goal of living on the Mercyship for 2 years as a family!!