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Wednesday, September 20th, 2023

34, mortgage and debt free: Here’s how

Trusted  Mortgage Broker VancouverOver the past 18 months Moneyville has followed my early retirement journey which started as a dream to retire when I was 45. I’ve been working hard over the past few years to make the dream come true and I’ve managed to bring the target down to Freedom 42, just eight years from now.

I’m a 34-year-old engineer living in Regina with my wife Rhea and our two boys. By my birthday in October, I will be completely debt free: No mortgage, no credit card debt nor any balance on a line of credit. If I was to sum up how I’ve been able to do it, it would be a well-defined plan, a strong focus on reducing my debts and the discipline to stick to the plan as much as possible, while coping with what life throws our way.

My last Moneyville update was in February and my net worth was at just over $490,000. Now it’s $523,000. My four-bedroom, two-storey house in suburban Regina has a market value of $377,000 (and a remaining mortgage of $18,000). My investments are worth $164,000. They haven’t done all that well during the stock market roller coaster this year and in fact, are $1,000 above where they were in February despite my contributions. Most of the gain has come from paying off the mortgage.

Related: Retiring at 42: What do I do next 

We bought our house in 2006 and although the $150,000 mortgage was small by today’s standards, we were a one-income family with a small child and I had no idea how I would ever repay the money. The one smart thing I did was reduce the amortization to 25 years from 30. This increased my monthly payments by less than $80, but meant I would pay off the debt off that much faster.

I didn’t think about the mortgage much for the next few years as we had a second kid and focused on my career.

I work for SaskPower and by 2009 my income had grown modestly. I took advantage of an option to increase my mortgage payments from $888 per month to $1,100. It wasn’t a huge amount, but this cut my amortization by another five years because the extra money was being applied to principal. In retrospect this was also smart because it was a painless way to pay down the mortgage. Once I upped the payment I forgot about the fact that I had $222 a month less to spend. According to a recent report by the Canadian Association of Accredited Mortgage Professionals (CAAMP) only 23 per cent of people with mortgages increased their monthly payment in 2011. My advice is that if you can find even just a little bit, go for it.

By the end of 2009 I had been elected to the Regina Public School Board as a trustee, a paid position that brought in a bit of cash I had not been expecting. I wondered what to do with the money and it struck me that what I wanted most was to be mortgage free.

So I started making lump sum payments. At the end of every month I took any leftover cash in our joint account and added it to the mortgage. My mortgage at Scotiabank allowed me to do this anytime, but many people may have to do it annually or semi-annually. When this was all put together — $222 more a month, lump sums payments and some cash from my wife’s daycare business — we tripled our mortgage payment from $1,100 to $3,600. This brought the amortization down to only four years.

In 2010 and 2011 my raises went into increased mortgage payments. Since I never saw the money in my pocket, I didn’t miss it. In fact, between 2009 and 2012 I raised my mortgage payments four times until my basic monthly payment is the current $1,940. The lump sum additions bring the average payment to now more than $4,550 per month.

In the end, a 25-year amortization has come down to just six years. While it’s taken a lot of discipline to stick with the plan, it has saved me more than $85,000 in interest and means that, as of October, and 19 years early, I’ll be paying myself, not the bank.

Related: Freedom 45: The math behind my retirement plan 

It might seem that this plan requires lots of suffering, but it didn’t, since we have always lived on a fairly lean budget. Instead, it involved thinking about what we really want right now and what could wait a few years. So yes, we did a trip to Hawaii for our tenth anniversary while paying off the mortgage, but we decided to wait on buying a new car and installing cork floors in our kitchen until after the mortgage is paid off.

Yet I had to wonder was paying off the mortgage the right thing to do, instead of investing, so I contacted Robert McLister, editor of the Canadian Mortgage Trends blog. McLister says that at a time when interest rates are low, paying down your mortgage is one of the best risk-adjusted ‘investments’ you can make.

In the end, doing anything to pay off your mortgage sooner is better than nothing. In fact, according to that report by CAAMP, only half of mortgage holders ever increase their regular monthly payments or make lump sums.

Thinking back on it, it was easy to add my annual raise into the mortgage. You can’t miss something you don’t see. Even $50 a month extra can matter. On a $400,000 mortgage with 5 per cent down payment, 30 year amortization and 3.99 per cent interest rate, that $50 extra a month will reduce your amortization by 9 years and save you more than $73,000 in interest.

If you don’t feel comfortable increasing your regular payments you can always add in a yearly lump sum. You are typically limited to only 10 to 20 per cent of your original mortgage balance but most people rarely get close to that amount. A $1,000-a-year prepayment will reduce a $400,000 mortgage by 2 years and save you more than $27,000 in interest.

McLister suggests that more people don’t use their prepayment options for a variety of reasons.

“Some people don’t have the disposable income, some prefer to spend instead of save and some have higher returning uses of cash. Others simply don’t understand the math.”

So next time you are looking for an investment, don’t overlook paying down your mortgage. It might be just what you are looking for. I know it worked well for me.

After the mortgage is paid off in October, we are planning a small party to celebrate that initial victory and will then start planning our reward trip for next summer — a month-long vacation in the Maritimes.

You can follow Tim Stobbs attempt to retire early on his blog Canadian Dream: Free at 45.


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