Today we’re sharing the story of Owen and his family. Find out what happened when they bought their house in the midst of tough economic times.
When we bought our first home it was in the middle of the financial crisis. Our purchase came with a $240,000 mortgage. It was a ridiculous sum of money. It also seemed like a very risky time to buy. People were being laid off, the stock market was tanking, and we were taking on a massive amount of debt. It was the largest amount of money we had ever owed.
Financially, we’re pretty risk averse. We didn’t like the idea of owing someone a large amount of money. We knew we wanted to be mortgage free one day, but our dream to pay off the mortgage early started as a joke. We’d talk about it. We’d laugh. It seemed impossible.
That all changed when our cheapo mortgage provider started charging us for amortization schedules. If we wanted to make a lump sum payment against our mortgage, our mortgage provider would charge us a $60 fee for an updated amortization schedule.
To avoid the fee, we built our own amortization schedule in excel and started to play around with the lump sums. It was exciting to see how the principle would drop with every extra payment.
Could We Really Pay Our Mortgage off Sooner?
We began to see if there was a way we could pay off our mortgage early. After re-working the numbers a few times we realized that it wasn’t a joke anymore. We really could pay off our mortgage early.
Setting Our Goal
Our initial plan was to have the mortgage gone in 7 years. It would require aggressive savings each month. It would require all our non-retirement money. It would require all the shares in our employee stock purchase plan. It would also require some serious budgeting. We would essentially have to double our savings rate*. But it was possible.
We broke our goal down into four month chunks. Every four months we would sit down and review our finances. Every four months we’d make a lump sum payment. Ever four months we’d see the principle drop. It was highly addictive.
Making Changes
Having the crazy goal of being mortgage free in seven years was very motivating. We’d always been good at saving but we would need to do more if we were going to get the loan paid off so soon.
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We managed our budgets separately but encouraged each other to find new ways to save. We had to make some big changes to reach our goal but we did it together. We fed off each other and challenged each other.
Here are some of the places we cut expenses:
- Created a cash food budget – Save $200/month in unnecessary impulse purchases
- Biked to work – Save $300/month and lots of exercise!
- Got rid of gym membership – Save $75/month; biking took care of exercise
- Cut down on travel costs – Save $1,000-$3,000/year thanks to credit card churning and switching to basic travel
- Shopped around for insurance – Save $80/month after negotiating home and auto insurance
- Learned to cook/bought less take-out – Save $60/month due to fewer pizza/Thai food orders
- Brought lunch to work every day – Save $200/month. Go leftovers!
- Bought coffee only as a treat – Save $80/month by making coffee at home or at the office
- Made a restaurant budget – Save $200/month
- Bought a modest economy car – Save $500/month in reduced car payments, insurance and maintenance
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h3>Maximizing Employer Matching First
Before making lump sums against the mortgage, we always prioritized whatever employer matching we could get. Employer matching on retirement plans and employee share purchase plans are easy money so it made sense to us to fund these programs before putting extra money toward debt. Even if it was small, we always made sure to maximize these programs first
Invest or Mortgage? Do Both!
There’s an endless debate between paying off the mortgage or investing.
We in fact did both. Part of our monthly savings went towards the mortgage and part went to investments**.
In Canada, we have a tax advantaged account called the Tax Free Savings Account (TFSA). It’s funded with after-tax contributions (max of $5,500/yr) and grows tax free. The name ‘tax free savings account’ is a bit misleading. Money within a TFSA can be invested too.
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The other advantage of a TFSA is that money can be withdrawn at any time and without penalty.
It’s the perfect account to build a mortgage payoff fund.
We invested money each month in our TFSAs. When our total investments in our TFSAs equaled our mortgage, we pulled the trigger and made the final payoff.
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Motivation Makes A Difference
When deciding whether to invest or pay off the mortgage there are a few soft benefits that need to be considered.
Just like using the ‘snowball method’ to pay off debt, paying off your mortgage early might not be the best “mathematical” option, but there are some other benefits that make it interesting.
First, we found it extremely motivating to pay off our mortgage early. This helped us make all sorts of lifestyle changes that we probably wouldn’t have made if we were just investing. This motivation helped us save $1,000’s more per year.
Second, now that the mortgage is gone, we’ve kept all our thrifty habits. As a result, we’re putting much more money into investments each year and we’ll need much less when we eventually retire.
Third, paying off the mortgage early has also given us the ability to be very flexible in our careers. Monthly expenses without a mortgage are very low. This allowed me to take two paternity leaves when my daughters were born. In total, I took 10 months of unpaid leave. These leaves weren’t planned but with our low monthly expenses we were able to take advantage of that opportunity without much worry.
From Seven Years to Just Five
Of course, things don’t always go according to plan. In our case, we got lucky. This helped us pay off our mortgage even faster.
Unexpected raises and bonuses went straight towards our mortgage.
Our strategy to invest a portion of our savings also helped. There was even a little left over in our investment account after the final lump sum was made.
In the end, we made an average of $48,000 in lump sum payments each year. The final payment came out in 2014, five years from the day we bought the house.
We’ve been mortgage free ever since.
* Income Details: We were DINKs during our mortgage payoff phase. Our first daughter was born 2 days after we made our final mortgage payment. We both made middle management salaries. Not ridiculous by any means but certainly above average. That helped us have a decent savings rate to begin with.
** Mortgage Details: Mortgage rate was 3.79% and paid with after-tax dollars (interest isn’t tax deductible in Canada) so that’s equivalent to around 5.4% pre-tax. A pretty good risk free return but not as good as investing in equities, which is why we chose to do both.
Bio: Owen is an avid traveler, father and personal finance geek. He founded PlanEasy Inc. to help make financial planning easy. PlanEasy provides inexpensive financial planning advice entirely online. Owen writes about personal finance topics on his blog
I really love the idea of biking to work. 🙂 I just started working remotely, which I did for a number of reasons, but the decrease in commuting costs has been a huge plus. 🙂
I think you really can do nearly anything when you set an actionable, smart goal. If you want to pay off your mortgage quickly, it’s possible, but it requires planning and plenty of lifestyle adjustments, too. Congrats, y’all!
Biking to work is fantastic. Originally it was just going to be for the summer but after one week we were hooked. Now we bike commute year round.
Its true that goals can make a huge difference. We’re still amazed at the progress we were able to make because of our goal. Thanks for your comment.
Great job, Owen! Thanks for sharing, Laurie.
Owen, I’m so happy to hear you were able to both pay off your mortgage earlier (7 years would have been early) and invest. The debate from a mathematical point of view is kind of silly to me. There is no way to explain the psychological boost of having no mortgage. Perhaps the one word you used explains it best – flexibility.
Thank you Mrs. Groovy!
The psychological boost is huge. We’re very happy with our decision to be mortgage free.
I have a small amount in my tax free savings account. How do I go about investing with it?
Hi Holly,
If you’re current TFSA is just a high interest savings account then you’ll need to setup another TFSA with a broker. Speak to your bank or look at a discount broker like Questrade. After you setup your new account you can ask them to transfer the TFSA “in-kind” from your current account. This ensures you don’t lose the contribution room this year.
Congrats on being debt free, Owen! I love that you mention how “addicting” making those extra payments was. Watching that balance drop is a great motivator. And no one can argue with the benefits of freedom and flexibility of time and choices that result.
Thanks Amanda! It was very addicting.
Breaking down our big goal into smaller chunks made it way more tangible. We really looked forward to making our lump-sum every four months.
Great job! Financial fitness as an addiction might be the only good addiction to have. 🙂
Thanks Brad!
Awesome work. I’ve considered paying down my mortgage in 5-6 years, but I’m trying to be a little more cautious because cash is important given today’s political uncertainty.
I definitely think paying down debt will be a great choice for a few years since the stock market and bond market aren’t too promising.
Thanks Erik!
Nicely done! Amazing what you can do with a little hard work and sacrifice. Now on to wealth building!
Thanks for your comment MMP. We’ve been mortgage free since 2014 and its been amazing to see what our frugal habits have helped us accomplish in such a short time.
That’s a fantastic timeframe to pay down a mortgage. And kudos for biking to work to save $300 a month: that’s just a mind blowing savings from one change.
We ultimately regretted paying off our mortgage due to the massive opportunity costs, and have since taken on a new one. But this is an area that’s pretty personal: there’s plenty of room for those who want to be 100% debt free and those who want to take the arbitrage route.
Hi Done By Forty, I completely understand that point of view.
There are definitely opportunity costs however we found the goal so motivating that we made a bunch of lifestyle changes that have really helped us for the long term. Looking back we’re not sure if we would have have made those changes if we were just investing.
That being said, it’s possible that if/when the market goes through a large correction we would consider taking out a small HELOC to help rebalance our portfolio. In the mean time it feels pretty nice to be debt free.
Congratulations, Owen! How amazing that your first child was born just at the time you finished paying off your mortgage. I’m with you on the “soft” benefits of becoming mortgage free. It’s more about psychology than math for most of us. We live in Canada too, and for our mortgage, we are are allowed to put up to $18,000 per year against it in a lump sum without penalty. We’ve paid off all non-mortgage debt, and this will be the first year we’ll be in a position to start making those lump payments. It won’t be the full $18,000 this year, but your experience inspires me to make it as much as we can : )
Thanks Ruth. The timing wasn’t entirely by accident. We did try and get those dates close together so that I could take some time off after our daughter was born. Two days apart was closer than we anticipated though.
$18,000/year is a great aspirational goal! Don’t feel you need to get there right away. We weren’t able to make the max payment right away. We had to work up to it by finding all the various ways to save in our monthly budget.
That’s awesome. We are looking to pay our $70,000 mortgage off in 5 years instead of the 15-year term. By changing some of our habits, downsizing to less expensive vehicles and delaying large purchases, we have saved a lot of extra money too since our regular spending amount is lower.
That’s awesome Josh. It feels good when its gone.
Don’t forget to tell your home insurance provider when you’re mortgage free. You’ll get a discount. Ours was close to $10/month.
Thank you, Owen. A big hairy debt annihilation story always warms my heart.
So true.
These stories always inspire me. What an inspiration!
Thank you Danielle!
Thanks for this post. My wife and I paid down about $40,000 in student loan debt right after we got married and it felt incredible to be done with that. I know eliminating the mortgage would feel the same way but the math keeps us from doing it. Even though the math should have also kept us from paying off the student loan too?
I like your point about the change in spending habits that came from attacking a big goal. Maybe I can convince myself to at least start small with putting just a little extra towards principal every month.
Maybe that’s the way to do it Grant. Find some ways to save money in your current budget and put that money directly towards your mortgage. Don’t re-purpose your current savings but look for extra money to throw at your mortgage debt.
That’s amazing! Paying a mortgage that fast is like a dream come true.
Congrats on being able to make such huge sacrifices and stick to your plan. We’re also living frugally and loving it so far! Not everyone is able to stick to a budget commitment though, so you should know you’ve done something really amazing 🙂
Thank you for your kind words Adriana!
We made those changes over a period of time, not all at once, so it actually didn’t feel like a big sacrifice at the time. Now they’re just habit so it’s pretty easy to stay on track. We still keep an eye on our spending but it doesn’t take nearly as much time now.