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.
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.
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