Today I wanted to share some steps that we took to cut off 6 years of our mortgage amortization. These steps were relatively easy to adopt and they didn’t make a huge dent to our overall lifestyle but they made a huge impact to our mortgage balance. With no consumer debt (or car loan) we are very focused on doing what we can to reduce the number of years we have our mortgage and effectively reduce the interest we will pay over the course of the loan. Even though in Canada interest rates are at record lows that might not be the case forever and while they are low we wanted to take advantage of this unique opportunity to accelerate our path to mortgage freedom.
Road to Home Ownership:
We purchased our home in April 2011 from a builder and we closed in December 2012. When we bought our home we needed to give the builder payments for the house and this money went to our down payment. In total we put a 10% down payment on our house. We could have put a little more down however we wanted to make sure we had some money set aside just in case something came up. In Canada in order to avoid paying mortgage insurance you need to have 20% down. There was no way we were going to get to that point so we made the decision to stick with 10%. This is not always a popular option among personal finance bloggers and I would not recommend it to everyone. We understood the repercussions of this decision and it was the right decision for us. Do your homework before you make a decision regarding how much you put down on your own home because our decision might not be right for your situation.
A Big Pile of Debt:
I remember one of the first feelings I had after we closed was a feeling of being overwhelmed as this was the first time I had ever owed anyone any money. While Scott had addressed his consumer debt in early 2011, I had never had the obligation of owing anyone any money. This was huge for me and for the first couple of months after we closed I remembered being very aware of the amount that was left over on our mortgage. I think it was this feeling of unease that started us on the path to focus on paying down our mortgage more aggressively than we had to.
4 Easy Steps We Took to Reduce our Mortgage Amortization:
Step #1: Rounding the Monthly Payment
We took this step from the moment we signed up for our mortgage. When we first got our mortgage we had a monthly payment schedule. I got paid monthly so it lined up to my pay. Our mortgage was an uneven amount and we just rounded it to the nearest $100. We had an even amount leaving the account every month which made me happy and that extra money didn’t feel like a huge difference. All of that extra money went to the principle each month and I’m sure we would have spent that money otherwise.
Step #2: Changing to accelerated weekly from monthly
After about 8 months we had gotten use to the monthly bills that came with home ownership (we won’t even get into property taxes as we didn’t pay them for the first time until 2014 – a story for another time). At that time we decided to change the payments to line up with Scott’s weekly paycheque and move to an accelerated weekly payment schedule. To calculate your accelerated weekly payment they take your monthly payment and divide by 4 and you pay that amount weekly. You are basically paying 1 extra month of payments per year and all of that extra money is going towards the principle. Of course we continued with step 1 and we rounded to the nearest $100 with this option as well. This step had the largest impact to reducing our amortization.
Step #3: Using the extra money from the CPP and EI payments
After a certain point in the year depending on your pay can you max our your government contribution to CPP (Canadian Pension Plan) and EI (Employment Insurance). You get a little increase in your paycheque once you have maxed out. In years prior this money was just added to our slush fund but eventually we started to set the money aside. After we put aside all of the money in January when the payments re-set we used it to make a pre-payment towards our mortgage. All of that money goes right onto the principle.
Step #4: Increasing the weekly payments in small amounts every year
We have the ability to increase our payments by 10% each year. We took advantage of that after we moved to the weekly accelerated payments and in the years we could we increased weekly payment by $50 dollars. This is a small change and it did mean cutting back on some other things. We felt it was the right decision and honestly I didn’t feel deprived by adding an extra $50 a week onto our mortgage. Again all of that money goes right onto the principle.
What these 4 steps have in common:
The common theme with these steps is that they had extra money going towards the principle amount and they weren’t huge changes to our life. We were able to put them in place and stick to them.
I have a goal of paying off $100K dollars within the first 5 year term of our mortgage. If we made no changes we would have paid off just over $60K from the principle. At this point we are on track to do that but we are very mindful that our mortgage payment is high and always make sure it lines up within the rest of our financial picture and makes sense. By not having a mortgage we understand that would open up more opportunities and give us a greater financial freedom but if we couldn’t keep up with the payments we aren’t going to rack up a line of credit debt just to pay off our mortgage. At this point our mortgage is the cheapest form of credit we have so it make no sense to use a line of credit to supplement our lives.
Priority #1 with a long term plan:
We treat our mortgage as the number one priority for our money. In another blog we will get to why we shifted focus to increase our RRSP (retirement) contributions recently but this is still the number one priority for our money – aka it gets the most amount of our money per year.
We also plan to stay put in this house for as long as we can; we love where we live and our house is big enough for our family of two adults and a cat. Knowing this also allows us to make decisions that we might not make if we were planning on moving in the next several years.
Another word of caution – these are tips that worked for us and you might not be able to apply them yourself. Please do your own financial research to understand the impact of any decision you make with your money. Purchasing a home is probably the biggest financial decision you will ever make; please do your our research to ensure that you are making the right decision for you an your family.
For those with a mortgage do you have any tips that worked for you to pay off your mortgage faster? We would love to hear from you in the comment section below.
Quote of the Week: “The German root word for “debt” is the same as for “guilt”. Dave Ramsey
Take Care – Sarah
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