THE SECRET IS…THERE IS NO SECRET!
Becoming mortgage free is not an easy task so I won’t make it out to be something that it’s not.
In fact many things have led to us becoming mortgage free in 5 years which I want to discuss with you today since many of you have emailed me.
Ever since I blogged about wanting to pay off the mortgage early I’ve had fans email me wanting to know if there were any secrets.
I thought I’d wait until we actually became mortgage free to fill you in just how we did it. No, we didn’t win the lottery or get money from family or friends we earned every last bit of it.
If you read our net worth update for April last week you already know that we were excited to tell everyone that we were finally saying good-bye to the mortgage payment. I promised you I’d let you know what we did and what problems we met along the way.
I thought the best way would be to get my good friend Michael Anthony Lloyd a mortgage expert who blogs at www.homehappy.ca and has blogged here before to share a bit more about mortgage discharge fees and other tips that you should be aware of when you want to become mortgage free and make that last payment to your bank.
The discharge fee was something that set us back as we didn’t do enough homework to learn what it was all about as well as how long it would take to make the last payment on the mortgage and the steps involved.
It takes time and you can’t just make a lump sum payment from your bank account either, you need a bank draft. Michael shares more information below that you should know.
Mortgage Freedom Day Tips
We all dream of the day we can finally get rid of that dreaded mortgage from around our neck. For many, it is still a long way away…for others, it’s coming up due to hard work and the right decisions a long time ago. So what happens when we finally get there?
The first thing to remember is that there is more than just your current mortgage holder involved in this. Though your lender is who you need to talk to, there is always the “property charge” that is registered with your Provincial body that many people forget about.
For example, here in BC, the Land titles office will have a registered charge placed on your property until the lender proceeds with discharging that charge. Until completed, your property is not “free and clear” even if you paid off the balance of your mortgage with your lender.
In Ontario & most of Canada, this is a discharge fee…paid to the Government /Lender to ensure their charge is removed from your property. Check with your lender for their discharge fees (it’s usually listed on their fee menus), it’s a necessary step many forget about…until years later when they are selling or refinancing their property.
-Michael Anthony Llyod
Our road-trip to becoming mortgage free
As many of you might know I bought my first house at the young age of 21 which gave me my kick-start into the real estate market. After selling that house I purchased a bigger home only to sell that before moving to Canada for a nice profit.
This was where a good chunk of my money came from to help put a down-payment on our house in Canada. My wife also had built a house when she was 30 and went on to sell that for a profit just a few years later so she could return to school, travel and ultimately meet me and get married. We didn’t buy a house right away in Canada rather we rented for a few years saving every penny we could.
We were a frugal couple from the moment we met and that helped us throughout our relationship as we didn’t have any money fights. We both were on the same page financially and knew that we wanted to be mortgage free early so we could do what we wanted in life not having the burden of debt looming over our shoulders.
While some couples may have already started a family we were both in school again for the second time which we paid cash for out of pocket. I purchased my vehicle cash and my wife had a brand new vehicle which she bought before she met me and paid for at 0% interest for 5 years with a $7,000 cash down-payment.
She took good care of her vehicle and it’s still in mint condition today, in fact I was quite shocked to see the shape of it with the Canadian winters but she’s always made sure to maintain it. Vehicles can be a money pit but I’d rather take care of it from the start than having to keep buying a vehicle every few years.
Grocery shopping has been a battle for us but we have learned so much about living a frugal life in Canada just by reading and learning from experience. Using Canadian coupons helped us save thousands of dollars and build a stockpile which we are still living from today.
We started the grocery game challenge when we started the blog and I can’t tell you how much tracking our grocery shops has helped us to not only save money but to teach us more about what foods we were putting into our bodies.
It’s been many years since the lucrative coupon frenzy and although there is still money to be saved the coupon train has slowed down for us. No using coupons didn’t mean we sacrificed nutrition or enjoying life either.
Many people will say they don’t have the time to use coupons and that’s fine. We weren’t going to turn our backs on free money. It was like shopping and earning a side income at the same time. I’m sure many couponers would agree it can be lucrative if you know how to budget and spend your money wisely when couponing. Buying products you “might” use just because you have a coupon isn’t a savings plan it’s a waste.
We bought clothes and still do buy some odds and sods including clothes at the second-hand shops and love garage sales, free stuff, online sales etc. to save us from buying new. It’s always easy to find someone who wants to get rid of something that is practically brand new than to rush out and buy it as long as you aren’t in a rush.
We buy quality items brand new that we want to last and don’t mind spending the extra money as we don’t like to spend money twice if we don’t have to. Being selective in our frugal lifestyle has helped us to see what areas we can be creative in and what areas we need to call in the pros or buy new like I mentioned.
Our careers have slowly but surely brought us up the ladder with ways to go but we would both work overtime and never turn down an opportunity to make extra money on the side.
There is always focus groups or studies going on in the Greater Toronto Area which pay good money for a bit of our time and heck who wouldn’t want to chat about insurance for an hour, get free food and paid $100 cash. I know… that’s where our entertainment money came from and sometimes still does.
As we were saving over the years we opted to eat in rather than going out leaving dining out for special occasions. We had no problem turning down invites from friends when the money simply wasn’t in our budget.
We didn’t actually start using a budget up until just before this blog was born. We refined our budget over the years and now offer our budget free to our fans. We’ve kept the budget pretty simple but most people want simple over complicated because budgeting isn’t something people line up for as it can be pretty boring unless you are a numbers nerd like I am.
We don’t have any children but are aiming on starting a family very soon especially now that we are mortgage free. We didn’t leave family planning until we were mortgage free either.
It is much more complicated than that for us but with having to start our life over returning to school lots had to be put on hold. We opted to wait until we were secure with our careers and finances but that’s not what everyone should do, it’s what we chose to do.
This post is an explanation about why we were so adamant in paying down the mortgage and stuck to our guns throughout our mortgage free plan.
Everybody knows about the traditional mortgage that a lot of people enter including my parents. The traditional mortgage was always based on a 25 year amortization period and had 12 monthly payments per year.
Over the years different mortgage options were presented by various financial institutions. They cover anything from 30 year amortization periods to rapid weekly payments that cut your total time to approximately 22 years.
Although the Canadian Government eliminated the 30 year mortgage with good reason, there are still a large variety of choices out there.
From the start when we were still looking at houses we already knew we wanted to pay it off quickly so we could be mortgage free and live a debt free lifestyle. We purchased a home that was well below what the banks said we could afford but we went with a mortgage that we could pay with one income including the bills. We did this just in case something was to happen to one of our jobs or if we became ill etc.
We played it safe but we also got a steal of a deal in a sought-after area. Our house is now worth over $100,000 more than the purchase price just 5 years ago.
Our home had everything we wanted at the time although now we wouldn’t mind the extras like a bigger yard, a pool, walk-out basement but they are just wants not needs.
Who knows what the future will hold….
Mortgage pay off plan
After much searching around for the right mortgage we entered into a 5-year open mortgage with a 3.99% interest rate on a rapid weekly payment scheme.
We put what we thought was a decent down-payment on the home of $80,000 and paid $265,000 for the house leaving us with a mortgage of $185,000.
That was 5 years ago now and we have happily finished paying off our mortgage. We initially started with the required weekly payments that would see us mortgage free in a projected 22 years as our incomes were lower than they are today.
As our finances got better due to increases at work and our spending became more controlled we started to drop in extra mortgage payments every month as and when we could. We eventually took advantage of the 20% mortgage pay down option each year and paid off $32,651 as a lump.
We continued to pay off extra payments and then paid off another lump sum on the beginning of year 4 to the tune of $37,000. Now that the lump sum payment option was at its maximum we increased weekly payments to the maximum instead.
The last payment we made was to clear the final amount owing including the discharge fee. This bank draft came to the grand total of $68,787.19. I had to bring in my remaining funds from the UK as that is what they were destined for.
We lost some money in the exchange rate as the actual exchange rate and what you get are different figures. That aside, I thought I would furnish you with the numbers showing why we did what we did through the savings.
A traditional 25 year mortgage with monthly payments at the same interest rate throughout the entire term, not just the 5 years would have cost us $291,657.29 which is made up of the $185,000 principal and then $106,657.29 in interest.
The rapid weekly mortgage payment option saved us 3 years of mortgage payments and would have given us the following figures had we stuck to the 22 year plan:
- $275,844.94 which is made up of the $185,000 principal and then $90,844.94 in interest.
However, our 5 year pay it like crazy option worked out like this:
The total we paid is $210,940.17 which is made up of the same $185,000 principal but only $25,940.17 in interest.
This saved us $64,904.77 in interest over our full 22 year term assuming that the interest rate stayed at 3.99% and a colossal $80,717.12 in interest over a more traditional 25 year mortgage.
To make $64,904.77 in 5 years we would have had to invest a monthly total of $972.12 and make 4.15% return in order to come up with the same amount which would have been easily attainable. The thing is, we invest roughly that much every month already.
To make $80,717.12 in 5 years we would have had to invest a monthly total of $972.12 and make 12.25% return in order to come up with the same amount. I haven’t seen a guaranteed 12.25% return yet so paying down our mortgage worked better for us.
Take the payments that we can now re-direct from paying off the mortgage and into investments will lead us to pay in $252,751.20 over the next 20 years.
I shall demonstrate the effect by taking the above basic monthly payment of $972.12 and adding to it every month with an interest earning rate of 3.99% (same as what the mortgage was). After the 20 years that payment redirection is now worth $357,332.73 .
When people ask me why didn’t we invest more and leave the mortgage chugging away on automated payments for years on end, do the maths for yourselves.
I’m not going to tell you to go pay it off now, not everybody can do it and not everyone’s financial numbers can support it. The point is, I like to see numbers and work out what the difference is going to be. I like to see where advantages are. Not everyone will agree with the path we took to becoming mortgage free and that’s fine, it’s our life and our finances.
I hope that you make the right choices with your finances but do it because you want to and not because someone told you that you should do it because it’s the right way.
My Canadian friend Mark at My Own Advisor who is also paying down his mortgage said something that I feel is important to hear when it comes to the debate of paying off the mortgage or investing the money.
I believe there’s no perfect answer to this debate, it depends on the situation, the timing and often some reflection of short and long-term goals
Be in control, do your homework and don’t gamble with investments especially if you don’t know what you are doing. Risk is inevitable but when you are risking your money without knowledge that could bite you in the butt. I’m sure any savvy investor will tell you that.
I’m not an investor but I do like to make our money work for me the best way I can. Maybe one day I’ll become an elite investor but for now I’m still learning that side of the financial coin.
By eliminating a drain on our resources such as the mortgage we can now benefit from investing the money instead of the bank benefiting from us. It’s also been nice to wake up knowing we are debt free and able to make choices that may have been out of reach for us in the past.
Are you planning to pay off your mortgage early or use all of your extra money to invest?
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