How we Paid off our Mortgage in 3 Years

In the October 2010 net worth update, I briefly mentioned that I was planning on paying of the mortgage balance this month and I’m happy to say that we’re mortgage free in 2010!  As this is a significant milestone in any financial journey, I thought that it deserved a post all on its own.

History

It all started when we purchased our first house in the summer of 2003, right after graduation.   The goal was to keep costs low, so we purchased a two apartment home to live in the upstairs while renting out the basement apartment.  I raided my cash savings for the down payment and went all-in on our first house.  Fortunately, 2003 was a time when houses were priced very reasonably, and combined with rental income from the apartment, our housing expenses were very low.  A couple years later, I found a great deal on an investment property, put a small 10% down payment and ended up being a landlord to another property.

With the principal residence, I wasn’t as motivated to pay off the mortgage as half of the interest was tax deductible.  While we did pay on a bi-weekly accelerated schedule, we didn’t do much in terms of annual lump sum payments.  As a result, when we did sell that house four years later, the balance didn’t decrease by a dramatic amount but combined with appreciation, we walked away with about $55k after fees.  We chose to move as we decided to expand our family, and the two apartment just wouldn’t work for us in terms of space and location. With that in mind, we built a house in kid friendly subdivision that is zoned for relatively good schools – we still live there today.  In hindsight, we should have held onto the first property as real estate has appreciated significantly since that time, but as you know, hindsight is 20/20.

Back on the topic of mortgages, we poured the proceeds of the sale of the first home, a fairly substantial cash savings amount, and the liquidated proceeds of my non-registered portfolio to put towards the new house.  With that hefty down payment, we managed to start with a 3-year open discounted variable mortgage with a balance of $150k.   As our careers were advancing, and business income ramping up, we felt confident in our income so we topped up our bi-weekly payments by about 50% in addition to making lump sum payments where possible.  What also really helped out was that  in early 2009, we decided to sell our rental property that netted us around $30k to put against the house.

All in all, the combination of savings generated from our frugal habits, reasonable mortgage balance for our incomes,  increased bi-weekly payments, and putting any lump sums to pay down the house resulted in paying off our house in less than 3 years.  We are mortgage free in 2010!

Strategies for Paying Down your Mortgage Faster

As previously mentioned, we paid off our mortgage at a fairly rapid pace, here are some of the strategies that we used:

  1. Set a Goal – I had a goal to pay off the mortgage before the open term was up which was 3 years.  What works for me is to set the big goal, and take baby steps towards it.  The baby steps include some of the tips below.
  2. Establish Savings Habits – It’s pretty difficult to aggressively pay down the mortgage without establishing proper saving habits.  Having the ability to generate savings brings a lot of freedom and can ultimately lead to paying off the mortgage faster.  Here are some ways to save money.
  3. Reasonable Mortgage Balance.  My personal rule is to never obtain a mortage for more than 2x household income.  For example, with our new build, the price was well over our annual incomes.  However, with our large down payment, we managed to bring the mortgage balance to a little over 1X gross household income. 
  4. Accelerated Bi-weekly Payments – This is a common strategy that works!  By simply paying the mortgage during bi-weekly pay periods (instead of monthly) can result in an extra payment by the end of the year, which ultimately means less interest.  This strategy alone can reduce the mortgage amortization by 3-4 years.
  5. Topped up Payments – I like the strategy of topping up mortgage payments as it is forced savings.  Even an extra $100 per mortgage payment can make a  difference in amortization.  Most fixed mortgages allow payments to be topped up by as much as 100%.
  6. Annual Lump Sums – This goes back to having savings habits.  With strong savings, it enables the homeowner to use up some of those prepayment mortgage allowances.  I believe common practice for a fixed mortgage is 20% of the original mortgage balance can be paid down per year.  As our mortgage was an open mortgage, we took advantage and put large amounts when cash was available.  For example, when we sold our rental property and liquidated the non-registered portfolio.

Do you have a goal of paying off your mortgage in a short period of time?  What are your strategies?

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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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larry macdonald
10 years ago

Congratulations. It would be interesting to hear where you are going to direct the funds that were going toward the mortgage

josh
10 years ago

congratulations. one question. why did you cut down your money trees”rental”
they worked well for you in the short term, think how good they would of worked for you 10 or 20 years from now,

Dana
10 years ago

Congrats! That is a *huge* milestone – worthy of a mortgage burning party, maybe?

We began a cash flow dam earlier this year and are hoping to pay off our mortgage by 2014 – seeing stories like yours helps keep me motivated and focussed on the goal.

Ron
10 years ago

Congrats FT! I hope to join you in the land of the mortgage free! (in a decade or so..) ;)

nralpmet
10 years ago

Kudos to you and my wife! The strategies you list are the simple logical steps to mtg-freedom. I also think there some more basic ideas that I don’t think people consider. My wife and I paid off our mtg in 7yrs (1994-2001) – the keys for us were:

1. The Bank may lets you borrow $xxx – doesn’t mean you should take out a mtg for $xxx. Our house cost about 60% of what we could have bought if we took out the full amount of the mtg the Bank was willing to lend us.

2. If you decide that you want to be mtg-free, then you need to have some discipline on making those extra payments. Our first vacation actually flying out of Ontario was in 2001, after we became mtg-free.

3. As you progress in your careers, resist the urge to upgrade to larger more expensive homes. Yes, sometimes you need to change homes to accomodate more family or job location, but do not buy a bigger more expensive home to keep up with the Joneses. Maybe some incremental changes to kitchens, bathrooms, basements are more prudent.

I wish more people would be more disciplined as you can never tell what the future brings. When I got laid off on 2008, servicing debt was not something we had to worry about.

Good luck.

Steve
10 years ago

I am also hoping to pay off my mortgage soon. I will pay it off some time next year putting it between 3 and 3.75 years. I bought my first home for $345K in 2008, putting $105K down, so $240K mortgage. It’s a four bedroom and my wife and I don’t have kids yet so I don’t think we’ll need to upgrade for a while.

I finished engineering school in 2004 and paid off my student loans ($20K) and car ($7K) by the end of that calender.

Started saving like mad after that while still renting in student housing (only grad students lived there so it wasn’t bad at all).

My wife’s income was only about $10K /year when we bought the house and all her money at the time was tied up in her condo and her business. She sold the condo and the $35K proceeds went to a lump sum mortgage payment.

We hoped to pay off the mortgage in 7-10 years. Since then my wife wound up her business (no cash from this unfortunately) and took an administrative job at the local university.

With the increased income we’ll start 2011 owing about $60K on the mortgage.

ldk
10 years ago

Our goal when we built our house in ’97 was ‘mortgage-free-by-40’ (which was a 13 year time frame and this year, incidentally!) We managed to be ‘mortgage-free-by-36’ (which doesn’t quite have the same ring to it, but was oh-so-satisfying) by employing many of your same strategies…namely avoiding lifestyle inflation as our businesses and income were growing and by throwing lump sums at the principal every chance we got. We bought/renovated and sold 4 properties for a profit over a few years that allowed us to dump about $50k on the mortgage and pay it off sooner rather than later.

With the $1200/month of extra cash flow, we have added $750/month to our other investments and allowed ourselves a few extra hundred dollars a month for spending.

Congrats to you on reaching your goal~Enjoy it!!

No Debt Guy
10 years ago

Congratulations!! That is a big mile stone. We set a goal to pay off our $316K mortgage in 5 years and being a little over two years into it we are on track.

Two points I want to make.

1. I think it is important for people to have a good grasp of how much interest they will actually pay if they do not make extra payments on their mortgage. This should provide the motivation to come up with some extra dollars every year to make extra payments.

2. Accelerated bi-weekly payments are a bit of a scam. Essentiall you are making the equivilent of 13 months of payments every year payments rather than 12. You are paying more over the course of the year with acc bi-weekly paymnet. You could also increase your monthly payment by 1/12th to make that extra payment with pretty much the same result.

Bi-weekly work well if you are paid every two weeks.

Duncan
10 years ago

I’d argue that paying down a mortgage more quickly at todays low rates makes zero sense. You’d be better off putting that extra money into other investments that pay more than 3 % per year.

Good for you for being prudent and disciplined enough to achieve your goal though. Not many people in Vancouver (where I live) can pay off their mortgages in 3 years with most over $500k!

youngandthrifty
10 years ago

Congratulations FT! This is HUGE and I am very jealous :) Those are really good strategies that you mentioned. I hope to use strategize and use these tips as well.

Early retirement next?

ChrisW
10 years ago

Congratulations, I thought I read somewhere that you were implementing the “smith maneouver” to help pay down your mortgage did this happen? Is the smith maneouver a strategy that is still recommended? I am far away from this milestone but I am researching all the steps to reach it.

SavingMentor
10 years ago

That’s great news FT! I’m really happy to hear that :)

Although I agree with some other posters that paying down your mortgage when interest rates are so low may not be the best option, I still like to do it myself. We should probably have our mortgage paid off in a year or two and then we will likely move into a bigger house as our careers hopefully continue to advance.

nobleea
10 years ago

Even at rates of 3%, it’s tough to find a guaranteed investment that will yield more than that after tax.

That being said, we don’t have a specific goal of paying off our mortgage early. We pay more than required every month and a lump sum payment once or twice a year. If we stopped travelling, playing sports, and renovating we could probably pay it off in 3-5 years. But you only live once.

Certainly a good way to pay it off quickly is to avoid lifestyle inflation and increase payments when you get raises. We also employ the tactic of constantly reducing expenses while income grows (cut back on utilities, hunt for coupons, grow side businesses, etc).

Another big thing that can help you in paying off your mortgage quickly is living in a low cost housing environment. It’s much easier to pay off a mortgage on a 220K house with a professional salary than a 350K or 600K house that might be more common in other parts of the country.

alexander45
10 years ago

Duncan,

It actually isn’t that simple. 3% pretax is still much less than my 2.5% post-tax mortgage payment. Only $5000 of that can go into a TFSA . . .

RickM
10 years ago

Congratulations! You’re offering up lots of options to consider to get off the merry-go-round of being perpetually in debt as many North Americans have chosen to do.. While many simply cannot afford to pay off their homes as quickly as you have done, certainly we can do it in shorter time frames saving significant amounts of interest. As was mentioned, one should calculate how much interest expense one can save by increasing the mortgage payments even by just a few dollars per payment. That in of itself will motivate people to get out of debt.

Steve Zussino
10 years ago

It is important to calculate how much paying down debt saves you in interest versus buying something small like a coffee.

$4 towards debt repayment vs the immediate pleasure of a coffee.

nralpmet
10 years ago

The invest vs pay off debt debate is one I have with my friends all the time. People say “Well, I can get 7% on my investments vs paying 3% on my debt”. I think most people forget that investments volatile reflecting the risk in a given instrument. An investment that grows at 7% might actually be anywhere from -7% to 20% (random numbers) at any point in time. Plus that 7% in only realized when you finally dispose of that investment. What happens if you need a cash inflow and your investment is in a down phase? Most people I know (myself included) do not have the skill and time to actively manage their portfolios accounting for risk and cash flows and most professional financial advisors are not much better at building risk-adjusted portfolios (I have worked in this industry). My view is get rid of the bulk of your debt and then start beefing up investing for your future.

But, to each their own, eh?

DanP
10 years ago

Were u worried at all about your lifestyle being negatively impacted by funneling all your funds into savings and your mtg? Someone said it above, you only live once.

Though that is an amazing feat to accomplish.

Briana @ GBR
10 years ago

I need to purchase a property first hehe but I definitely plan on doing bi-weekly payments and applying any type of lump sums available.

Michael James
10 years ago

Congratulations, FT! I thought my wife and I did well eliminating the mortgage on our first house in 4 years. We used some of the same strategies that you used — increasing payments and applying lump sums yearly. Apparently, we didn’t do it to quite the same degree you did.

Michael James
10 years ago

: Yes, we were mortgage-free for 2 years and then upgraded. Actually we owned both houses for a couple of months. After the first one sold, we took the leading digit off the new mortgage. A couple of years later we were mortgage-free again.

Rachelle
10 years ago

Congrats…and welcome to freedom…you can now step out of the rat race if you choose to. Obviously you are much more insulated against catastrophe, such as illness, unemployment even an abusive boss.

It’ll be easier to be selfemployed if you want to be of just watch those investments grow

Awesome !

DanP
10 years ago

@ 22. FrugalTrader

My thoughts are more along the lines of vacations, schooling, hobbies…not necessiary material possesions, but experiences. Now im not able to know that you didn’t do these things, but just questions that arrise in my personal life.

For instance, last year i had the option of putting an additional 6k into savings, instead i decided to pursue my CFP and completed that instead. In 2 months time, i have a 3k bonus im expecting…and again, im contemplating putting that towards savings, but i am leaning towards taking that money and going to Europe and expereincing/seeing things i’ve never had the opporunity to do. I just always have an internal struggle with saving money(putting it towards a mrotgage in your situation), or going out and just enjoying life. I always save 10% of all my pay, but i’m not ever able to justify passing up things in life.

JK
10 years ago

Congratulations FT!

With the meteoric rise in property values in the St. John’s area, my wife and I are planning to sell our 2 apartment homes in the next 2-3 years. After that’s done, then we will be in the “mortgage free” club.

By the way, you still have your LOC on your re-advanceable mortgage, right?

Jungle
10 years ago

Wow congratulations. Make sure you go out and celebrate, maybe go out for a nice dinner. That is a HUGE accomplishment at your age. Very few people could say they’ve paid off their mortgage like that.

Now you don’t really have anything going to interest cost (except SM debt) so all your income is now available to save, invest or spend. I look forward to seeing what you do with money.

Just build up a massive non reg account, maybe ETFS by dollar cost averaging and stocks when they are on sale.

Mr. Frisky
10 years ago

Congratulations! Perhaps you and others can offer me some advice.

I am 29 year old professional netting about $7,000 per month. The rent on my 500 square foot downtown condo is $1,400. I’ve just finished paying off $60,000 in student debt in April and since have been able to squirrel away $35,000 in an RRSP savings account and $5,000 in my TFSA. I am on track to achieve my goal of $60,000 in total savings by my 30th birthday in April, and $100,000 by end of 2011.

My hope is to own a condo outright by 35, but with high downtown prices and a lifestyle in flux, I’m not sure of the best way to proceed. If I buy a a condo I can afford, it will be too small for me and my girlfriend to live in. If I stretch myself, I’m afraid I won’t be able to reach my goal by 35.

A friend I trust advises that I continue to save/invest until my situation stabilizes, but my concern is that if I wait I won’t have as much disposable income to achieve my goal in time as responsibilities begin to creep in.

Thoughts on best course of action? What should my target price be?

Rachelle
10 years ago

Mr Frisky,

Consider getting better value out of the downtown core. You can be close to a subway or streetcar to make the commute bearable.

This way you can have both a debt free existence and paid off condo.

For example a few days ago on the MLS I was looking at a 3 bed condo for rent a 2 minute walk from Kennedy station for about $100K. You may not want to be that extreme but it is out there for people who want to do something different.

By the end of 2011 you’ll be able to pay cash for that sucker :) and never pay rent again.

Sampson
10 years ago

Great job!

Now you will finally HAVE to tell us what you will do with the freed up money. HELOC? Invest? Finally some lifestyle creep? Come on… you have to stop putting us all to shame.

Maybe you guys can have more kids ;)

Sampson
10 years ago

Absolutely, new monies have been slow to go in, but we remained very active through the past few years. Quite glad, since the gains over the past 1.5 years will easily cover the interest of not paying down the mortgage.

Still, it must feel nice to be debt free though. All the flexibility in the world.

Rachelle
10 years ago

I agree with Sampson, tell Mrs. Frugal that you need more mini Frugals around

Jimmy Dean
10 years ago

I have been fan of this website and love reading the posts. These strategies are very useful. They requires some serious discipline, will power and some amount of luck.

Foundation –First rule of thumb is never take a mortgage more than your means. Keeping your monthly payment to < 31% of gross monthly income is vital. Second, make a big down payment. I recommend 20%. If you don't have it. Don't buy home. Make sure you have 6 months worth of savings in emergency fund at any time.

On a 300K mortgage at 3.5% fixed rate. Interest costs ~$46000 for first 5 years. All strategies by FT are spot on. It all nails down to "needs" and "wants". That I why I mentioned discipline and will power are most important factors to being mortgage free,

nwormald
10 years ago

@nralpmet: You raise a good point about investment volatility and unrealised gains (or “paper profits”) when assessing investment versus debt repayment options. Your question about needing cash inflows when an investment is down is over-complicating things, IMHO.

For me, I’m not putting money into investments, unless I don’t need the money. My “cash inflows” are covered by my emergency fund. So for me, down means I’m waiting or cutting my losses. Otherwise, if a “cash inflow” is needed, the only options are to use it as collateral on the hope it rebounds or sell it, taking whatever loss.

The other factor is to learn as much as you can about investing, when you can so that in future, you will benefit. Based on knowledge gained over the last several years, I was able to recognise Mar 2009 as a buying opportunity.

I also knew that I wanted to pay down my mortgage while waiting for a capital gain, I wanted leverage for a beaten down sector (financials) plus dividends that was not tied to only one stock. The basket I selected cost me $3.80 per share and as of the November 2010 dividend, has paid out a total of $1.80. As of earlier this week, it trades at $11 per share (unrealised gain).

Even if I miss selling for top capital gain, I’m pretty sure I’m ahead of the game compared to using the same money to make extra payments off the 5.8% mortgage. As for risk, it helps to be buying on the low end – there was risk but being able to cherry pick at low valuations IMHO made it worth it.

The biggest barrier I see is that most people treat their job as continuous learning process. For some reason treat investing as an all or nothing situation. A bit here and bit there, helps avoid mis-steps and can pay off dramatically.

The bottom line is that without the time spent learning, I wouldn’t have recognised there was an opportunity, known about baskets instead of individual stocks or been focussed on a beaten down area.

youngandthrifty
10 years ago

Taking the online business full time would be awesome! Or even decreasing the frequency of how much you have to work per week, variety is the spice of life, right? :)

Future Money-Bags
10 years ago

AWESOME!!
That is an amazing job you have done FT :)
I started reading this blog last year, and have learned a huge amount of financial details and tips. (This was the first financial blog I started reading).

You have opened me up to a whole new way of thinking and helping me learn more every day. Though I may not have my mtg paid off, or even have one in the first place, I have a plan AND I know the steps I will take to pay off my mortgage.

Since my first job I have saved my money, and only spent what I needed. I have spent the last 4 years saving for a DP, but I never feel that I have enough yet. Since I am going to purchase a rental property and continue to rent out an apartment, I need to get 20% D/P saved up. I know you say not to get a Mtg for more than 2x my annual income.. but When last year I made under $30k before tax, that 2x rule is not possible.

I am always trying to make more money, and find ways where I don’t have to keep working 60 hour weeks, but for now I will have to keep doing that. Since I live in vancouver, I would like to buy a place $250-350k.
Do you think I should just buy a 30 year old apartment to rent since I will not be living there?
I do not want to have to worry about repairs, since I will be working fulltime. will not have a lot of time to be a landlord, you know?

I am 24 and plan to be mortgage free by 35.

Dr. STAN
10 years ago

A most excellent milestone. Welcome to the club of the young and mortgage free. It’s a great feeling. My wife and I paid off our $360K Ottawa house a couple of years ago at age 31. We then took out a HELOC at prime to invest about $44,000 in various large cap stocks, will fully tax deductible interest of course. We’ll pay it back gradually with our newfound cashflow.

Our house is modest compared to what some of our friends own (in the $450-500K and up range), but it’s hard to not crack a smile at dinner parties when someone goes on about how nice it would be if only they were mortgage free. “It sure would…” This opens up many avenues for travel, investing, home improvement, leave from work, etc. It’s nice to have options.

Geran
10 years ago

Congrats FT!

I bought my first condo 1 year ago, and while saving for paying for our wedding I still managed to chop off 1.5 years from the mortgage already. Won’t be paid in 3 years, but we’re working on it.

Here are 3 ways I use to pay the mortgage faster:
1) After July, my paychecks are about $200 more each (twice a month) (no longer paying for employment insurance I guess). We budget the entire year on the lower amount, and that “extra” goes directly towards the mortgage. That alone basically contributes to $2200 paydown / year.

2) I get paid twice a month (not every other week) so bi-weekly payments are a pain. Instead, I do what someone else mentioned: increase payments by at least 1/12th

3) This year, we bought a Rent-To-Own investment property with a positive cashflow of about $600 a month (ROI of about 29% per annum). Most of that will go towards paying down our own house faster.

Cheers!

Financial Discipline
10 years ago

Congratulation on paying off your mortgage in three years! It is nice to read this blog and find out that there are some like minded people out there. My wife in I will have our mortgage paid off in early 2012 (we are 27 and 28 and have had a mortgage for one year).

The formula for paying it off is simple. We rented a nice but small place for three years and saved up a $110,000 down payment (we used the RRSP homebuyer withdrawal to save taxes). Then when it was time to buy the home we purchased a $300,000 place instead of a $700,000 place (which is what the bank wanted to loan us). Since our living expenses are so low we are able to put about 75% of our income toward reducing our mortgage each year (we also make RRSP contributions and have a leveraged investment account).

The difficult part is staying disciplined when everyone we know is a conspicuous consumer. Blogs like this help. Keep it up!

ernie
10 years ago

Not to diminish the accomplishment, but there was an obvious tradeoff. E.g. you took the
” proceeds of the sale of the first home, a fairly substantial cash savings amount, and the liquidated proceeds of my non-registered portfolio to put towards the new house.”

My question is whether you monitor your overall net worth more than debts outstanding. In going ‘all-in’ on the house, you are committing a lot of eggs to that basket. A basket that is ultimately only worth what someone will pay you for it.

Now, you seem to have a steady stream of income from salary, so it isn’t a big deal, but I think it’s something to consider.

Amy
10 years ago

Congratulations. But I would like to say it didn’t take you 3 years to be mortgage free but 7 years. You bought your first house in 2003 and then just rolled over your equity into the new house for a new 3 year mortgage.

cannon_fodder
10 years ago

FT,

Congratulations on a monumental milestone! How did you and Mrs. FT celebrate?

Hopefully your blog is responsible for inspiring many more people to be mortgage free sooner.

Coincidentally, I am going to make a final lump sum payment on our mortage to eliminate it tomorrow. My wife and I are going on a cruise next week and I will surprise her one evening with the news. I plan to smuggle onboard a small bottle of icewine, that we have been saving, to toast our success.

Going forward, we will put all of the mortgage payments toward our HELOC. The Smith Manoeuvre has worked out well for us so far…in just over 2 years it is almost double the value of the HELOC.

Gordon
10 years ago

Enjoy being mortgage free. For now.

Because soon, you’ll be grabbing another mortgage. Why? Because all the net worth sitting in your house is doing nothing for you–it’s not working or growing, but in this market, will probably soon start shrinking.

So you next prudent step will probably be to borrow against your house to invest; this is a very common and successful strategy (as you know).

I say this only because I had a similar opportunity to pay off my mortgage, but through: why? I’d rather let my bank hold the risk, and put all my money elsewhere–where it can grow even if my house value retreats.

I wrote about this on my Savings-Sense.com blog:
http://www.savings-sense.com/2010/11/how-to-save-when-value-of-money-is.html

True with a paid off house you enjoy the illusion of security, but our economy is built on credit and that’s not always a bad thing. If disaster strikes or opportunity knocks, you’ll be looking to borrow money soon enough. And mortgages are the cheapest money you will ever get.

So while I applaud your discipline, I question your strategy.

Zip
10 years ago

Welcome to the mortgage free world, FT.
We are finally mortgage free as well. It took us 5 years, but it was worth every sacrifice.

PS: We live on the westcoast with LOTS of snow (lately!) :)