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 officially became 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.
My Journey To Becoming Mortgage Free
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. I wrote this article about comparing the best real estate investment property if you are curious what my process was.
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 apartments 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!
A huge part of my financial freedom strategy was employing the smith manoeuvre and turning my mortgage into a tax deductible investment. You should also read more about how i ended up completing the million dollar journey in 2014.
Strategies for Paying Down your Mortgage Faster in Canada
As previously mentioned, we paid off our mortgage at a fairly rapid pace, here are some of the strategies that we used:
- 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.
- 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.
- Reasonable Mortgage Balance. My personal rule is to never obtain a mortgage 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. Use a mortgage payment calculator to plan ahead.
- 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.
- 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%.
- 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?
Paying Off Your Mortgage in 2023
As you can tell, this article was originally written all the way back in 2010. Since it’s still very popular among readers, we decided it’s time to freshen it up a bit with relevant information and hopefully start a new discussion.
Even though most of what was written back then still holds true today, the financial climate is much different and so are my thoughts on whether you should even invest in real estate and how to do so in the best possible way.
We recently published an extremely popular (and slightly controversial) article about why buying a house in Canada isn’t necessarily a wise choice. In today’s market at least, real estate investments simply can’t compete with the returns you’ll get from the best Canadian dividend stocks.
Aside from that, we published numerous articles since then discussing whether or not you should even pay off your mortgage so quickly, or keep it as a tax deductible investment instead. I’m curious to hear from both old and new MDJ readers about what path they ended up taking with their mortgages in their quest for financial freedom and safe early retirement – let me know in the comments below!
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