Posted by With the Bank of Canada raising interest rates by 50bps this week, homeowners on variable rate mortgages are understandably queasy. Myself included.
We live in a high cost of living (“HCOL”) area in Canada and we bought a house at the peak of the post-COVID real estate market in 2020. (As at Q1 2022, our area has appreciated between 10-20% in just a single year! These real estate prices are completely unsustainable, but I digress)
Our $1M+ property isn’t anything to write home about; it’s a 50 year old home in a middle class neighbourhood in a slightly below average school district. There are barely any luxury or sports cars in the neighbourhood, though we do have someone that drives a Tesla! Needless to say, we don’t live in a McMansion in a fancy area.
Despite buying a fairly modest home and putting a 30%+ downpayment, we have a hefty mortgage of ~$800K. Thank you, hot real estate market!
Although we have a 30-year mortgage, we intend to pay it off within 15-20 years so we can achieve financial freedom without debt. How will we get there?
(1) Accelerated bi-weekly payment
Instead of using a monthly or bi-monthly option, an accelerated bi-weekly takes half of the monthly required payment and payments are made every two weeks. This effectively means there are 26 payments made in a year, which is equivalent to an additional month’s worth of payments compared to the monthly and bi-monthly options.
By using an accelerated bi-weekly payment, we can repay our mortgage faster by ~2.3 years compared to bi-monthly payments.
(2) Increasing our bi-weekly payment by 20%
We opted for a 30-year mortgage to minimize the required repayments. Our 30-year mortgage has a ~0.1% higher rate than a 25-year mortgage, so it is a small cost to provide us with the most financial flexibility. In the unlikely event of income loss, we have minimized our monthly mortgage obligation.
As part of our mortgage product, our lender allows us to increase our minimum payments by up to 20%. And so we add 20% more than each of our payments!
We treat the extra 20% as a required payment. It reduces our free cash hanging around our bank account and enforces financial discipline. Could we always call the bank to reduce it? Sure we could, but we’ve gotten used to these higher payments; we don’t see a need to change it, but always have the option to do so if we run into financial troubles.
By adding an extra 20% to our payments, we can repay our mortgage faster by 4.8 years.
(3) Make the same dollar payments as our pre-refinancing amount
About a year into our mortgage term, interest rates had dropped and we refinanced our variable rate mortgage and reduced our rate by ~0.75%. Under our new mortgage terms, we reduced our required payments by ~$400/month! We refinanced because we wanted to save on interest costs, not because we were cash-strapped and needed the excess cash.
Given we were used to our previous mortgage payment and had learned to live without that ~$400/month, we decided to put this excess amount back into our refinanced mortgage. Every month, we make a $400 lump sum payment.
By simply refinancing our mortgage to a lower rate, we were able to redeploy the extra cash back into the mortgage and repay our mortgage by 2.8 years.
(4) Put my salary raise against the mortgage
I received a moderate salary increase at the start of 2022. Given my higher tax bracket, I didn’t want to start investing in a taxable brokerage account, as my TFSA and RRSP were almost maxed out[1]Due to CRA attribution rules, I cannot use my excess paycheque and have Mr. LJ invest it in his taxable brokerage accounts to benefit from his lower tax bracket. Although there are spousal loan … Continue reading. Since the after-tax paycheque bump was only nominal, I decided to add my extra couple bucks into our monthly lump sum repayment.
For every $100/month payment, we would pay off our mortgage ~1 year faster.
(Mr. LJ will also be getting a salary increase. Since he still has contribution room in his TFSA/RRSP, he will invest his paycheque bump into those accounts.)
Repaying our mortgage in 15-20 years
If we can commit to all of these tactics over the life of our mortgage, we could wipe out our $800K mortgage in 15 to 20 years.
Is it easy to do? Absolutely not, it takes a lot of budgeting and making tough choices on what we want to spend. Instead of buying new toys or taking an exotic vacation, we are choosing to pay off our mortgage faster and achieving financial freedom earlier!
References
| ↑1 | Due to CRA attribution rules, I cannot use my excess paycheque and have Mr. LJ invest it in his taxable brokerage accounts to benefit from his lower tax bracket. Although there are spousal loan options to overcome attribution rules, we’ll leave it for a future tax planning post! |
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