Thursday, August 09, 2007

How to Kill A Mortgage

Yesterday I had a comment by Telly asking if I intend to be mortgage free by 45 (my retirement date). Yes I do want to have that gone by then. I was actually playing with a few calculators earlier this week so I will outline a few different ideas.

1) Do Nothing

This first plan is the easiest. I don't pay down a extra cent until I turn 45 and then I pay out the remaining balance with some of my retirement savings.

2) Mild Acceleration

My current time line to be mortgage free is 19 years which isn't too far from my plan to retire at 45 (16 years). So another option is to save myself a lot of interest costs and prepay just enough of the mortgage to ensure it is gone by the time I'm 45. I estimate I would need to pay off approximately $9000 in the next two years which is completely doable.

3) Completely flatten the mortgage

Of course this option was a bit fun to figure out. If I put every spare cent I have against the mortgage I can be complete debt free in just over 8 years. Which also has some appeal since then my cost of living drops off the deep end and I could look at doing semi-early retirement perhaps by age 40.

Conclusion:

Right now I'm thinking about doing option 2, since I'm very close to trigging my mortgage equity plan with my bank. So if I drop the mortgage fast and decide I need some money to invest I can pull it out and if I use it to invest in a taxable account we can right off the interest against our taxes (Basically I could do a small version of the Smith maneuver).

I must admit option 3 also has some appeal. Yet for now I think I'll try for option 2 for now. Any one else been in a similar situation, if so what did you do?

4 comments:

FourPillars said...

I'm in exactly the same situation. We are basically doing option 2 - reasonably aggressive paydown of the mortgage. We also have a secured line of credit and we do a bit of leveraged investing with that.

Mike

Will said...

Ditto for my wife and I. We're on an accelerated bi-weekly payment plan. It hurts twice a year when we have to make three payments in a month, but worth the time savings (cuts a 25 year ammortization to 17 years).

Once my wife and I get our RRSPs maxed (should be doable by next April), we'll also start putting our tax returns down on our principal.

Canadian Dream said...

Mike,

Ah, good I'm not the only one with this idea.

Will,

Not a bad idea, but I've decided to use the prepayment at anytime clause in my mortgage so I can control when that extra money goes out.

Thanks,
CD

telly said...

We bought our house 4 years ago and are already down to 8 years left on the mortgage! Only problem is, we're not sure that this is the house we plan to stay in forever. :(
We're trying to hold out for as long as we can though. Either way, we definitely plan to have the mortgage retired by the time we retire (which is more like 55 for us).
Our "trick" thus far has been to use the pre-payment clause (20+20) with BMO. Each year since we've owned our house we've increased our payments by 20%. By Jan., our payments will be more than double what they started. Every once in a while we'll make a few bulk payments as well.