As I’ve mentioned previously, we just went through a process of refinancing our home. Now, to a normal person this is a rather joyless occasion because it doesn’t really change anything. But to a financial nerd like me, this is just another excuse to crunch the numbers and play with scenarios.
Think about these scenarios as traveling through time. What will our lives be like when we’re completely debt-free?
Great news about paying off mortgage!
… is the fact that we’re finally making a dent in this mortgage of ours. Yes, I know mortgage in French means “thing you have till you die” or may be “herpes”, but after 5 years of making payments we’re seeing the difference and perhaps a glimpse of light at the end of the tunnel. Now we just have to make sure that the light isn’t an oncoming train.
When we first got our mortgage, it came with a bi-weekly payment of $495. Every year or so, we’d increase the payment by 10% till the payment increased to $658. The extra payments would go towards the principal and slightly speed up the process of paying off mortgage. Extra payments coupled with a healthy downpayment made a nice dent in the mortgage by the time we had to refinance 5 years later. The amount of money we still owe is $195,000 (price of our home - $285,000)
Another great news is seeing how much of our new payment will be going towards the principal. On original payment of $450, huge chunk of it was interest. By the time the payment grew to $658, it was a bit less than a half. New payments consist of roughly 30% interest and 70% principal repayment. And that means more and more of our money going towards principal and less towards banks’ profit margins and their nice furniture. Take that, banks!
Paying off mortgage is hard. We’re still not even half way towards repaying it. We’ve paid $285,000 for our home, and the mortgage is barely under $200,000 right now. It’s a bit depressing to think how much we still have to pay towards it. I want us to be debt free yesterday! I want us to keep the money we’re throwing at the mortgage in our bank account to enjoy it, not hand it over to some big corporate bank! Trust me, the quality of life for me and my wife comes first before that of banks and banks’ shareholders (sorry, dividend investing bloggers).
So, I’ve said to my wife: “- I hate our mortgage!”
And she said”: “- Hey, so do I!”
And then I said: “- Hey, I’m glad we finally have something in common!”
Then she gave me THAT look, and I’ve decided to proceed with our options:
Option # 1: DO NOTHING
Our new by-weekly payment is $602. If we do absolutely nothing and never increase mortgage payments, we’ll pay it off in exactly 15 years.
In 15 years I’ll be close to my 50’s. I’m probably going to have some gray hair by that time or be completely bold and look like Michael Chiklis. Justin Bieber will be replaced by another teen idol and probably go through a cycle of alcohol abuse due to the fact that nobody cares about him anymore. Fast and Furious 27 will be showing at a theater near you, now in 4D coupled with smell-a-vision. We may or may not have flying cars by then. Conservative party will still be in power in Canada.
The point is - 15 years is way too long to wait for debt-free status.
Option # 2: Increase our payments by 10% every year
We’ve been increasing our mortgage payments by 10% every year since we’ve bought our home. If we keep increasing our payments by 10%, we’ll be debt-free in 10 years.
In 10 years I’ll be over 40 years old. It will be time for me to go through a mid-life crisis and buy a yellow Corvette and start wearing tight clothes again. We might not have flying cars, but I’m sure most shopping will be done just by merely thinking about food. Old people will still be complaining about “kids these days” and saying that they used to rock to Jay Z and Kanye West who are way better than garbage young people are playing.
In all honesty, this is a good option. We’re used to ever-increasing mortgage payments and 10% bump every year doesn’t feel like a huge loss to our budget. Also, our income will increase over time (at least I hope so) with my wife finishing school and me coming up with a new sliced bread idea.
Option # 3: Increase our payments + annual lump sum payment
Let’s say we go nuts. Like, completely bananas about paying off mortgage and like two crazy kids throw everything we can into it. For this, we’ll increase our mortgage payments by 10% every year AND throw additional $15,000 annually on top of it. In this case, we’ll repay our mortgage and be completely debt-free in just six years!
Six years is nothing. Six years means we’d pay off our $285,000 home in just 11 years. In six years, I may not even be bold yet, and old people might still be in “Rush is the greatest band of all times” phase. Six years and be completely debt-free? That sounds like a dream.
Unfortunately, I don’t think it’s very realistic. The increased payments are not a problem, but $15,000 in extra payment annually? That might be a stretch with our modest incomes. We do not have $15,000 lying around at the end of the year, and if we were to throw this much money into our mortgage, it would seriously cut into our commitment of investing 35% of our income. Sure, we’d pay off our mortgage faster, but we’d be investing next to nothing. And our house won’t be producing income for us unlike our investments hopefully.
So, we’ve decided to go with the second option of increasing our payments by 10% annually. If some unexpected money falls out of the sky for us, we can always throw it into our mortgage. But the way things are currently, we’ll be paying off our mortgage for the next ten years.
Do you want to pay your mortgage faster?
Check out Scotia Bank’s online mortgage calculator. Try playing with few options and see how different actions affect the length of repayment time. Switch from monthly payments to bi-weekly, increase the payments annually, and play around with lump sum payment amounts.
How fast do you want to be completely debt-free? Five years? Ten? Twenty five? Never?