Why I am Paying Down My Mortgage More Aggressively

I never thought I would say this because initially when I bought my condo I thought I would use the mortgage interest to offset my work at home income or to offset future rental income when I end up renting out my condo to save on income taxes.  However, a couple things kind of put a little bug in my ear to get me to think otherwise.  Mainly I have to thank my boyfriend who is very debt averse who spoke to me about my mortgage debt (yes, I am dating someone more financially savvy than me, how wonderful!).

When You Sell Your Home You Should Add in the Mortgage Interest Cost

You know that price you have in your head when you first bought the home?  And you get excited to see what it's worth now because you're selling for a profit?  Well, if you think about it, you're not selling for as much profit as you think when you factor in the mortgage interest that you already paid for your home.  That mortgage interest does not go into your home equity, it does not pass “go” on the game of Monopoly.  It only passes go to the big wallets of the bank, of course.

Related: What To Consider Before Buying A Condo

In This Low Interest Rate Environment It Doesn't “Pay” to Invest in “High Interest” Savings (If You Have a Fixed Mortgage)

Why I am Paying Down My Mortgage More AggressivelyWith the recent cut in the bank cut rates the high interest savings account are yielding even less money for investing your hard earned cash with them.  If you have a variable mortgage this is pretty good news for you.  However, if you have a fixed mortgage, the money you have in cash, just sitting there, could be working to cut down on the thousands of dollars of interest income you have to pay on your mortgage.  It might be a good idea to put it to work.

I have a bit of cash (about 20% of my net worth) in high interest savings accounts earning a very measly 1.25% or so (haven't recently checked) and my fixed mortgage interest rate is at least double that.

I haven't even mentioned how the high interest savings accounts or GIC's doesn't even keep up with inflation too!

Even with a Low Mortgage, That's a Lot of Interest in a Year

One of the big kickers that helped propel me into mortgage pay down action is that I saw how much mortgage interest income I paid over the year for 2014.  That is a lot of money that just went “poof”.  My dividend income was just a little bit over the mortgage interest income so basically I negated the cost of my mortgage last year by just a bit.  I know my mortgage interest will be less next year, but still, it sucked to see that much money I paid into interest.

Related: How Much Home Can I Afford

With the Amortization Schedule, You Should Pay Down Your Principal Starting ASAP

Another thing is that with the mortgage amortization schedule, you are paying VERY LITTLE against your principal when you get your mortgage payments deducted from your chequing account.  Basically you are chipping away at the very tip of the iceberg in the beginning.  Why not chip away at it from the middle of the iceberg and get that debt away faster.

It's Kind of Fun Receiving Those Mortgage Disclose Statements

When I started paying some extra mortgage payments against my principal balance, I started getting these Mortgage disclosure statements from my bank detailing my total principal and interest payments to the end of term, and the total interest to the end of the term.  Seeing that number shrink is actually quite satisfying.  When you pay your mortgage regularly (you know, when they automatically take money our for your mortgage in your chequing account) you don't really see where that money goes (well, you do see that you owe less money to them, but you don't see how much interest you will have saved if you pay it down faster).

Here are 4 ways to Pay your Mortgage off faster if you haven't checked it out yet.  An article on the CBC website also agrees that paying down your mortgage might be a better idea than investing right now.

Readers, what do you think?  Would you do the same as me and pay off your mortgage faster?

12 Comments

  1. Money Beagle on March 25, 2015 at 10:10 am

    I’ve always said that regardless of what you think you can make in alternative investments, that paying off your mortgage early is never, ever a bad strategy. Good for you!



  2. Although a lot of people say it’s foolish to pay down your mortgage when it’s so low, it’s hard to beat the guaranteed rate of return paying down your mortgage provides. I should be mortgage-free by November this year.



  3. SST on March 28, 2015 at 12:54 pm

    More factors need to be addressed in this issue. Especially the pervasive and ongoing mentality that one’s principal residence is an “investment”. It’s not. (Perhaps in Vancouver it could be, with the average house price breaking $2 million by the year 2030.)

    With rates so low, why not pay the minimum and invest the difference over a 25-30 year amortisation? Thirty-year stock return have never been negative. Or utilize the Smith Maneouver to achieve mortgage reduction and wealth building with one fell swoop.

    This debate is almost seminally Canadian — afraid of large debt and large wealth.

    My personal example: wife and I aggresdively paid down mortgage during the first 8 years. We recently changed the ammortization out to 30 years, our payments are now laughable. We invest the difference (old-new) and also use the SM. As a bonus, wife got to retire…at 35. We could easily sell our house today for purchase price + all costs. In other words, we spend the first half of our mortgage (interest wise) reducing debt, now we are using it to build long-term wealth.

    Again, many more aspects to mortgages than what PF blogs and banks tell you.



  4. randy on March 29, 2015 at 9:20 am

    It’s actually almost impossible not to beat the return on paying a mortgage



  5. Kyle on April 3, 2015 at 6:18 pm

    I really appreciate what Sean has been able to do from a wealth-building and commitment perspective SST, but I would agree with your assessment and use of the SM as well.



  6. Dela on April 6, 2015 at 7:58 am

    This is a perfect example of why, if possible, it is crucial to make a 20% down payment upon purchase. Avoid the mortgage insurance altogether.



  7. Cassie on May 22, 2015 at 7:59 am

    I’m so glad to hear you’ve decided to tackle your mortgage. Better to pay no interest than to get part of your interest payments back through a tax return 🙂

    I just took out the money for our soon to be annual lump sum payment yesterday. Cheers to paying down mortgages!



  8. Greg on May 22, 2015 at 11:05 am

    Considering Vancouver real estate an investment is delusional. There is no guarantee of future returns to 2030 and losses are likely at these levels of price and house hysteria.

    Get rid of your mortgage quickly and you will have more cash flow and wealth building ability than the SM touting wizards who will still be fumbling through life with massive debt and risk.



  9. Kyle on May 23, 2015 at 12:12 pm

    Care to explain the math behind this assertion Greg?



  10. Alex on May 23, 2015 at 3:00 pm

    Both are gambles anyway. Will the $800k house fetch $2000k when you sell in 30 years or just $1000k? Paying down the house fast guarantees one thing though: I don’t have to worry about shelter, even if something hits the fan otherwise. Personally I don’t want to sell the house when I’m old. I want to live in it without paying rent.



  11. Kyle on May 23, 2015 at 3:49 pm

    They might both technically be “gambles” in some weird sense of the word Alex, but every single study I’ve ever seen over the long term shows equities to be a much better gamble than housing values. I don’t mind paying rent at all if I have $1 million+ because of long-term portfolio growth.



  12. Randy on June 8, 2015 at 2:33 pm

    My question is, why pay down the mortgage if YOU ARE SURE that you will be converting this into a rental property in a fairly short period of time (i.e. 5 yrs or so). Why not save your cash (HISA or low/medium investments) that you would’ve used to pay down your mortgage, and instead use it for a LARGER down payment on your next principal residence that you will be moving into in a few years? Won’t this save you more $ in the long run? Let’s say your mortgage on the new residence will be much higher, and let’s say interest rates may go up (who knows, they probably will go up in a few yrs?).

    Any thoughts?



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