I find that many people nowadays are buying their home with only 5% down and amortizing the mortgage over 30 years. Now I have no problem with this strategy. After all if you are in a position to do so, it makes much more sense to buy rather than renting. However, the problem that I have is that most of these people don't have or make a plan to reduce their debt.
They often are happy with just paying whatever their mortgage is and just continuing to live there life. This is not a very smart strategy. Let’s say this person bought their home for $350000 with 5% down amortized over 30 years. Assuming that they never made any extra payment this home after 30 would have cost them $537970.58 including interest. This is also assuming that the mortgage rate does not go up during their term which is not realistic. That’s over $190000 in interest.
That’s why it’s important to make a plan to pay off your mortgage as quickly as possible. By taking some simple measures you can pay off your mortgage faster and keep some of that money in your pocket. Here is a article that I found
I spent most of my twenties paying off student loans and credit card debt. When I reached my thirties, my priorities shifted to saving for the future.
My wife and I made the final payment on our student loans last year and sat down to create some new goals. We looked at our household budget and made some decisions on what to do with our extra income.
We came up with these four priorities:
- Be mortgage free in 15 years
- Max out our TFSA
- Pay for our daughter’s post-secondary education
- Build a bigger emergency fund
We needed a path to get there. After our bills are paid, we have an extra $2,000 per month to work with. So we divided that up into a 40 per cent, 40 per cent and 10 and 10 per cent solution.
Increase mortgage payments: We will increase our mortgage payments by $800 per month to meet our 15 year mortgage retirement goal.
Now we take advantage of our mortgage prepayment privileges and direct 40 per cent of our extra income toward paying off our mortgage ahead of schedule.
Maximum in TFSA: I belong to a defined benefit pension and don’t have much RRSP contribution room. This means the bulk of our investing will be done using our tax free savings accounts.
My wife and I each have $5,000 in annual contribution room, so we are putting $800 per month into our TFSAs and investing in blue-chip dividend stocks and REITs.
RESP contributions: We want our daughter to get through University without the burden of student loan debt, and contributing to an RESP is the best way for parents to help. The government kicks-in one dollar for every five dollars you contribute, to a maximum of $500 a year. That’s a 20 per cent return.
We’re putting away $200 per month – 10 per cent of our extra income – into RESPs.
Bigger emergency fund: I didn't keep a big cash emergency fund when I was in my twenties. Now that I have a young family to support, I prefer to have a few thousand bucks in a high interest savings account for peace of mind.
Each month I transfer $200 into my savings account with ING Direct.
We’re lucky to live frugally in a fairly inexpensive city, and to have a healthy cash surplus at the end of every month. The key is to make the most of your savings by charting a path to achieve your goals.
You never know what life will bring. Making a financial plan is very wise just in case times get tough. It’s never a bad idea to eliminate debt.