How We’ll Repay Our Mortgage in Less Than Three Years

As I mentioned last week, we recently bought a house in our little town. It’s been hard adjusting to small-town living after having lived in Montreal, Winnipeg, Calgary and Ulsan but if there’s one thing that towns have over cities it’s their amazing cost of living.

Our rented condo wasn’t perfect by any means but with smaller condos renting for $2,000+ in Calgary, our $1,500 all-inclusive rent was a steal. The rental stock in town is old and reflective of the housing shortage the town suffered during the last oil boom. We could have rented a cheaper house but would have had water issues, poor insulation and an absentee landlord. No thanks.

Despite thinking that we would be renters forever, a house came on the market that was perfect for us. Its 874 square feet (plus finished basement) with two bedrooms and two bathrooms. The out-of-town Realtor for this estate sale had priced the house to sell and within 24 hours of it being listed we had won the bidding war.

OMG GIVE ME THE DETAILS ALREADY!

Alright, here we go.

Purchase price: $195,000
Down payment: $5,000 (2.5%)
Closing costs: $1,700

Our assessed value with the town is $188,000 but with two independent realtors assessing our house at $225,000 we’re going to use that number. This not only gives us $30,000 of instant equity but reduced our loan-to-value ratio from a whopping 97.5% to “only” 84.4%. Slowly, we were getting there, if only on paper.

One of the big things we didn’t do was touch our RRSPs or TFSAs. With our accounts fully invested, we didn’t think the time was right for me to pull out money with the Homebuyer’s Plan or to withdraw from our TFSAs.

The terms of our loan are simple – we pay a slightly-higher-than-normal interest rate of prime (2.7%) but with the option to make pre-payments of any amount at any time. We definitely wanted an open term because there is no way we’re going to have this mortgage for a prolonged amount of time and we didn’t want to lock ourselves into a long amortization. We thought about taking a shorter amortization – maybe 10 years – but the payments would have been too high to manage.

As it stands, our mortgage payment is a tiny $700 a month. With a payment that low, we could realistically be in debt for 30 or more years. This obviously works out well for the lender as he can collect a risk-free 2.7% on his money well into his retirement.

However, the nature of our jobs means that some months are very lean and some are very rich. In the summer months for example, I can earn $5-6,000 a month but in December, I’m lucky to make $1,000. Compound that with going back to school (more on that later) and huge tax bills in the spring and you can understand why we didn’t want to commit to a permanently high mortgage payment.

Our August Balance

We spent July and August gathering up cash to throw at our loan. Our previously untouched Paypal accounts were drained and our savings accounts depleted to write a cheque for $26,000 and knock out a chunk of our loan.

For people who don’t want to scroll up, our mortgage now sits just under $165,000 including accumulated interest. This is 87% of the original loan balance and 73% of assessed value.

While our first month’s mortgage payment will not be replicated in September, we do have a goal of paying off another $30,000 by the end of 2016. In early 2017 we’ll have to start putting our cash flow aside for taxes but mid- and late-2017 should see at least two more large pre-payments. Combine these pre-payments with our regular mortgage payments and we should be debt-free by December 2018. Obviously 30 months is too long for me though so my ultimate goal is to have our mortgage paid off in 22 months, or by my 30th birthday.

I’m so psyched about paying off this debt that I’ve started a new Excel sheet and have TWO new fun graphs!

Graph 1 Graph 2

As you can see, we won’t be making a lot of progress month-to-month. That’s because with a $700 mortgage payment, we’re only paying about $300 of the principal, with the rest going to interest. This is not acceptable to me which is why we’ll be making giant pre-payments along the way (the huge drops).

How Can We Afford This?

This is the question that everyone’s been asking me – how can we afford to pay a $190,000 mortgage in less than three years?

  1. We don’t have kids. Being childfree not only allowed us to buy a smaller house and have small utility bills but we also don’t have the expense of buying things/experiences for the child.
  2. Each of us earns enough to sustain the entire household making one of our incomes “bonus” money. Instead of spending our “bonus” money on vacations and a new car like we did last year, we can put it towards our mortgage 100%
  3. I’m a frugal wizard and have the time to cook meals cheaply and the time to find ways to save money. Instead of buying a new couch, I found one online for a quarter of the cost. Rather than shopping at our expensive grocery stores, I rely on the local food co-op for veggies and buy our meat in bulk at Costco. We absolutely spend less than $300/month on groceries, even more so now that we’re trying to lose weight
  4. We’re committed to this goal and have a lender who gave us favourable terms. At a traditional bank we would have been forced to pay a higher interest rate, or had worse repayment terms. Either way, our monthly payment would have been higher and we would have to be more cautious about making pre-payments in case we had an unexpectedly slow month
  5. We will be holding off on our RRSP and TFSA contributions for the next few years. With tax-saving measures already in place, we won’t need to worry about tax bills as high as they were in previous years. Since the contribution room accumulates year over year, we can safely take three years off without falling too far behind

Why are You Doing This?

With interest rates so, so low right now it doesn’t seem to make sense to forego savings to pay off our debt. In fact, my husband was very against paying off our mortgage at all, preferring to throw hundreds of dollars away on interest every month rather than own a house outright in less than three years.

I however, cannot do that. I can’t imagine a world where I owe someone such an insane amount of money and one in which I’m OK with it. Yes, I understand that there are tax savings with contributing to an RRSP and over a period of 30 years the stock market will return more than 2.7%, blah blah blah. My head knows all that but I literally cannot stomach the idea.

Mortgages restrict you in so many ways. You can’t rent your house out for less than the mortgage payment, you’re forced to have homeowner’s insurance, your credit can go down the tubes/you could be homeless in the event of a job loss. Mortgages are dangerous, nasty things and I don’t like them in the slightest.

So join me on our long, long journey of 30 months while we tackle our mortgage. It’s not going to be easy but I hope that through this blog and through the support of my readers, I can stay motivated to repay all our debt. I’ve added a handy sidebar income and mortgage tracker, as well as a page on this blog which will keep track of our payments and balance owing. So exciting!

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