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Mortgage Strategies

financial planI was recently reminded how low mortgage interest rates is making making home owners think about paying their mortgage faster or investing. It’s a constant conundrum for many, especially if you have limited savings to put towards everything. I will have to preface this post that I strongly recommend you put aside 10% of your gross income aside for savings. It’s called paying yourself first and has nothing to do with the interest rate environment. You do that regardless of any interest rates. That nest egg needs to be built. Once you have that in place and you can pump those savings, you have options and big decisions.

Related: Pay Your Mortgage Faster or Invest it

Mortgage Strategies

Depending on how long you have left, different strategies can come into play without putting stress on your wallet and yet it pays your mortgage faster. Beat the banks and pay the least amount of interest.

Accelerated Bi-Weekly Mortgage Payments

Use any mortgage calculator out there and you can see that using accelerated bi-weekly mortgage payments will initially reduce your amortization by 3.5 years on a 25 amortization. Making those two extra payments per year makes a difference. For many that are paid bi-weekly, it’s a simple process and it matches your pay structure.

Related: Best Mortgage Calculators

Increased Mortgage Payments

After 3 to 5 years of paying your mortgage, you should be comfortable with the home owner situation and have your budget in order. It’s time to look at those pay increases you get and put them to work :) Don’t forget that you are putting 10% of your gross income aside already. You are paying yourself first.

The goal here is to avoid lifestyle inflation and reduce your mortgage faster. I understand that this is where the conflict of interest rate may come into place and I won’t debate it as it is really dependent on your overall finance situation rather than just the interest rates. Someone with a $300K mortgage faces different dilema than someone with $100K.

Now that your finances are adjusted to being a home owner, think about putting your pay increases towards your mortgage. It’s not huge but you should still have 15 to 18 years remaining and putting your pay increases towards your mortgage will again reduce the amortization. I personally did that for 3 years.

Lump Sum Payments

Bonus time? if you have a bonus plan at your company or even stock options or an employee stock purchase plan (ESPP), it’s extra money that hopefully you don’t plan on using to cover your credit card spending. That extra money can definitely be put to work.

The question will weight on you to either top up your TFSA or RRSP or even your RESP. That is a fair question. What I have done is that I decide on a percentage to put away regardless. For us, it’s the fun fund. Having a family trip is important to us and we put a percentage away to fund our fun fund. The same process can be applied towards the mortgage.

Make Your Mortgage Tax Deductible

Once you are really confortable with your finances and ability to manage your debt, think about making your mortgage tax deductible – the reminder of it that is.

Executing the Smith Manoeuvre has been touted as a way to achieve this but it doesn’t make your mortgage tax deductible. It converts your mortgage into a tax deductible investment loan to help boost your investment. It’s basically an investment loan. I am still on the fence with this one. The process might help putting more of the income from the investment towards the mortgage which accelerates it.

The other way which officially makes you mortgage tax deductible is to sell your non-registered investments, pay your mortgage with it and borrow the same amount to invest. You continue to make your mortgage payments against your loan and all your interest is tax deductible. This is a tough one because you need to have savings outside your RRSP and TFSA. It’s already hard to keep up with those, who can really do this? I have some through Computershare and Can Stock but not enough to make it worth it just yet.

Related: When should you consider the Smith Manoeuvre?

My Mortgage Strategy

Here is what I have done so far:

  • Bi-weekly accelerate payments
  • Increased mortgage payments
  • With 7 years left, I am now considering my next strategy
    • Lump sum payments
    • Sell investments and to pay and borrow again to invest to create a tax deductible mortgage
    • Execute the Smith Manoeuvre

Readers: What’s your mortgage strategy? Do you play the interest rate game?

Image(s): FreeDigitalPhotos.net

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9 Responses to "Mortgage Strategies"

  1. I used to try to pay extra towards our mortgage. However, recently we refinanced to an interest rate in the 3% range and I feel I can do better by investing in the market over the long term. Another reason I prefer investing is the money is fairly liquid. If I pay down and eventually off my house I will be building equity. If I need money for some reason (besides what I have in emergency fund) then I will be forced to take out a home equity loan of some kind. However, if I have a large investment account I will have the ability to sell some stocks (although I’d rather not) to raise some capital.

    I think either way, you can’t go wrong. Either paying down your mortgage early or investing, you are still leading towards a financially bright future!

    • The Passive Income Earner says:

      @ Dan Mac

      I have a 2.4% variable rate at the moment (prime – 0.6%) and I do both; invest and pay down the mortgage. Our goal is to be done the mortgage when the kids reach university. I don’t think our RESP alone will suffice to cover the cost and with the mortgage paid, we will be in a great position. I am trying to avoid touching our TFSA so it can contribute to our retirement.

      How long is your term? Will you change strategy once interest rates are up? What’s your take on the front loaded interest payments on a mortgage regardless of the rate?

  2. We are paying $700 extra every month. It will still take a long time to pay off though. If we need extra money, we can stop paying for a few months.

    • The Passive Income Earner says:

      @Joe

      Looks like a good plan considering you have retired :) Once the big mortgage is gone it will be nice I suspect.

  3. paying interest only on my mortgage and use extra cash to pay other debts ;-) Very unconventional, but I don’t mind :-)

    • The Passive Income Earner says:

      @ Dividend Guy
      It’s definitely a way to manage the cash flow and prioritize certain debt. It’s a good one to know and be aware of for those that might need to do that some day.

  4. Got a fixed around 3% now for a while longer. I wish I went variable…kicking myself for doing that. Ugh.

    Our goal is to be done the mortgage in 9 years.

    The mortgage is still over $200 k. Too much for my liking. I hope to be below $200 K in 2 years.

    Once the mortgage gets to be around $100 k, if interest rates stay dirt low, I might take on the Smith Manoeuvre.

    • The Passive Income Earner says:

      @ My Own Advisor

      Would you consider selling your TFSA to pay the remaining, borrow the same amount and invest it in an unregistered account until you pay off the loan? The loan would be tax deductible at that point. I am leaning on doing this before doing the smith manoeuvre. Imagine you do this for 5 years and once it’s done, you funnel it all back in your TFSA and RRSP if you want.

  5. Putting pay increase towards mortgage is surely a creative and positive idea. If we take care of our debts regardless of condition of interest rate environment, we become the doer not talker. Loan City Home Loan

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