I 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.
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.
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?