Kevin and Stella, both 30 years of age, have purchased their first home. After a 20-per-cent down payment, they have a $330,000 mortgage, which they plan to pay down over 25 years.
Since it’s their first home, they have locked in a five-year fixed mortgage. Given a hypothetical interest rate of four per cent and assuming the rate remains steady over the duration of their amortization, Kevin’s and Stella’s mortgage will be shortened by taking some extra steps.
If the couple makes the minimum payments of $1,779 per month, they would be mortgage free at 55 years of age.
However, given that rates may rise in the future, by increasing their monthly payment by $100, Kevin and Stella can reduce their amortization by three years. By following this plan, they will be mortgage free at 52 years of age and will have the opportunity to redirect three years of mortgage payments to their retirement savings.
In addition, they can decide to cut back on some of their restaurant and entertainment costs. In doing so, they have an additional $2,000 annually they can contribute in a lump sum payment towards their mortgage. This step further reduces Kevin’s and Stella’s amortization so that they will be 49 years of age when they make their last mortgage payment.
A new poll reveals that, on average, Canadians currently holding a mortgage believe they will be 55 years of age by the time their mortgage is paid off, leaving them with a short window of opportunity to ramp up their retirement savings in their “mortgage-free” years.
However, the CIBC poll, conducted by Harris-Decima, also revealed some positive news. Among Canadians in the poll who have successfully paid off their mortgage, they achieved mortgage freedom by 48 years of age, which is a full seven years sooner than current mortgage holders anticipate.
But becoming mortgage-free faster is not easy and involves some sacrifices, such as cutting back on vacations and entertainment.
“A key finding in this poll is that Canadians who have successfully paid off their mortgage made some difficult choices about how best to spend their money over the course of their mortgage,” said Delaney.
A majority of mortgage-free respondents used one or more strategies to pay down their mortgage faster: 52 per cent made lump sum payments annually when they could, 52 per cent increased the amount of their regular mortgage payments, and 40 per cent increased the frequency of their regular mortgage payments.
“Being mortgage-free is a top financial priority for many Canadians, and this poll suggests that by having a plan, Canadians may be able to pay off their mortgage sooner than they anticipate,” said Colette Delaney, executive vice-president of mortgage, lending, insurance and deposit products at CIBC.
“Consider what you normally pay to your mortgage every month, and then imagine that dollar amount going towards your retirement savings instead. That really puts into perspective the difference paying off your mortgage even one or two years earlier can make.”
There are some strategies Canadians can employ that can minimize the feeling of sacrifice. For example, using your tax refund for a lump sum payment in the spring or increasing your mortgage payments by a modest amount at the start of each year if you receive a salary increase can help you accelerate your mortgage repayment while minimizing the impact on your overall cash flow.
Some Canadians currently paying down a mortgage, or planning to purchase a home with a mortgage may feel that as house prices have steadily increased, becoming mortgage-free sooner may seem like a difficult task today. However, it’s worth noting that some Canadians who are mortgage free today started out in the late 1980s and early 1990s with interest rates sometimes in the double-digits, and yet still achieved mortgage freedom in their late 40s on average.
“If you review your finances and find a way to contribute a little more towards your mortgage every month, or make an extra lump sum payment, you can capitalize on today’s low rates and accelerate your mortgage repayment,” said Delaney.