ANALYSIS: Sean Cooper’s story has gone viral. At the age of 30, he paid off his $255,000 mortgage in 3 years and 2 months. I spoke with Sean a few years back and trust me he has always been financially savvy and very frugal. But it was more than that. He was driven by a deep desire to free himself from the stress and risk of carrying huge amounts of debt. Kraft Dinner became his meal of choice, he worked three jobs, there was literally no travelling, he brown bagged it for lunch and actually lived in his basement apartment while renting out the balance of the house. We are all in awe of him and yet there were sacrifices he made that many say they simply couldn’t or wouldn’t consider doing.
People are looking for a little more balance in their life, but can they afford that luxury? In a recent report from the Canadian Centre for Policy Alternatives, 1 in 10 homeowners younger than 40 would be under water on their mortgages if real estate prices crashed. It is estimated that 260,000 Canadians would see their net-worth wiped out if home prices dropped 20%. Canadians in debt in their 30s carry an average of four times their incomes, with those living in Toronto, Vancouver and Calgary the most vulnerable.
It doesn’t have to be all or nothing. There might be a balance to accelerating the mortgage burning party.
Here are a few tips to retire your mortgage faster –
1) Accelerate to bi-weekly payments – every 2 weeks for 26 payments per year. A $300,000 mortgage at 3% over 25 years will cost $125,920.44 in interest. Increase your payments to bi-weekly, and you will shave nearly 3 years off your amortization schedule and save just over $16,000.00 in interest.
2) Make a lump sum payment once a year. An annual lump sum payment of $250.00 on a $400,000 at 3.5% over 25 years combined with bi-weekly payments results in decreasing 3.5 years off your amortization.
3) Put “found” money, and that includes gifted money on the mortgage. Little amounts chip away and could save you years. Use RSP refunds to pay down principle.
4) Consider rounding up your mortgage payments – if you pay $457.00 a month, round it to $500.00 and combine it with bi-weekly payments. You won’t really notice the difference and the savings are huge.
The following few tips came from Sean himself:
5) Shorten your amortization period. By shortening your amortization from the standard 25 years to say 20 years, your mortgage payments will be slightly higher, but you’ll save a boatload of interest.
6) Pay your mortgage as if mortgage rates are higher. By upping your mortgage payments as if rates are 3 percent higher, you’ll be prepared if interest rates increase when your mortgage comes up for renewal.
7) Do shop with a mortgage broker. Your local bank branch may not give you the lowest mortgage rate. By shopping with a mortgage broker, you’re more likely to get the lowest rate. A mortgage broker is compensated directly by the lender, so you won’t pay anything out of pocket.
8) Do consider other factors besides just the interest rate. The lowest interest rate isn’t always the best mortgage. A slightly higher interest rate may offer you perks, like more generous prepayment privileges.
9) Do understand mortgage penalties. Chances are when you sign up for a mortgage you don’t intend to break it. But sometimes life happens – you get sick, lose your job or get divorced. If you decide to sell your home, you could face a hefty mortgage penalty. Ask about mortgage penalties before signing up for your mortgage. Find out whether your mortgage is portable.
10) Bottom line: if you picture yourself mortgage free, then arm yourself with the right tools and strategies, to transition to being debt free and enjoy the freedom Sean Cooper is experiencing that much sooner.