I recently read an article in the Financial Post about how one couple paid off their $104,800 mortgage within 5 years. At first glance the accomplishment may seem impressive, especially the thought of being mortgage-free within such a short time. However when dissecting their financial situation, the story becomes less unusual and for the following reasons.
The couple’s mortgage balance is low to begin with
According to superbrokers.ca the average home loan in Toronto is $270,729,which is almost triple the mortgage amount from the article. A mortgage balance of $104,800 with a $700 monthly payment is not applicable to most home owners in Toronto. With a $700 monthly payment, becoming debt-free is not an amazing accomplishment. Most people are paying a much higher monthly mortgage payment, and having to save more money to pay down their mortgage may not be feasible. The article
states the couple’s income is roughly $100,000 per annum, and there is good indication they do not have children, therefore paying down a $104,800 mortgage balance does not come off as a great challenge.
Better to increase your monthly mortgage payment by a few hundred dollars a month
Multi tasking with your finances is an essential part to paying down debt and saving at the same time. With paying down your mortgage, the money is simply gone with no access unless the house is sold or another loan is taken out against the equity in the home. Although the couple will be saving about $700 a month in mortgage payments, it is not a significant change compared to having money in the bank for other endeavors. It may be better to increase the monthly mortgage payment by $100-200 dollars (depending on your budget) and save the rest of the money on a savings account. You will still save thousands of dollars in interest and have accessible money for better living.
Save up money for something else
The money saved could’ve been used for other projects such as renovations, dream vacations, RSP and more. Depending on your goals in life, paying down debt may not be top priority when it comes to living your life and enjoying the present moment. Family situations are very different, especially if you have kids, then their education, extra curricular activities etc. may take up a chunk of your savings.
Depends what your age is
Paying down debt makes sense most when you are nearing retirement age, since it is ideal to retire debt-free. However, if this is your first home, it is unlikely you will live in it forever. Many people sell and buy a few times in their lifetime before settling down in a dream home. Therefore, saving for a downpayment on a second home may make more sense than paying down the existing mortgage. For example, my s.o. and I purchased a home, we invested our money in renovating the basement. We resided in the basement and rented out the top. We plan on purchasing a second newer home within a few years, with the money saved while living in the basement. Therefore, paying down the mortgage is not a priority for us but saving for the next downpayment is.
What about living your life?
Saving money and waiting for the special time to spend it may not be the best option because that special time may never come. Some people save for their entire life and wait for retirement in order to spend the money. However, life happens, some people pass away, becomes ill, other family circumstances get in the way and the money ends up being used in other ways or simply gets passed down to the next generation. It’s important to not deprive yourself from living, and enjoy the present moment, that cup of coffee may save you a dollar if not purchased, however your soul may feel neglected. All in all saving money is a good habit, however balancing the art of saving and spending is an even better habit.