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How I Used Lump Sums To Pay My Mortgage Faster

March 10, 2014
4 mins
A realtor helps a young couple with paperwork

Being mortgage-free at a young age can seem like a pipe dream, but for me it will soon be a reality. I plan to be mortgage-free before the age of 31 - and it all started less than two years ago, when I made an aggressive plan to pay down my mortgage in five years.

Home sweet home - and almost paid off!

My Start In The Housing Market

In August 2012, I purchased my house for $425,000 in Toronto, one of Canada’s most expensive housing markets. Since then, I’ve already paid off over $100,000 from my mortgage, which started at $255,000 and today it sits at just $137,000. I know paying off your mortgage early seems difficult, but I’m living proof it can be a reality.

So, how did I do it?

I Used My Mortgage Pre-Payment Privileges

Here's the catch regarding mortgage pre-payment privileges - many Canadians simply aren't using them, with less than four in 10 homeowners (38%) taking advantage of them last year, according to the Canadian Association of Accredited Mortgage Professionals (CAAMP).

Mortgage pre-payment privileges are the secret to mortgage freedom. If you have a closed mortgage, many lenders allow you to accelerate your mortgage repayment. Most lenders allow you to make lump-sum payments, increase your payment, and double up your payment. Your extra payments to straight towards principle, which can takes years off your mortgage and save you thousands in interest.

I Made Lump Sum Payments

As a single homeowner with a full-time salary of less than $50,000, I’ve been able to maximize my mortgage lump sum payment privileges and RRSP contributions each year. For many people, the idea of coming across large sums of extra cash can seem rare or even impossible.  What’s my secret? It all comes down to goal-setting and working hard to bring in extra income.

I Built My Budget To Save

I’m a big advocate of paying yourself first. When you’re a homeowner, it’s important to have a household budget, especially if you’re a first-time home buyer. A budget makes it easy to plan for the upcoming year and see how much you can afford to pre-pay towards your mortgage. A budget isn’t set in stone – you should regularly monitor your spending to make sure it’s on track and for ways to reduce your spending.  For example, I’ve been able to painlessly save on groceries by shopping at discount grocery stores, and on transportation cycling and taking the transit to work instead of owning a car.

I Boosted My Income

If you’re youthful with time on your hands, why not put it to good use? Part-time and freelance work is an excellent way to pay down your mortgage sooner. On the weekends I work part-time at a supermarket, earning approximately $10,000 per year. I also have a freelance writing business on the side. 2013 was my most successful year ever – I earned $20,000 from freelance writing. I also currently rent the main floor of my house for $1,550 per month.

I'm Focusing On My Mortgage Before Retirement

There seems to be a never-ending debate about whether it’s better to pay down your mortgage sooner or contribute to your RRSP. I’m in favour of paying down your mortgage first. Not only does paying down your mortgage early provide you with a guaranteed rate of return, it’s a form of self-insurance – if I lose my full-time job I can stop saving for retirement, while I still have to pay my mortgage.

If I’ve taken advantage of mortgage pre-payment privileges, I won’t have such a large outstanding mortgage balance to deal with. Paying down your mortgage is also a way to manage interest rate risk. Mortgage rates may be low today, but chances are they’ll be higher when your mortgage renews.

I Make Saving A Habit

I am a strong believer it’s important to become a habitual saver. With the debt-to-income ratio hitting a new record at 163.7% in the third quarter of 2013, it's clear Canadians need to concentrate on saving instead of spending. Instead of choosing your mortgage over retirement savings, why not do both? Contributing to your RRSP throughout the year is easy with a PAC (pre-authorized contribution) plan. Contributing $200 a week is a lot less painless than coming up with $12,000 right before the RRSP deadline. Once you receive your tax refund, you can use it make a lump sum payment on your mortgage – it’s that easy! If you have rental income, contributing to your RRSP can help you reduce your marginal tax rate.

The Bottom Line

There’s nothing stopping you from reaching mortgage freedom like me? It’s important to take control of your finances and prioritize what matters most. If I can reach mortgage freedom at a young age, you can, too!

Sean Cooper

Sean Cooper is the author of the new book, Burn Your Mortgage. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Financial Journalist, Speaker and Money Coach, his articles and blogs have been featured in publications such as The Toronto Star, Globe and Mail, Financial Post, Tangerine: Forward Thinking blog and TheDot. You can follow him on Twitter @SeanCooperWrite.

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