Will from Canada got a wake up call about the exorbitant amount of money he was wasting on mortgage payments and decided to pay the entire balance off in just six years. Enjoy!
Tell us a bit about yourself
I am 41 years old, and I am in my 16th year of teaching high school. I am married with two kids; a girl of 8 and a boy of 4 years old. My wife has stayed home with our kids since the birth of our daughter. Our idea of a good vacation is a wilderness canoe trip rather than some epic all-you-can-eat resort. My wife and I bought our house shortly after I started teaching, but while she was still completing her Master’s degree and various other schooling.
How much mortgage debt did you start out with?
Our initial mortgage was for about $120,000. We were lucky and bought our house for $154,000 before the housing market boomed. I believe the house is now worth roughly $300,000. My parents were kind enough to lend me $34,000 for a down payment so I could avoid having to get mortgage insurance. So in reality I was in debt for the full $154,000. I just didn’t have to pay interest to my parents for the portion they had lent to me, or even to pay it back on any particular schedule.
What motivated you to pay off your mortgage early?
After having paid on the mortgage for 6 years, I bumped into a colleague who was unusually happy. Upon asking her why, she told me she had just paid off her mortgage. I was stunned and wanted to know how. After crunching some numbers I discovered that I had been paying roughly $1000/month for 6 years (ie: $72,000) but I still owed just over $100,000 on my actual mortgage! I wanted to know why I had only managed to pay off $20,000 of the mortgage given I had paid the bank $72,000. After being shocked by the $52,000 difference, I then realized that I had been paying the mortgage and interest with my after tax dollars. So in reality it had cost me much more than $72,000 to get this far. My colleague said she had paid off $120,000 in 2 years! It should be noted that at the time, both she and her husband worked as teachers while I was (and still remain) the only breadwinner in our family.
What plan did you formulate to pay it off early?
After talking to my debt free colleague, I found out that she had used something called The Smith Manoeuvre – a financial plan that allows Canadians to be able to deduct the interest on their home loans via investments. I didn’t formulate my own plan, I just followed someone else’s plan via The Smith Manoeuvre. What I did do was a lot of reading and research about the efficacy of The Smith Manoeuvre. I also researched the tax side of it to make sure it was okay with the Canada Revenue Agency. I have been audited recently and everything is fine. Essentially the plan was:
Take any equity in my home and invest it in stocks that would produce dividends every month.
Use these dividends to pay monthly lump sums on the mortgage which would go directly to the principal balance as opposed to normal mortgage payments that go mostly to interest (which explains the missing $52,000 I mentioned earlier).
As I paid down the mortgage I was able to take more equity out of my home and buy more stock…which then increased the amount of dividends each month. I was able to put between $800 and $1000 lump sums down each month from the dividends. When I started this process I was still paying off the last year of a car loan. When we bought the car we had decided to pay it off in 3 years at $800/month. Once the car was paid off I just put that $800/month into my lump sums, making monthly lumps of $1800 +/-. In Canada, if you borrow money to invest, the interest you pay on the loan is tax deductible. So every tax season I got a tax refund of about $3500 +/- which I religiously put onto the mortgage in addition to my normal lump sums. I should point out that my wife hadn’t worked in 14 months when we started this process.
What resources did you use to help you through this process?
Basically just money, willpower, and a financial advisor who knew what he was doing. We made a decision that paying $52,000 for the privilege of having a mortgage for 6 years was appalling! The things I could do with that money! We paid off our $100,000 remaining mortgage in four years on my salary while raising the first kid.
Did you face any challenges along the way?
Sure. We didn’t go anywhere exotic or live the high life. Sometimes we had expenses that came up unexpectedly and we had to decide between that or the mortgage. Other than that we didn’t change much. We still bought the food we usually did, which is good quality local and organic.
What were you doing for a living while you were paying off the debt?
I have been a high school teacher the whole time. My wife has been a stay-at-home mother. Nothing fancier than that.
How did it feel once you paid it all off?
It felt good. But once it was paid off I remortgaged the house for $40,000 so I could pay back my Dad, and with the remaining little bit I did some renos on the house. I do the renos myself so I get more bang for the buck! We paid that $40,000 off in 2 years – by which point we had 2 kids.
What practical tips do you have for people looking to pay off their debt?
Don’t buy a house that is at the maximum of what the bank will give you. The bank LOVES your interest payments! Pay your mortgage weekly, it is more efficient. Put lump sums on the mortgage WHENEVER you can. This will dramatically reduce the amount of money you pay in interest. I paid my mortgage off 13 years early and we are now without a mortgage. I estimate, very roughly and very conservatively, that by doing this I have saved about $200,000 in interest payments for the next 13 years! Also, that $1000/month I was paying in mortgage payments now stays in my bank account…and I am still getting the dividend payments of roughly $1000/month. I get my yearly tax refund of about $3500 from the interest I pay on the investment loan. My wife’s still at home with the kids and she can choose to do so for as long as our kids need it. Life’s good!
Note: This is part of a series called “Debt Success Stories” which features people who were able to pay off a significant amount of debt. If you have a Debt Success Story I would love to hear about it. Please visit the contact page to let me know the details.