Long-term planning series: Pay yourself first

In a recent survey by CPA Canada (2012), four-in-ten Canadians believe they will be paying off their debt/mortgage after they turn 65.

When you think of retirement, do you think of RRSP’s (Registered Retirement Savings Plans), TFSA’s (Tax Free Savings Accounts), company pension plans, and government assistance?  In comparison, do you think about being mortgage-free?

In a recent survey by CPA Canada (2012), four-in-ten Canadians believe they will be paying off their debt/mortgage after they turn 65.  This is an alarming statistic.  

Imagine the possibility of investing in your future by owning your own home, and being mortgage-free, well before retirement.  Consider living in Europe and Japan, where 100-year mortgages were first introduced. You could never expect to own your home in your lifetime.  In Canada, a 25-year mortgage is currently the longest term.  The recent 40-year mortgage was deemed not to be in the best interest of consumers, and thankfully, is no longer available.  This presents you with a great opportunity.

The question of whether to “rent or own” has been widely debated.  I believe, in the long run, owning a home is almost always a better investment in your future.  When you own a home, you are building equity.  As long as you are building equity, you are accumulating wealth.

Here are some of the key points to home ownership that I consider to be essential to accumulating wealth.

  • Plan to purchase a home that you can afford.  Being “house poor” means that most of your disposable income goes toward your mortgage payment.  Purchasing an affordable home will allow you to have enough disposable income to pay all your bills, and still have a surplus for non-recurring or “unplanned” expenses, such as vehicle repairs.
  • Save for a down payment.  While banks will currently grant mortgages with only 5 per cent down, a down payment of 20 per cent will eliminate paying CMHC fees (this is a fee that many people are unaware of, that is built into your mortgage payment).
  • Shorten the amortization period of your mortgage.  Consider a mortgage term of 15 years.  This strategy builds the “pay yourself first” concept into your home ownership.  You can drastically reduce the money you pay to the bank in interest, and increase the money you keep for yourself.  The interest on a 15-year mortgage ($250,000 at 3.0 per cent) is $61,000.  Compare this with interest of $106,000 on a 25-year mortgage.  That is a savings of $45,000.  At an interest rate of 6 per cent, the savings jumps to $103,000 (not to mention after 25 years you will have almost paid double the purchase price of your house)!
  • Opt for a variable rate mortgage.  Many people feel extra security by locking in to fixed rate mortgages.  The problem is that there is a trade-off between security and cost.   Baby boomers may still be uncomfortable with this advice, after living through the late 70’s, and early 80’s when interest rates were both high and volatile.  However, over the last 10 years, variable rate mortgages have consistently been the best rate.

If you have a plan, and combine it with self-discipline, you will be mortgage-free well before the age of 65!  

About the Author

Alison Stanley