Why you should pay down your mortgage sooner
Money can bring happiness – it can also cause stress, especially in relationships. Over two-third (68 percent) of couples say fighting over money would be their top reason for divorce, followed by infidelity (60 percent), says a BMO survey. That’s right, fighting over money is worse than cheating on your spouse!
Many of those arguments have to do with debt. And what’s the single biggest debt for most families? A mortgage. It used to be considered taboo for seniors to carry debt into retirement. How times have changed. Of homeowners 65 years or older, over a third (35 percent) have a mortgage, according to Mortgage Professionals Canada. These aren’t just small balances we’re talking about – the average loan-to-value ratio is 33 percent.
A common argument is that it makes no sense to pay down your mortgage, especially while mortgage rates are so low. I disagree. While I’m aware most people can’t pay off their mortgage in three years by age 30 like me, that doesn’t mean you should take your time paying off your mortgage and carry it into retirement. Here are three compelling reasons from my upcoming book, Burn Your Mortgage: A Simple, Powerful Path to Financial Freedom, on why you should pay down your mortgage sooner.
To reduce stress
Skyrocketing home prices mean people are taking on bigger mortgages than ever before, often carrying debt into their golden years. Paying off a mortgage is especially challenging when you’re on a fixed income. What if you’re in your peak earning years right before retirement and you’re suddenly laid off from work? This can throw a wrench in your plans to be mortgage-free. Don’t put yourself in this risky situation, to begin with and aim to pay down your mortgage before retirement. By paying down your mortgage early, you can reduce stress and hopefully avoid a costly grey divorce. You might even be able to afford to take a job you truly enjoy that pays a little less.
To save on interest
To see how much interest you’ll save, it helps to understand how mortgage payments work. The interest on mortgages is front-loaded. In the first five years of your mortgage, as much as 90 percent of your payments can go towards interest, not principal. If you pay off your mortgage over 25 years, you could end up paying over double the purchase price of your house when interest is included. Ouch!
Mortgage rates are near a record low, so take advantage of them. Make lump-sum payments with “found” money. Instead of using your tax refund money to go on a cruise to the Bahamas, pay down your mortgage. You may not get as nice of a tan, but by making extra payments, you can save tens of thousands of dollars in interest and pay off your mortgage years sooner.
A guaranteed rate of return
There are few things in life that are certain besides death and taxes. Conventional wisdom says you should take your time paying down your mortgage. Why should you be in any hurry when you can get a better return in the stock market? While that may be true, there’s no guarantee. If we have another financial crisis, it could take your portfolio years to recover. That’s why I prefer the guaranteed rate of return of your mortgage.
Achieving financial freedom
A paid-off home is the first step in achieving financial freedom. A mortgage-free home reduces financial stress and makes a lot easier, especially in retirement. With your mortgage paid off, you can afford to pursue your true passions in life like writing a book, traveling and volunteering.