Author Topic: Best way to pay off mortgage early - double down vs prepayment  (Read 5664 times)

elaine amj

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Best way to pay off mortgage early - double down vs prepayment
« on: October 20, 2013, 07:24:51 AM »
As we work towards FIRE goals, I have taken a close look at our mortgage. In the last couple of years, we have been focused on lump sum payments every year, paying the max 15%. Now that our mortgage is down to just $51K with just a 3 year term left, I'm not sure that is the best method (it might never have been the best method, we didn't research it thoroughly).

I used some mortgage calculators and I think double down is the best method but want to get some feedback from wiser brains.

Mortgage Balance: $51,716.49 
Regular Payment: $595.13 
Maturity Date: August 25, 2016   
Term: 5 years 
Remaining Term: 2 years, 11 months 
Remaining Amortization: 3 years, 7 months     
Interest Rate: 3.59%     
Variable or Fixed: Fixed     
Payment Frequency: Biweekly

If I double down, we would pay an extra $15,470 a year and be done in UNDER TWO years (ran numbers for the first time and am super excited - IF these numbers are right).
Total interest over 2 years of: $1640.
If we do this, we can sock away extra savings directly towards retirement. (i.e. out of $40K a year we have been dedicating towards mortgage, we would put $30K and have another $10K for RRSPs/whatever).

If we prepay, we can only prepay 15% of our original amount. So $25K every year. We just did this so will be eligible again next September.
Total interest: $1877.
We would only have to prepay one more time next year. The following year, our regular payments should discharge the whole mortgage. I don't think we would be able to discharge it earlier than that without penalties.
If we do this, we can sock away extra savings directly towards retirement in Year 2. (i.e. we would put $40K in Year 1 and only $13K in Year 2, with $27K for RRSPs or whatever)

I'm still figuring out mortgages, etc and don't completely understand it all so would be super grateful if folks can help me point out assumptions I have wrong or anything I am missing in my calculations.
« Last Edit: October 20, 2013, 07:38:58 AM by elaine amj »

Daleth

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Re: Best way to pay off mortgage early - double down vs prepayment
« Reply #1 on: October 20, 2013, 09:36:56 AM »
If you owe $51k at 3.59%, it only makes sense to pay one DIME extra towards the mortgage if it's on some sort of balloon schedule (as yours appears to be--since if it only has 3 years left on it and you're only paying about $600 a month, that's not enough to pay off $51k in 3 years. On the other hand if the 3 year schedule is an arbitrary deadline that you set yourself, but the actual mortgage is set up to be paid off in another 8-10 years, then it wouldn't make sense to pay it off early because you're in effect only getting a 3.59% return on your investment. It'd make more sense to take all those extra mortgage payments and invest them in something with a higher rate of return.

KMMK

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Re: Best way to pay off mortgage early - double down vs prepayment
« Reply #2 on: October 20, 2013, 09:44:25 AM »
Daleth makes an important point. Do you have other investments and what are you making on them? Right now I've been getting around 6-7% on my index funds, so it doesn't make sense to put any extra money towards my mortgage at 3.39%. But my husband's money is only making like 2.5% so he should put more towards the mortgage. I'm going to keep putting all my extra money towards investments, especially as long as I have RSP and TFSA room, and then in 5 years when we see what the mortgage rates are, I'll rethink my strategy.

elaine amj

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Re: Best way to pay off mortgage early - double down vs prepayment
« Reply #3 on: October 20, 2013, 10:19:07 AM »
We delayed paying off the mortgage for years because we felt investments would give us better ret.urns and we could leverage our debt. Now I just want to pay it off because:

- psychological factor of NO debt
- frustrated with stock market.

Right now its mostly for  the feeling of freedom not to have any debt.

Also, our payments are $600 every 2 weeks - so $1200 a month. We have 3 years, 7 months of amortization left although just 3 years to the term of the mortgage. I'll edit my post to make it clearer.

KMMK

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Re: Best way to pay off mortgage early - double down vs prepayment
« Reply #4 on: October 20, 2013, 10:52:03 AM »
If that is your goal then, I don't think it matters which way you get it paid off. The difference in interest paid is negligible. I'd do whatever is easiest for you. Unless you can make double payments automatically, just making a lump sum payment is probably the way to go. Unless you like the psychological effect of making those extra payments more frequently, which is something I do enjoy, but I like fiddling with money more than the average person.

PapaDoble

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Re: Best way to pay off mortgage early - double down vs prepayment
« Reply #5 on: October 21, 2013, 11:22:41 AM »
"...we have been focused on lump sum payments every year, paying the max 15%."

What 15% maximum overpayment are you referring to? Is this a lender-enforced limit?

kdms

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Re: Best way to pay off mortgage early - double down vs prepayment
« Reply #6 on: October 21, 2013, 01:31:33 PM »
Yes...the banks here in Canada generally impose a percentage limit on the amount that can be prepaid as a lump sum.  The percentage varies depending on the bank and terms of the mortgage.

(That's assuming the OP is in Canada, as RRSP's were mentioned in the original post....)

Exflyboy

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Re: Best way to pay off mortgage early - double down vs prepayment
« Reply #7 on: October 21, 2013, 03:23:43 PM »
Pay as fast as you can but do not pay anypenalties as that is just throwing money away.

As for pay off on 2 years vs 3 years.. Well what if the economy nose dived in year 3?.... Your stocks are worth hardly anything, you have no job etc etc.

As long as you have enough money to pay off your mortgage at that point its OK..... But if your $20k short you could loose your house back to the bank who ypou can bet will make a tidy profit on it!

Thats why paying the house off is much more than just a case of which way is the best way to invest.. its the roof over your head.. if you own it its yours!.. well almost.

Frank

Spudd

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Re: Best way to pay off mortgage early - double down vs prepayment
« Reply #8 on: October 21, 2013, 04:58:12 PM »
Depending on your lender you may even be able to do both. I'm with TD, and I can both increase my regular payment (up to double) as well as lump summing up to 15% of the principle annually.

Self-employed-swami

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Re: Best way to pay off mortgage early - double down vs prepayment
« Reply #9 on: October 21, 2013, 05:07:28 PM »
I am in Canada, and I can pay 20% as a lump sum annually, and I can increase my payment by 25% on each yearly renewal anniversary as well.  I am now making double-up payments each week, as we've had the mortgage for 4 years, and I've upped it each year by the full 25%.  We had a 35 year mortgage, but we've only got 7 years left, if we never make another lump sum payment.

elaine amj

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Re: Best way to pay off mortgage early - double down vs prepayment
« Reply #10 on: October 21, 2013, 08:19:22 PM »
I can do both? That would be awesome.

And yes I am in Canada. I am with First National. I'll have to ask to confirm, but I don't see anything on their website saying I can't do both. Would never have thought of it though. You guys are great :)

I think we will double down and then next September's we will find out how much more we were able to save and apply it towards our mortgage. Very exciting to think we could be done very soon.