Creating a Happy, Colorful, Handmade Home & life on the shores of lake superior

June 23, 2014

Money Talks: Mortgages and Monster Trucks


I learned a hard lesson in my younger-youth (I'm still young-ish!) that was reinforced by our recent house sale: magically making money isn't going to happen for me.  In my early teens I invested $5000 with Investor's Group (and my parents' help).  Since my birth, my grandmother had put aside $25 a month for me, and the plan was to double my money by the time I ventured off to law school.  Instead, I was hit by the Enron bankruptcy (and just a slew of other bad luck, despite a pretty diversified portfolio).  For nearly a decade I lost money.  In my mid-twenties I finally gave up, sold my stocks, and walked away with only $3000.  It was crushing, especially because my grandmother had worked so hard to gift me that money and I felt like I had squandered it.  (I should have invested in Pyrex, the prices have exploded...)    

When Handy Hubby and I bought the townhouse I hoped that when we eventually sold it, we would see the windfall of profits for which I'd been patiently waiting.

Nope.

When we sold the townhouse, we broke even.  We got back every cent we put into it, even the real estate agents' fees, but we didn't make any money.  We did, however, walk away from the sale with a mittful of cash - enough to pay for the down payment on the lakehouse, enough to replenish our depleted savings accounts (carrying two mortgages proved more draining than we imagined), and also enough to gleefully skip over to a car dealership and buy a brand new Ram 2500 Truck.


Hello Lovely.

"Pay For a Brand New Car with Cash," had been on my bucket list since before I could drive (I was a weird kid).  It was truly exciting to pay for our truck with cash, although it was a lot less exciting than I had dreamed.  I always envisioned a burlap sack with a $ painted on the side, and me dramatically - no, triumphantly - counting out bills.  In reality we paid using a cashier's cheque, but it still felt like a major win to own our truck outright as soon as we drove it off the lot.  

As we pulled away from the dealership, we grinned at each other.  Neither the stock market nor the housing market had been kind to us.  But we had built up equity in our house and made magic happen.  WE did that, and it felt good.

Our biggest "secret"?  We over-paid our mortgage.

We started off small.  We were very nervous about jumping from renting to owning and opted for a longer amortization to decrease our monthly payments.  As soon as we were settled into a routine and knew our limits, we added a small amount to each of our payments.  We kept increasing our payments, any chance we got.  When we finally finished paying off student debt, we started putting a good chunk of that amount toward the mortgage every month.  When we finished paying off our car loan, we added even more money.  By last year, we had doubled our monthly payment.  All of that extra money went straight to the principal, which saved us a lot of interest.  When we bought the townhouse we had a schedule of 35 years to pay it off (yikes!), but after only four years of over-paying, we'd whittled the number of years left to 7!

Now we're turning our attention to our new mortgage, eager to reduce that beast too.  Some banks do whatever it takes to keep you paying a mortgage, longer, by offering things like low monthly payments (with lengthy amortization periods), low down payment options, "payment holidays".  Our own mortgage lender discouraged us from paying extra on our mortgage.  A good financial expert can help determine the right course of action because paying off a debt isn't the only secret to financial health, and in some cases it might be wiser to invest or save extra money.  I hesitate writing these Money Talks posts because I'm no financial expert (obviously), but I think there's value in laypeople chatting about what has worked (or not worked) for them.  Plus, now that I'm 30, aren't I inching toward the age when it's appropriate - nay, expected - to dole out advice to young whipper snappers?

Here are a few more thoughts on saving money on a mortgage - as well as some reasons why there is no one-size-fits-all advice.

There's value in a large down payment.  In Canada Mortgage Default Insurance (CMHC Insurance) applies to a mortgage with a down payment between 5%-19.99%.  It's good and bad: it means people can buy a house with a smaller down payment than used to be required and mortgage rates overall are (supposedly) lower, but it also means that folks with a down payment of less than 20% incur a fee (around 2-3% of the purchase price).  It's difficult to determine the "right" course of action when it comes to down payments.  Sometimes even if a person/couple has the 20% required, they might want to use it for renovations/emergency savings so it could be smarter to just accept the fee and not need to rely on credit cards or a personal line of credit for updates or emergencies that arise.  Also, it might be worth it to incur the fee rather than continue to rent.  Each person's situation is different, but to save money on a mortgage, the larger the down payment the smaller the amount of interest charged - plus the CMHC fee can be avoided

A weekly or bi-weekly payment can help.  We've always liked a weekly or bi-weekly payment plan to help nudge thing along.  I'm not promoting RBC bank, but I found a great chart on their website that illustrates the savings with different payment options (ranging from monthly to accelerated weekly).  A mortgage lender can help figure out the exact savings for you.

 

Mo money, less interest.  A mortgage is one of those problems you can throw money at.  For us, adding more money to our mortgage payment helped reduce a mortgage because all that "extra" money went to the principle.  Any amount helps and can really add up.  Again, I don't want to promote a particular lender but this calculator demonstrates the savings generated by even a small additional payment to a mortgage.  Lump sum payments are a good approach too (see you, income tax return!).  Unfortunately, lenders typically cap the amount of extra money that can be put toward a mortgage annually.  

Of course the egghead suggests reading.   In my humble opinion, I think that individuals need to be informed, in general.  No institution is perfect and we can't rely on professionals exclusively.  For example, there are excellent interior designers out there but even folks who hire one flip through a decor magazine to get an idea of what they'd like.  Cancer patients often read up on the latest courses of treatment so they're informed when meet with their doctors.  I think we need to approach finances the same way.  Having said that, a lot of jibber-jabber about finances is really difficult to comprehend.  I may or may not have a low-risk investment in "The Utilities," a decision based solely on how profitable it is to own the utilities in Monopoly.  I do my best to muddle through.  Gail Vaz Oxlade is really good at making it all seem so simple.

One day I might work up the courage to try higher-risk investing or, better yet, maybe I'll get my windfall after all (that's why we buy lotto tickets!), but ultimately Hubby and I know that we need to work hard for future financial security - there's no easy answer.  All I know for certain is that if we continue to chip away at our mortgage, the next time we sell our house I'm buying my dream car...vroom vroom.
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16 comments

  1. In 5 years I have whittled my amortization from 35 years to about 20 (I think? maybe its 15). My bank is great at repayment options and while I cant afford to double my payments, I do pay bi-weekly and I up it by the allowed 15% every year. I also through straight cash at it if I get the chance!!

    Congrats on the new car!

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    1. Casey, that's awesome!! You're really making incredible progress. I'm happy your lender is so encouraging.

      One reason we could double our payment was that our house was pretty inexpensive.

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  2. Great tips. Another mistake I see a lot of first-time buyers make, is to be swayed by the size of mortgage a bank will give them. Just because the bank wants to give you a $400,000 mortgage doesn't mean you should buy a $400,000 house. Ending up house poor is a serious issue. I also like Gail Vaz Oxlade, and whenever I watch her programs I am shocked at how little basic, common financial sense some people seem to have. Seriously, this stuff should be taught in school.

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    1. Sandra, that's such a great point!! The banks DO throw huge mortgages at people. For both of our homes we've set a budget smaller than what the bank offered and it still seems daunting. I know some people in giant homes who can't afford a bed for their kid - he sleeps on a mattress on the floor. But their house is huge.

      Thank you so much for bringing that up!!

      I am also shocked by how little people know about money. I wish it had been taught in schools. Canadians have really high levels of consumer debt compared to other countries. You'd think some education would be put in place.

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    2. Yup! My bank told me I could borrow 50k more than I did - and I struggled sometimes to make payments and still eat good food and leave the house occasionally, as it was. Technically I could have made the higher payments but oh boy it would not have been fun or worth it. And that was with a variable rate, while the interest was going DOWN! When I took out the loan, I did my budget and assumed interest would go up several percents. I wanted to make sure I could still pay it if that happened.

      When my interest went down, and I got a raise, I put all that extra money into payments. It came out in the wash - I don't have credit cards and I had very little savings after doing renos, so I did end up redrawing the mortgage a few times for emergencies - and ok, once for Christmas, which I am embarrassed about. But it did save me interest in the meantime, much more than I would have in a savings account and I wasn't paying credit card interest either. I am in advance still - I can't see the length of my loan at the moment but I'd say I've knocked a few years off. Not as much as I'd like but you know, every little bit does truly count. Sometimes that $20 is needed and I spend it, but when I can I chuck it on the loan.

      My partner has just paid off his own mortgage. In SIX YEARS. He had some help and some lucky windfalls, but most of it was just not spending money on anything except the loan. Which I am not willing to do - I want to still be a human person who does things (not that he hasn't, but his work clothes are a uniform and he has cheap hobbies) but he was also earning a lot less than me for most of that time. Most of it was paid in $5 or $10 here and there.

      I wish I'd been taught this stuff in school, too. I had to teach myself how to balance a budget, and compare phone contracts, and all that stuff. It's maths anxiety times a million! I do ok but you know, it took me a long while to get as much of a grip on this stuff as I have. I was very lucky to have a good loan rep, who gave me excellent advice when I got my loan. I could very easily have been taken advantage of. I'm glad you're talking about it - when I got my loan I didn't even know what to look for, or what to think about. I had just never ever heard it talked about before!

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    3. The major error our bank made in offering us larger loans than we accepted (both times) was not calculating other expenses properly. They underestimated condo fees for the townhouse and completely forgot about insurance for the lakehouse. They had blinders on and only looked at debt vs. income - nothing allotted for other housing expenses. It's so great you have a lender you can trust! We've yet to find a good one, who can provide us good advice. Instead, we've had to argue with each rep about what we can actually afford.

      Incredible that your partner paid off his whole mortgage. He should be writing a money blog!! But you're right: it's about balance. My Investor's Group rep from long ago had a stroke a few years ago and gave me new advice: "Don't worry about saving, you might die tomorrow. Enjoy your money". It was a weird thing to hear from him, but his stroke had totally changed his perspective. His advice was a little too simplistic but he had a point: you should enjoy the money too. Live with it.

      It would be so nice to have been taught this stuff in math class. I don't care how many watermelons fit into a sedan, I want to know how many cans of paint I can afford!!

      It sounds like you're doing awesome, despite an educational system that has failed us all in the finance department. You've put extra toward your mortgage, but still enjoyed life and - best of all - not accumulated credit card debt. Knocking a few years off is no small feat. Congrats!!

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  3. You are spot-on, Tanya. When we got married, my spouse had a huge debt, and I had just bought our townhouse. So... We lived on my salary for two years while he paid off his debt with what he made, and we paid an extra $100/month on the mortgage. It wasn't much compared to what you guys did, but we are debt free... and had a chunk to take with us when the townhouse finally sold this past winter. Keep telling your story. People need to hear that they don't have to be financially terrified their whole lives.

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    1. Your story is so inspiring. It's motivating to hear how well you and your partner worked together to combat debt. Congratulations on being debt free!!

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  4. I really loved reading your advice, Tanya. I really wish I gathered the courage to hassle a mortgage but I'm still thinking about it. Reading about what you went through really gives me a great perspective on things

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    1. Hi Dora,
      If you ever want to chat more/ask me questions, you're more than welcome to email me (dans.le.townhouse@gmail.com). A mortgage seemed so scary to me in the beginning, but we just didn't want to rent anymore. It helped to talk to people who had recently bought/sold houses.

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  5. about 4 years back we bought a fixer upper in a great neighbourhood. we reno'ed the hell out of it and sold at profit. split the $$ we got into two downpayments, one on a condo, one one a townhouse for us. 20% down each with cash left over for a rainy day. lived in the condo for a year as our principle residence, while the townhouse was being built (this investment property did not require 30%+ downpayment to acquire). now moving into our townhouse, with condo already rented out!

    the townhouse is our FOURTH home, and we're around the same age as you guys. just turned 30. with two little ones. we're hoping that hubby will get into a great PhD program in the next year and so he'll be quitting his job to do that, long distance! :) and we're renting the basement out to my brother to help us pay off the mortgage faster! :)

    it is amazing how many people do not realize the power of cash and the power of not spending every dollar that comes in. the freedom we have due to our low mortgage payment is incredible. the security we have due to a 2nd property that is being quietly paid off is also awesome. We have yet to buy a car with cash, but I"m looking forward to that a little down the road :)

    yours is a great story, thanks for being so open about money. many people are not and it's a missed opportunity for others to learn.

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    1. You and your husband are INCREDIBLE!! You have accomplished way more than us, so I'm so glad you shared your story. I'm so happy you made money on your reno'd flip. You definitely are an inspiring example of what can be done if you're smart with money. It sounds like your savvy has made it possible for hubby to get his PhD!

      Congrats!! I'm just so blown away. I always thought Gail Vaz Oxlade should do a show of people doing it right and then maybe have them compete for some awesome prize. I'd vote for you, on my imaginary show.

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    2. sorry, i hope i didn't come off as bragging. it's just that so many ppl talk about renos, without talking about how they are paying for these. and while we all have our own unique situations, it is nice to see the lifestyle choices behind it all :)

      just to say again, really loved your post :)

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    3. You definitely did not seem like you were bragging. I'm SO happy you shared. Sometimes when I feel bad about a money decision I've made, I'll watch a show like til debt do us part and think, "hey, I'm still more together than these people!" but that's hardly the right attitude. I like hearing about people who really have their stuff together because it's so motivating. And you're right: we see fancy renos but rarely see how they happened financially. I really, really loved reading about your experiences.

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  6. Great and inspiring post. We are working hard to rid that mortagage payment as well. I am a big believer in extra payments. We worked very jard last summer paying out debts off and the feeling of being debt free is the most freeing feeling in the world. Loved hearing your story Tanya! You should write for a magazine
    Amy

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    1. Thanks, Amy! You always know how to make me smile :)
      That's incredible that you paid off your debts last summer. "Freeing" is such a good way to describe it. And, from the looks of your IG, it seems like you and your family have the freedom to travel and relax more now - that's fabulous!!

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