Mortgage Free At 31: Worth The Sacrifices
The following article is a guest post by Sean Cooper who blogs about personal finance at Sean Cooper Writer.
According to a poll by CIBC, the average homeowner won’t pay off their mortgage until right before retirement – age 58. I plan to do it a lot sooner – by age 31. I bought my house at age 27 in Toronto, Canada’s second most expensive real estate market, yet in only two years I’ve paid off over half my mortgage.
I received a lot of feedback from my recent article in the Globe and Mail, I’m on track to be mortgage-free by 31. While some people thought my goal was ambitious, other people questioned my desire to reach mortgage freedom at such a young age, saying I was sacrificing too much.
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I’d like to address those concerns and explain why I still strongly believe in my dream of being mortgage free at age 31.
Time on my side
At only 29 years old, I have over half my life ahead of me. Some readers thought I was sacrificing too much, mainly my youth, to be mortgage-free; I see it differently. In only four years I’ll have my mortgage paid off, sooner than a lot of homeowners who hold onto their mortgage for 25 years or longer.
Four years may seem like a long time, but I believe it’s worth it. By working hard for four years, I won’t have six figures of debt looming over my head once it’s paid off.
A lot can happen in 25 years – with my mortgage fully paid off, I’ll have the financial flexibility to handle any curveballs life throws me – illness, job loss, or otherwise.
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If striving towards mortgage freedom has taught me anything, it’s that we give too much meaning to material possession as a society. Instead of always trying to keep up with the Joneses, we should be happy with what we already have.
Even though I work hard, I still manage to have fun. You don’t have to travel to Europe to have a good time. I’ve learned to appreciate the little things in life – there’s nothing more relaxing than a walk at the beach on a hot summer’s day.
Traveling
Why am I paying off my mortgage when I could be traveling the world? Traveling is an enjoyable and life-changing experience, especially when you’re younger, but who’s to say I don’t plan to travel?
I strongly believe in paying off debt before self-gratification. Perhaps if more people shared my vision, the household debt-to-income ratio wouldn’t be near a record high. I still plan to travel the world – just after I’ve paid off my mortgage.
At age 31, I’ll still be young enough to enjoy traveling and best of all I won’t have to worry about a boatload of debt when I get home.
House rich, cash poor
Don’t put all your eggs in one basket – it’s one of the most common pieces of advice from financial experts. Why pay down my mortgage so quickly, when I could be investing my money instead? What if there is a major housing correction and home prices drop 20%?
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When it comes to housing gains and losses, they’re only paper losses. Owning a home is a long-term investment – unless you need to sell your home right now, you can wait out the storm.
By living in my home’s basement instead of upstairs, it gives me a lot of financial flexibility. I could stop working tomorrow and the rent from my tenants would be more than cover my mortgage and household expenses.
Even if the housing market crashes, I’ll be fine, as I’ll still have the rent coming in from my tenants to weather the storm.
Investing vs. paying off my mortgage
With mortgage rates at a record low, why am I in any hurry to pay off my mortgage? If the financial crisis of 2008 has taught us anything, it’s that investment returns are far from guaranteed. Paying down my mortgage provides me with a guaranteed rate of return.
When interest rates eventually rise, I’ll have the peace of mind knowing my mortgage is paid off.
That’s not to say I’m not investing – I contribute the maximum amount to my RRSP each year. I still recognize the importance of compound interest – with time on my side I would be foolish not to invest.
From the income I earn as a financial journalist, I’m able to make extra mortgage payments and contribute to my RRSP each year.
Putting off marriage and starting a family
With the divorce rate close to 50%, I’m not in any hurry to tie the knot. That’s not to say I won’t get married one day, but I’ll do it when the time is right. My friend Melissa gave me some excellent advice on marriage. She said that the most important factors to a happy marriage is that you know what you want in life and what your ideal partner would be like.
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Some marriages fail today because of marrying young, finances and poor decisions, lack of honesty and respect for significant others, and laziness. With age and money on my side, my chances of a successful marriage are a lot better. You don’t have to get married to enjoy life – you can still be happy with family, friends and the feeling of success in life.
When do you plan to pay off your mortgage? Would you be willing to make sacrifices to pay it off sooner?
Sean Cooper is a financial journalist. He is a first-time homebuyer and landlord who aspires to be mortgage-free by age 31. He was inspired by Income Property’s Scott McGillivray to live in the basement and rent out the upstairs of his house. He is on Twitter @SeanCooperWrite and blogs on his personal website.
Paying off a mortgage so early takes some serious financial discipline, which you clearly have. Not many people would be able or willing to make the financial sacrifices you have made, including myself. Your hard work and financial discipline will pay off (literally) in the future. All the best, Sean!
You’re a man with a plan, that’s for sure! I also paid off my mortgage rather quickly but it was a much smaller mortgage than yours.
I’m not as aggressive as you in paying down debt and saving by choice. I think you are right that you aren’t making an unimaginable sacrifice because it only took you 4 years to do it and you still have almost your whole life ahead of you.
For me though, I still wouldn’t be willing to live as frugally as you in the basement of my own house even if I could have the flexibility you are anticipating after 4+ years. I’d rather settle for somewhat lessened flexibility with a little more fun, travel and comfort in my younger years. I’m on the same side as the spectrum as you, just not nearly as far along.
It’s also likely that if you and I had invested in the stock market, we’d be theoretically further ahead. I tend to agree that the guaranteed tax free return of paying down debt is just too hard to ignore. I go 100% equities with the investments I do have because I’ve put so much money towards paying off my mortgage. I view that as the lower risk portion of my savings.
Personally, I won’t be paying a cent more than I need to on my mortgage – at least for now. With rates ultra low, its not hard to get a return above 3-3.5%. It just seems foolish to pay down a mortgage when my money can better of in the market. Also like Rob wrote a while back, if you lose your job or get sick/hurt, you can pay the bills by selling your investments, can’t say the same for equity in your home.
The guaranteed return of paying down the mortgage is the equivalent to buying a GIC. If your going to invest money are you the kind of person to buy a GIC? If not, then why pay down the mtg early.
If rates were to risk to the 5% level I can see some merit in paying down the mortgage, for me personally, I can’t see myself beginning to consider this unless we see rates rise above 6%
Well, I had locked in at 5.05% for five years just before rates tanked to the 3% range so it made more sense for me.
I also disagree with some of your points. Paying off the mortgage is much better than a GIC for a few reasons. First, the interest rates are typically better. Second, you don’t have to pay tax on money saved from paying off your mortgage so you can effectively gross up your savings/earnings by ~30%. Third, if you have a mostly paid off mortgage you should also have a line of credit so you can definitely use that money in an emergency. Selling the house and renting is always an option too.
Like I said in my original post, I can see myself being further ahead with hindsight had I invested the money instead and I know based on typical stock market returns that would be the case. However, the stock market doesn’t come close to offering guaranteed tax free returns. It allows allows me to invest 100% equities without breaking a sweat. It’s a trade off for sure, but one that I think works reasonably well.
If he lost his job, he could use the home equity to get a Secure line of Credit @ 4%.
Thanks for the feedback, everyone!
@Stephen
I see living in the basement as short-term pain for long-term gain. Living upstairs would be silly – there are 3 bedrooms and 2 bathrooms for ONE PERSON. What is the point? I could get roommates, but who wants to deal with that headache? Until it makes sense to move upstairs, I’m perfectly content living in the basement. With such a massive mortgage ($255K), I had to make some drastic lifestyle changes if I wanted to pay it off anytime soon. I don’t like to judge others, but the problem with today’s youth is that they aren’t willing to make sacrifices. They live a great lifestyle – rent a condo downtown and live pay cheque to pay cheque – and when it comes time to buy a house, the bank of mom and dad cover their down payment. I’m not a parent, but I don’t think that’s a good lesson to teach your children. While I may take frugality to an extreme, perhaps if others were a bit more frugal they wouldn’t struggle to afford a home.
@Ben
“Also like Rob wrote a while back, if you lose your job or get sick/hurt, you can pay the bills by selling your investments, can’t say the same for equity in your home.”
While I may be house rich and cash poor, there are some ways I’ve protected myself from losing my house. By living in the basement, my rent from my tenants is more than enough to cover my mortgage, utilities and property taxes (I actually have a positive cash flow each month). Furthermore, I have 6 month’s living expenses saved up. I earn freelance writing income on the side. I also have a part-time job where I could increase my hours if I needed to. The amortization period of my mortgage is 30 years – if I needed to, I could scale it back to the minimum payment. As you can see in a worst-case scenario, I’m pretty well-prepared (all without relying on my parents for a bail out).
Good points. I’m married with 2 children. At the time I was just married but I enjoyed having the extra rooms for an office and extra living space. Real estate is so cheap where I live it was completely affordable as well. I agree that some sacrifices need to be made but I’m all about avoiding the sacrifices if possible while still being well off financially 🙂
I also forget in my earlier response to Ben that because I had made so many increased and double payments to my mortgage as well as a ton of lump sum payments, my mortgage policy would allow me to skip payments for as long as I wanted to until all the extra payments I had made was used up. That would have taken forever. With my 25 year amortization I could have lived 10 to 15 years without having to make a mortgage payment if I had lost my job or become financially strapped. More details on what I could do in an emergency here:
http://www.howtosavemoney.ca/why-you-may-not-need-an-emergency-fund
You’re a man on a mission. Four years is extremely aggressive for most, but more power to ya! Personally, I feel strongly about paying off mortgages by 15 years maximum, while still contributing to retirement. If you cannot do that then you shouldn’t buy a home or buy a smaller one.
This message rings true with me. Before my wife and I married at age 22 we both had already started our Registered Home Ownership Savings plans. We moved to a small town and worked full time plus managed a 24 suite apartment building (for free rent plus $125/month income). In our third year we bought a lot and built our first house. After two years had our first child, sold our house for a modest profit and built our second house (in the same neighborhood). Second child, 2 years later and then sold 2nd house starting on our third (house that is). Oh, oh third child came along and so by 30 had our house paid off and three in car seats. As a single income family, you can see we made a lot of sacrifices but not on the important things.
We focused savings on what we like to call disposable things like not eating out, limiting alcohol, second hand clothes… you get the picture. It was very comforting to have an ever decreasing mortgage during a period when mortgage rates reached heights of 20%. We also were fortunate to be able to build equity in each of the houses we built through sweat equity and smart shopping. Had our 4th child at age 32 and my employer closed up shop and we had to relocate.
Now at age 58 have been retired for three years with substantial savings in RSP’s and other investments including rental property all because we made those sacrifices early on in our marriage. I wasn’t always a cake walk but the best benefit of all is seeing our four (now adult) children embracing our financial planning in their own lives as they have witnessed first hand the benefits.
My best advice to those willing to listen, is make sacrifices early, on those things that really don’t matter in the long run and keep meticulous records on spending. Just having to write it down makes you more accountable to the goal… My wife can tell you to the dollar what it cost to raise our kids (its no where near what is being broadcast so don’t put that off either if its important to you).
Congratulations on such an achievement. While I’m on the same track as you, I’m not in the extreme that you have done. I have lived in a basement apartment for 4 years and it was time to get out as I was going crazy in there. So I’ve upgraded a little and it was well worth it. I had a view of the lake which made my breakfast a little more enjoyable watching the sunrise from my balcony even in the winter or watching a ballgame across the street from the comforts of my own home. I don’t travel but I do participate in sports and water activities just to name a few. That is my balance and helps to set the tone of what I like to do in the future without feeling like I’m making up for lost time.
Everyone has their own balance and your “balance” is definitely not for everyone, that’s for sure!
Congrats again!
I think these are justified reasons for you paying off your mortgage bu the time you are 31. Good for you!
Good for you! We paid off our mortgage this year and live in the GTA as well and are under 40. We have one child on the way right now. I agree with you on many points in your post. I did however buy my first home at 21 and travelled extensively when I lived in the UK so I don’t feel like I’ve missed out. My wife on the other hand hasn’t done as much travelling but she has been to a few places. I’m happy we are starting a family debt and mortgage free and have balanced that with our investments over the years.
Good for you! I’m not sure I’ll own a home until I’m closer to 30. My friends and I were chatting a couple weeks ago wishing we had been born a couple years earlier so we could have had the means to take advantage of the housing crash!
Sean, I wish to congratulate you on your journey. I’m glad to see someone your age with a plan, especially one so ambitious. However, I’d just point out that there is other ways to go about things.
I have had my house for four years now, and I started in a similar situation as you ($245K mortgage), and like you, I did increase my payments, and I placed lump sums on my mortgage to reduce the principal when I could. However, I made a choice to keep my investments ($63K at the time), and it worked out for the better.
Although, my results are certainly not typical, I have increased my portfolio to over $165K, and managed to have cash savings of over $85K. My mortgage is now down to $196K, so I could pay off the mortgage and have plenty left over, but that isn’t going to happen. As has been pointed out, mortgage rates are quite low, so paying it off isn’t as good as investing in stocks – although paying it off quicker is part of a good overall strategy.
I was also able to live in my house without a tenant, or even a roommate, and traveled quite a bit. 🙂
Again, I commend you for what you’ve done, and don’t wish to take anything away from your accomplishment. I just want to point out that there are other routes to the same goal.
Sean, it will feel GREAT not to have a mortgage. Like you, I made it a priority to pay off my mortgage early, and did so in seven years. Having my own home free and clear is extremely comforting. While things are nowhere near as scary here as in the States re mortgages, there is a lot to be said for not being indebted to anyone.
What level of income are you at and how much debt did you have on the mortgage initially? You have to bring in some serious cash flow to pay 200K debt off in 4 years.
If you finance based on household income * 2 for max property value most people wouldn’t be able to scrap up 20% of their debt value to cover every year.
A little interested how this was even possible.