A discussion on Rob Carrick’s Facebook page today started with a question about debt – how big a priority is it for you to reduce debt?
- Top priority
- Important, but not my main financial goal
- I’m chugging away at debt repayment, and that’s fine
- No debt
I answered (2): We put any extra money toward RRSP and RESP contributions rather than paying more toward our mortgage at the low interest rate of 2.05 percent.
Related: Are low rates punishing savers? Hardly
Carrick replied with a comment that made me pause and think about how my approach to debt has changed over the years:
“Robb, that’s smart. I think it’s a form of buyer’s regret that has people with historically low mortgage rates rushing to pay down their mortgages. They’re unnerved by how much they owe. You can get a 25-year mortgage down to 22 years just by paying biweekly.”
Mortgage payments didn’t always take a back seat to investing in our household. Before we built our current home we saved like hell in order to come up with a 20 percent down payment and avoid CMHC insurance premiums.
Still, I was uncomfortable with a mortgage in excess of $300,000. Maybe it was a form of buyer’s regret that led to my extremely aggressive approach to pay down the balance. What started as an extra $500 payment per month turned into $1,100 per month with the idea that we could be mortgage free before the age of 40.
This went on for three years before I relaxed and realized that rates weren’t going anywhere, and that extra money could be put toward more RRSP and RESP contributions, as well as toward developing our basement. Additional years of compound growth for my RRSP contributions, not to mention free government grant money for the kids’ RESPs, would surely beat the guaranteed low rate of return I was getting on the mortgage payments.
Looking back, you could say it was regret that led us to prioritize our mortgage pay-down ahead of our investments. Maybe I was nervous about the amount we borrowed, or that we might have moved into our forever house too soon. Back then (2011) alarm bells were going off about household debt and impending interest rate hikes (funny, it still sounds like that today).
Related: Why our debt-to-income ratio is misleading
High prices and the constant threat of rising interest rates can have a powerful psychological effect on home buyers. According to a survey by the Canadian Association of Accredited Mortgage Professionals (CAAMP), more than one-quarter of first-time buyers say they would probably not be able to afford their home if the minimum down payment increased from 5 to 10 percent. And with prices still sky-rocketing in cities like Vancouver and Toronto, many home buyers are saddled with mortgages 2-3 times the amount we borrowed.
It’s clear now that I was being overly cautious about our mortgage situation. We could afford to double our monthly payments (which we did, for a year), so an uptick in interest rates wasn’t a concern. We put more than 20 percent down and now have about 40 percent equity in the home. We also plan to stay put for a long time, avoiding the trap of constantly trading up to a bigger home.
Plus, lowering our mortgage balance wouldn’t help us during a bad recession with a prolonged period of unemployment. We needed savings.
Related: Mortgage free at 31 – Worth the sacrifices
We’re comfortable with our financial plan and take a balanced approach to paying down debt and saving for the future. While it’ll feel great when we’re finally debt-free, we don’t want to ignore the asset column of our balance sheet. Especially when the current interest rate on our mortgage is so low and we have decades to let the compound interest on our investments do its thing.
What’s your take on prioritizing debt repayment? Is Rob Carrick right about home buyer’s regret?
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