One of the ideas I’ve been wrestling with for the last few months is my mortgage payments. I’m currently paying $660 bi-weekly, which is approximately $110 more than my minimum payment. I was happily paying this extra money until I realized that early retirement was still my number one financial goal. And if it’s the most important financial goal for me at the moment, why wasn’t my budget reflecting my priorities?
I thought about this for a long time, debated the merits of mortgage payments vs. RRSP with friends, tried to find money in my budget, got jealous because BF has a pension plan waiting for him in less than 20 years… and then I decided to make my move.
Related: What does retirement mean to you?
The extra $110 I’m putting towards my mortgage on a bi-weekly basis is gone. Instead, I will funnel the money into my RRSP/TFSA. That’s an extra $2,860 I can save in 2014, and will help me with my goal of saving at least $750/month towards retirement this year. With the tax refund I will receive, that money will go towards my mortgage as a lump sum payment.
I think this is an appropriate move because even with just my accelerated bi-weekly payments, I will be finished paying off my mortgage before my desired retirement age. And if that’s the case, it makes sense to put extra money into my retirement accounts now so that I can benefit from compound growth for the next 25+ years.
Take a look at the chart below. The dark blue represents accelerated bi-weekly payments without any additional prepayment options. That cut my original 30-year mortgage down by 4 years.
What I have been doing for the majority of last 2.5 years is what the orange represents: accelerated bi-weekly payments with an additional 20% prepayment. That knocked my mortgage down even further, to 19 years. It’s hard to give that up.
I’m anxious about reducing my mortgage payments, because my plan was always to pay down my mortgage as fast as possible. It doesn’t feel right to pay down debt at a slower rate than I’m capable of. But the past 2.5 years of home ownership have taught me a lot. Being a single homeowner is difficult. It’s hard to get ahead, and planning for the future is tough on a one-income household – especially a future that includes early retirement without a company pension. I’m comforted by the fact that my tax refunds will now go towards my mortgage, so at least I’ll continue to over contribute in some way. :) And, by changing the way I save my money, I believe I’m keeping myself on track to achieve my financial goals.
Have you ever had to choose between paying down a mortgage faster or contributing to retirement?