Being mortgage-free is a worthy goal that many Canadians set themselves. What’s more, even with today’s relatively high cost of real estate, there are still lots of people aiming to pay off their mortgage faster than ever.
So, is it possible to pay off your mortgage by 40 years old? Here’s what you need to know.
Can you pay off your mortgage by 40?
The short answer is yes, you can pay off your mortgage by age 40, but there’s a list of things that need to be in place in order to make it happen. To pay off your mortgage early, you’ll either need a larger amount of disposable income than the average person or have purchased a more modest home than average (or both).
Of course, to have your mortgage paid off by 40 it will help if you’re still in your twenties – it’s a much bigger task for a 35-year old.
Fundamentally, paying off your mortgage faster involves getting a mortgage with a shorter amortization period, but higher regular payments. Your amortization period is the total length of your mortgage. Most amortization periods are around 25 years or so, but you can opt for a lower number of years, so long as you can afford the regular payments.
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Should you pay off your mortgage quickly?
While it’s generally a good idea to pay down your debts quickly, there’s a reasonable argument against paying down your mortgage as quickly as possible. Mortgages are typically the cheapest kind of finance you can get. If you can find an investment that results in a higher long term interest rate than your mortgage costs you, then you’d generally be better off taking that investment instead of accelerating your mortgage payments.
Here’s an example. Let’s say your mortgage rate for the next 10 years will be 3.5%. Let’s also assume that you have an Exchange Traded Fund (ETF) that will grow an average of 7% per year over the next ten years. In this scenario, every dollar that you accelerate your mortgage payment will save you 3.5%, but every dollar that you invest in your ETF instead would be earning 7%. By investing in your ETF instead of accelerating your mortgage payments, you’d be financially better off.
Note that this is a simplification of this process. There is also more risk involved in this strategy, as interest rates will change over time in both the mortgage and stock markets. But know that paying off your mortgage as fast as possible may not always be the best approach.
How to pay off your mortgage quickly
Paying off your mortgage as quickly as possible isn’t easy in practice, but the actual principals are quite simple. Any of the following strategies will help you pay off a mortgage sooner, although combining them is the best approach.
Increase the size of your regular payments
The larger your regular mortgage payments, the less time it will take to pay off your mortgage. Easily said, but doing it isn’t so simple! In order to increase the size of your payments, you’ll need to free up funds from other sources. Here are a few ways you could do it:
- Divert money from retirement savings or other investments to your mortgage payments
- Increase your income in order to increase your payments (there are lots of ways to do this, but we’ll leave that for another article)
- Decrease the cost of your lifestyle, and divert those savings to your mortgage payments (there are a few ideas below)
Keep in mind that diverting money from your other savings goals will necessarily mean some sacrifices. It’s also important to always keep some savings in cash on hand for emergencies.
It’s also important to remember that your mortgage will likely have restrictions on the amount that you’re allowed to increase your regular payments. If you want to increase your payment size more than your lender allows, you may need to refinance your mortgage.
Buy a smaller home
It will be easier to pay off your mortgage faster if your mortgage is smaller, and buying a smaller home is the easiest way to reduce the size of your mortgage. Of course, there’ll be some compromises needed in order to find a cheaper home to live in, which could include:
- Buying a condo instead of a house
- Living further from your city’s Downtown core
- Finding a smaller home to live in – a condo with fewer bedrooms, or a house with less land, for example
While there can be some pain coming from scaling down your expectations, remember that a less expensive home can directly lead to you paying off your mortgage sooner. Financial independence at a younger age is a valuable asset, so it may very well be worth the trade-off.
Find a mortgage with a lower rate
One of the most expensive parts of getting a mortgage is the interest you’ll pay on the loan. Minimizing your mortgage rate is one of the best things you can do to reduce the overall cost of your mortgage, which can help you pay it off sooner. There are many ways to get a lower mortgage rate, but we don’t have time to cover them all here. Here are the main approaches you should consider, with links to more information:
- Compare mortgage rates from multiple lenders
- Improve your credit score
- Keep your income stable (and as high as possible!)
- Pay off your existing debt
- Speak to a mortgage broker to find a better rate
Each of these will either see you offered lower rates directly, or give you access to mortgages products and providers that tend to attract lower rates.
Reduce the cost of your lifestyle
The more disposable income you have, the more money you can afford to put toward your mortgage. If you can’t increase your overall income easily, then your best bet is to reduce the amount you spend. There are entire websites, books, and careers dedicated to this, so we won’t cover everything here. That said, these are some of the big changes you can make today to reduce the cost of your lifestyle:
Make a budget: Even without making any changes, making and keeping to a budget can help you limit unnecessary spending, saving money in the process.
Sell your car: If you have decent access to public transport, you can save hundreds of dollars per month by owning one fewer car. Look into car share networks in your area to see if that could be an alternative option for you.
Pay off your credit card: Credit card interest is very expensive, and totally unnecessary if you budget properly. Getting your credit card balance paid off as soon as possible, and keeping it that way, is a great way to reduce unnecessary charges. While you’re at it, consider switching to a zero fee chequing account.
Minimize your subscriptions: Ongoing subscriptions are one of the best ways for companies to fleece us of our hard-earned money, so cancelling the ones you don’t use is a great way to save money quickly. After that, decide whether there are other services you can do without. For example, maybe you can replace your gym membership with a regular run and some second-hand weights. A service like Netflix or Crave might be avoidable by sharing accounts with a friend, or by using your library card a little more often!
Improve your financial literacy: To take your saving efforts to a whole new level, you’ll want to level up your financial literacy. Our personal finance articles are great places to start, but there are lots of other resources that you should check out. Here are a couple of books ton start with:
- Broke Millennial by Erin Lowry
- Worry-Free Money by Shannon Lee Simmons
- I Will Teach You to Be Rich by Ramit Sethi
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The bottom line
Paying off your mortgage by 40, or just paying it off earlier than normal, is certainly possible. However, it will generally require some sacrifices, whether that’s buying a more modest home, working longer hours, reducing the overall cost of your lifestyle, or a combination of these.
The best way to get started on paying down your mortgage faster is to learn as much as you can, starting with the resources we mentioned above. After that, your best bet is to speak to a financial advisor or mortgage broker, who can give you expert advice on your path forward.