September 22, 2011
As a single, first-time homeowner with a modest emergency fund, I knew that before jumping into home ownership, I had to be financially prepared. Especially since I live in Vancouver – which is arguably the most Canadian expensive city to live in.
My main goal when deciding on the terms of my new mortgage was to make sure I was doing all that I could to protect myself in the event of a job loss, or if I am unable to work for an extended period of time. So after much thought, I decided to go with a 30-year mortgage, and a 5-year fixed rate of 3.74 per cent through Vancity, Canada’s largest credit union.
Because I chose the 30-year amortization, I had to pay a CMHC premium of $463, which equals a penalty of 0.2 per cent of the total mortgage amount.
By choosing a 30-year amortization period over the traditional 25 years for my mortgage of $238,000, it means that my minimum monthly payments are $1,098, whereas with a 25-year mortgage, it would have been $1,220. That extra $122 each month could affect my budget in a huge way, if I lose my job and have to live off of savings, or unemployment insurance.
In 30 years I will be 58 years old, and I know that I do not want to hold my mortgage for the entire 30 years. My goal has always been to retire early, so before I finalized my first home purchase, I devised a plan that would help me cut my 30-year mortgage in half by using Vancity’s 20/20 lump-sum payment option.
The 20/20 payment option allows me to increase my mortgage payments by up to 20 per cent once a year, as well as prepay up to 20 per cent of my original mortgage amount once a year – both without penalty.
I switched my $1,098 monthly mortgage payments ($13,176/year) to the maximum 20 per cent prepayment, meaning my new mortgage payments sit at $660 bi-weekly ($17,160/year). I also plan on putting an additional $250 each month into a savings account. This will give me $3,000 to put towards my mortgage once a year as a one-time payment.
By doing these two things, my mortgage will be reduced from 30 years to 15 years.
Granted, I don’t know what interest rates will be like when I go to renew my mortgage in 5 years, but I will work hard to increase my income and save more money so that I can stay on track to be mortgage free as soon as possible.
Krystal Yee is a marketing and graphic design professional living in Vancouver.