Financial Freedom At Any Age

Written on May 16, 2012 by Boomer in Real Estate

Owning a home is one of the cornerstones of building financial assets for most Canadians. However, making mortgage payments for 20 to 35 years can take quite a bite out of your budget, even with low interest rates.

It’s surprisingly easy to reduce the amortization – and the amount of interest paid. When you pay off your mortgage faster, a big part of your household budget will become available to help you achieve your other financial goals.

Make a lump sum payment

A lump sum payment, or prepayment, is an amount you pay in addition to your regular mortgage payments within the mortgage term. The prepayment reduces your outstanding principal balance. The sooner you can make the prepayment, the less interest you will pay over the long term, and the sooner you will be mortgage-free.

Your mortgage agreement will specify the maximum amount you can prepay each year (usually 10% – 25%) and how often (usually once per calendar year) without penalty. The prepayment option is not cumulative, so if you don’t take advantage of it one year, you can’t double the payment the next year.

Coming up with such a large lump sum (up to $75,000 on a $300,000 mortgage) is next to impossible for most mortgage holders unless you’re lucky enough to receive a windfall. Keep in mind though that even small lump sums – from a bonus or tax refund, for example – can still reduce your overall interest amount.

One thing to note, if you pay off your mortgage and are facing a penalty for doing so, the lender is obligated to reduce the mortgage balance by the allowable prepayment amount before calculating the penalty.

Increase the amount of your payments

One of the ways to pay off your mortgage faster is to increase the amount of your regular payment. This option is easier for most people than coming up with a large lump sum. Most mortgage lenders will allow you increase your payment by 10% to 100%, but there may be a fee if you change it again during the calendar year.

Paying $100 extra a month on a $300,000 mortgage at 3.29% over 30 years will give you an interest savings of over $11,000 and reduce the amortization by 3 ½ years.

Make more frequent payments

Most financial institutions offer a number of payment frequency options. The standard options are: monthly, semi-monthly, biweekly and weekly.

Many people like to match the frequency to their pay periods for ease in budgeting.

If you decide to make more frequent payments, make sure you choose an accelerated option. Accelerated weekly and biweekly payments can save you thousands, if not tens of thousands, in interest charges because you’ll pay off your mortgage much faster. The reason is that you make the equivalent of one extra monthly payment each year.

There is very little extra savings if you just switch to a more frequent payment without taking the “accelerated” option.

On the same $300,000 mortgage as above, a biweekly payment will save just $289 in interest. On the other hand, an accelerated biweekly payment (an extra $50 per payment) will save over $18,000 over the life of the mortgage.

Keep your payments the same if you renew at a lower rate

When you renew your mortgage, if the interest rate is lower than what you were paying previously, your regular payment will be less. You could pay off your mortgage faster by simply keeping the amount of your payments the same.

Conclusion

You can save thousands of dollars in interest by paying off your mortgage as fast as your household budget allows. Choose any one, all, or a combination of the prepayment options available to you.

Contact your mortgage lender for your payment options and any penalties and fees you may be required to pay.

How Young Adults Can Still Thrive Financially

Written on May 14, 2012 by Echo in Personal Finance

Much has been written recently about the financial state of young Canadians. The Globe and Mail’s Rob Carrick thinks today’s young adults have it tougher than ever, and financial expert Kurt Rosentreter thinks Canadian 30 year olds are screwed because we spend too much time on the internet.

I get it. We’ve just experience a massive recession and Canadian house prices are at an all time high. Meanwhile, tuition costs are sky high and employment is hard to find right out of school. When you do find a good job, chances are there’s no company pension, since those are disappearing at an alarming rate.

With all that’s gone wrong in the economy lately, it’s hard to see the silver lining for today’s youth.

Luckily, it’s not all doom and gloom. There are plenty of opportunities for young Canadians to thrive financially.

Attending Post-Secondary

Some students waste many years (and dollars) in university and college trying to find out what they want to do with their lives. A year or more of general studies, or changing program major’s mid-stream can easily lead to an extra few years of school and thousands of dollars in additional expenses.

The ones that get ahead are the students who quickly find their passion, work or intern during the summer in their chosen field, do co-op work in their final year and graduate in four years. Get in, find out what you want to do, and try to graduate without tacking on a couple years worth of unnecessary expenses.

Entering the Workforce

Throughout your career, you’ll be surrounded by campers and climbers. Be a climber, especially early in your career. Think of each stop along the way with a three-year plan in mind. In year one, learn your job. In year two, excel at your job. And in year three, learn your boss’ job.

Volunteer to lead a new company project, or take the initiative to make your business unit more efficient. Show your superiors that you have what it takes to move up the corporate ladder. It will come in handy when a promotion comes up or it’s time to ask for a raise.

Owning a Home

Young Canadians can save on the overall cost of home ownership throughout their lives by staying in their houses longer.

The average Canadian moves between 5-6 times in their lifetime. Moving every few years can get awfully expensive when you’re paying $15,000-$25,000 in real estate fees, plus the other costs of buying and selling a house.

There’s an argument to be made for buying a bit more home than you need if it means avoiding the temptation to upgrade your home every few years

Starting a Family

Starting a family before you are financially prepared can really set you back. Don’t get me wrong, having kids is a wonderful experience – but don’t underestimate how much it will cost to raise a family. You don’t want to be choosing between buying diapers and making your minimum credit card payment.

Waiting a few years to have kids can have tremendous financial advantages. Once you reach your thirties, hopefully you’ve paid off any non-mortgage debt, your career is on the right track and you’ve established good savings habits.

Starting a Side Business

Some people can turn their hobbies into a lucrative side business. Look at some of the entrepreneurs on Dragon’s Den who work on a side hustle on evenings and weekends.

I know quite a few 20 and 30-something’s who run a successful side business. Some of these include landscaping, photography, graphic design, freelance writing and running an online store.

A side hustle can help compensate your regular job when wages remain stagnant and promotions start to dry up.

Using your savings – tax free

One savings tool that wasn’t available for older generations is the Tax free savings account. Canadians start building contribution room in their TFSA once they turn 18. Money can be withdrawn from a TFSA at any time with no tax consequences, and any amount you withdraw is added back to your contribution limit for the following year.

But while older Canadians have complained about the low $5,000 annual contribution limit, the TFSA is a perfect fit for young Canadians. This account is highly flexible and can be used for emergency savings, medium term savings (like for a car or down payment on a house) and as a retirement savings account.

Final Thoughts

Every generation has had to overcome some type of adversity. The normal reaction is to complain that we weren’t dealt a fair hand, but inevitably we must adapt and respond to our changing environment.

This generation of 20 and 30-something’s probably won’t retire at 55. In fact, there’s a good chance we’ll be working until we’re 70. Hopefully we’re doing what we love (and it’s part time).

But I don’t believe young Canadians are screwed financially – not all of us, anyway. Some need a good kick in the ass to get going, but most of us will be fine.

Some of us even use the internet to help improve our finances.

How To Pay Off Your Mortgage Faster