# first time home buyer/ aggressive mortgage plan



## twowheeled (Jan 15, 2011)

Hi guys, I need some input on this as mortgages and home ownership are really weak points for me, and I don't trust a broker to give me solid advice on this because it seems to me as lenders they would benefit more from my interest payments. 


I am 25yo, single, ready to buy my first home with a budget of 300k. Right now I've saved up 100k in cash, 25k in TFSA, and 25K in RRSP. I would like to put all this down including the RRSP. I'm also hoping to be able to pay off this mortgage ASAP. I don't want to carry debt and would rather pay this house off in 2-3 years max. Lets assume I want to get a mortgage for 150k. 

My after tax income is 9400/month. Month expenses are 1000 for rent, 150 for car insurance, and approx 500 for gas/food. That leaves me about 7700 left for paying the mortgage down. The rental payment is mandatory even with purchase of the house, since I work out of town. My question, what is the best way to do this and pay minimal interest? I would like to purchase in the near future, in the spring at the latest. The interest to me is worth having a house right away, IE I don't want to save for 2 more years to pay cash, and skip the mortgage altogether. 

I definately can't afford to pay it off in 1 year, but can afford to do it in less than 2 years. What's the smartest way to do this? Say if I go on a 1 year term, amortization period of 2 years and overpay in my 1st year, will I be penalized for ending my term early in year 2? Should I save until I have enough downpayment that I can pay off the mortgage in a single 1 year term? Or should I take a 2 year term with 2 year amortization and aggressively pay this off in the first year so more of my payment goes toward the principle? (again is there penalty for this?) 

thanks!
-Jon


----------



## peterk (May 16, 2010)

I would just amortize and pay consistently for two years. The extra you save for accelearated paying down will be minimal, and then you won't even have to worry about penalites or not etc. 
How secure and steady is your income? You work a trade with massive overtime on shift in Fort Mac, right? Should you be prepared for the possibility that next year or the year after you won't be given as much overtime and could be bringing in 20k less than you expect? You should ask yourself these questions before you obligate yourself to pay ~6400/month for the next 2 years...


----------



## phrenk (Mar 14, 2011)

Most lenders will allow you to double your monthly payments (TD, RBC for example), where it would be applied to the principal only. I would suggest a 3 year term and increasing your montly payments by 50-75%. 

A 150K mortgage @ 3% and 36 months term is approx. $4,362 per month. 

You could easily increase payments optionally by 50% to $6,543 per month, well below your budget. By increasing by 50%, your mortgage would be paid (according to my calculator) in about 23-23 months, however you would have the flexibitily to go up to 100% of your regular payment. Also, most lenders also allow a partial prepayement of 10%-15% of the original mortgage amount on the anniversary of the mortgage.

I don`t believe you will be penalized for prepaying your mortgage using the tools i mentioned (double down payments & lump sum paydown on anniversary), since these are provided by the banks as an option / courtesy.


----------



## Dmoney (Apr 28, 2011)

Take a look at ING, I think they are the most flexible in terms of pre-payment options. You should be able to pay 25% of principal annually (pay off in four years).

I personally would stick with a longer amortization period, (5, 10, 15 years) and then pay as much as you can extra.

I think the most flexibility might be getting a one year term with a longer amortization (not 25 years but something so as to be extremely comfortable with your mortgage payment) you can pay 25% of principal in lump sum, you can increase your monthly payment by I think 25% or maybe even 100%, and then at the end of the year, if you still have cash, you can pay a big lump sum, and get a new mortgage at the reduced principal amount.


----------



## Oldroe (Sep 18, 2009)

With TD you can sign 25 amortization and move that to 5 year amortization before first payment.

Really think I would look at line of credit. This would give you no restrictions on how much you pay monthly and the cost would not be to high for 24 months.


----------



## mind_business (Sep 24, 2011)

Oldroe said:


> With TD you can sign 25 amortization and move that to 5 year amortization before first payment.
> 
> Really think I would look at line of credit. This would give you no restrictions on how much you pay monthly and the cost would not be to high for 24 months.


A friend of ours set up a 'Manulife One' account. He loves the ability to accelerate payments without penalty. Something to look into to see if it meets your needs ... http://www.manulifeone.ca/


----------



## crazyjackcsa (Aug 8, 2010)

Hang on. You're worried about the difference between 1 year and 2 years on a mortgage? And the penalties? The difference in interest payments is about $2,300 between 1 and 2 years. Or, less than 1 extra payment.

Taking a look at your earnings, we're actually worrying about 1 weeks pay. 

I don't even know why you've put this much thought into it.


----------



## twowheeled (Jan 15, 2011)

so I shouldn't try to save an extra $2,300 just because I earn that in a week? :hopelessness:


----------



## crazyjackcsa (Aug 8, 2010)

I said it may not be worth the headache and thought you're putting into it. It's a small amount of money to you and you're already on a very aggressive plan.
It's about the point of diminishing returns. I get that you want to give the bank as little cash as you can, but after you've saved a $1, how much is the push to save $1.01 really worth?


----------



## Xoron (Jun 22, 2010)

Just go short (term) on your mortgage. You can fully repay the mortgage on the renewal date. This is what we're doing with TD. 

We took out a 25 year Amortization (may be much longer than you need, but lets say you go with 5 years) and 1 year terms. Double up your payment (allowed with our bank), and prepayments up to I think 20% of the borrowed amount every year. And on the the anniversary date (the date you go into the bank to beat them down from the posted rate), you can fully pay it off without penalties.

I'm not advocating using TD (in fact they changed their mortgage structure right after we got our mortgage making it harder to port it to other lenders, so I'd actually avoid them now), but I'd bet most of the major banks have similar repayment rules.


----------



## sprocket1200 (Aug 21, 2009)

get this done asap and go with the biggest lump sum pre payment you can. then prepay for this year immediately and prepay for next year on Jan 1. then double up everything you can. congrats on paying it down so fast, why it takes anyone more than ten years is a mystery...

two tips:
1. avoid fancy programs like manulifeone at all costs
2. don't buy right now


----------



## Sudstoy (Oct 21, 2012)

As sweet as it would be to pay off a house in 2 years i would strongly not recommend getting into anything where you HAVE to pay that amount each month. You never know when something will change or hours will be cut as someone else on here has suggested already. Set yourself up something like a Line of credit where you have the availability of making a small preset amount of money each month but also are allowed to put as much money on the loan as possible.

If you dump all of your cash reserves into your down payment, all it would take is a month off work injured or sick, or a temporary freeze on hours to get way behind on payments. Set it up safely and then pay it down as fast as possible. Always give yourself a way to scrape by if need be, this wouldnt be possible if you HAD to put almost every dollar you make into living expenses.


----------



## Pigzfly (Dec 2, 2010)

Pretty much what everyone else said already. Shop for the ability to double payments and make a large lump sum payment. Get a short term (1 year) and a medium length amortization - maybe 15 years. Then, double your payments, put in up to the max lump sum and when it comes up for renewal, consider using a line of credit, or renew for another 6-12 months, doing the same. There shouldn't be any penalties for doing this, as long as you don't go over your prepayment limits. 

Definitely set it up to avoid being stuck with a huge bill that you can't pay. I am aware of mining and energy companies that went from 10-15% OT above scheduled hours, to zero, on one week's notice. Lots of people were not happy.


----------



## Chigu (Aug 6, 2009)

Pigzfly said:


> Pretty much what everyone else said already. Shop for the ability to double payments and make a large lump sum payment. Get a short term (1 year) and a medium length amortization - maybe 15 years. Then, double your payments, put in up to the max lump sum and when it comes up for renewal, consider using a line of credit, or renew for another 6-12 months, doing the same. There shouldn't be any penalties for doing this, as long as you don't go over your prepayment limits.
> 
> Definitely set it up to avoid being stuck with a huge bill that you can't pay. I am aware of mining and energy companies that went from 10-15% OT above scheduled hours, to zero, on one week's notice. Lots of people were not happy.


Why not just get a variable rate open mortgage with a longer term amortization period. That way you protect yourself on the MINIMUM mortgage payment you have to make (in case of work slow down/lay-offs etc), but you still have the flexibility to pay as much as you want and close the mortgage at any time. Given your time frame, nobody expects interest rates to rise significantly, so you are better off going variable-open.


----------



## Guigz (Oct 28, 2010)

Chigu said:


> Why not just get a variable rate open mortgage with a longer term amortization period.


Open mortgages are usually a few percent more expensive than closed ones. While they would definitely provide the most flexibility, it would also cost a bit more in interest over the 2 years. Expect to pay 1,500-3,000$ more in interest over the 2 years term.


----------



## Hawkdog (Oct 26, 2012)

Just for info.
I have a mortgage with investor's group.
Its a 5 year term, we pay 2.4 % interest, but our payments are based on 4% - so the difference goes to the principal.
If interest rates increase the 2.4% goes up but it caps out at 4% for till the term is finished.
We can also pay off 20% per year without penalty
We make bi-monthly payments.

If you can get a mortgage rate of less than 3%, why would you want to pay it off in a year? If you can invest it and make 6% I think you would be farther ahead.
Max out your rrsp contribution first or at least make sure you hit the sweet spot where you get as much of a return back as you can, put the return on the mortgage.


----------

