Tuesday, September 29, 2009

Younger Canadians Not Respecting Mortgages

Posted in the Globe & Mail by Chaya Cooperberg:

For me and most of my friends, mortgages represent the single large expense in our family budgets. We are staring at many long years of amortized payments on our homes. Yet, we are all still spending on vacations, cars and electronic goods. We spend even as we pay large sums of interest to service the biggest debt load of our lives.

Mortgages used to be treated with more respect. My grandparents led what we would consider to be austere lives until their mortgage was paid in full. They didn’t own a car or travel. Their single nod to consumerism was the purchase of a television set in the 1960s. Until their last payment was made to the bank, they didn’t even put aside money for retirement.

According to consumer advocate and financial expert Linda Leatherdale, our modern approach to spending is making us “house poor”.

“Your goal in life is to have a mortgage free house, especially by the time you retire,” she says. Money should be saved and applied to your mortgage, rather than spent on frivolities like trips.

Some financial experts make a strong case for paying off your mortgage before paying into an RRSP or buying equities. After all, it’s a guaranteed return and a safe bet. After seeing the value of my portfolio dribble away last year, it’s not difficult to convince me to invest in my mortgage first. But it will be challenging to curb the spending on holidays and other creature comforts.

“To be house rich, you need to be disciplined,” Ms. Leatherdale counsels. “There’s nothing better than paying your mortgage. You give money to yourself, not to the banks.”

She has some stern advice for those who want to own their home before they retire. First, don’t even consider buying a home unless you have 20 per cent of the purchase price. A down-payment less than that will result in the added expense of mortgage insurance.

Next, make mortgage payments on a bi-weekly, rather than a monthly, schedule. The heightened pace is comparable to making 13 monthly payments, which will lead to a faster payoff and lower overall interest costs. If you can, double up on mortgage payments as often as possible.

“There is nothing better in life than being mortgage free,” says Ms. Leatherdale.

I’ll have to keep her words in mind the next time I feel the urge for a holiday.

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