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Shrinking our huge mortgage for peace of mind
Old 07-23-2020, 08:09 AM   #1
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Shrinking our huge mortgage for peace of mind

I've been reading various threads and articles about the pros and cons of paying off a mortgage before retirement and understand that mortgage rates, investment returns, taxes and other factors are relevant to the calculation of whether it's the best thing to do from a financial perspective.

But leaving the purely financial calculation aside, I'm feeling a lot of stress from holding such a large mortgage in these uncertain times, when we are unwillingly a single income household (and that income is a little uncertain) - in a situation where we're sitting on fairly substantial financial assets.

Here are the basics:

Husband and I are both 56, with no kids (just cats). He's unemployed, severance will run out at the end of August and he's not eligible for unemployment insurance because he moved countries shortly before he lost his job. I'm employed (lawyer) and working from home. But there's about a 25% chance of my losing my job in the next year. (I likely could find another job within a year, though.)

We've got about CAD $3.7 million in financial investments north and south of the border - about 3/5 in registered retirement funds (401ks, RRSPs, IRAs and a small ROTH IRA) and 2/5 in unregistered investments. Sitting on about CAD $90K in cash or near-cash (e.g. money market funds). We also will have some pension income starting at age 65 (three corporate pensions, about $60K per year but only one is inflation protected) and government pensions (US social security and Canadian CPP) at 67+ (about 48K per year).

We'd been renting in NYC (and before that in Paris) for 13 years, so we only got back into the housing market in 2018. Houses in Toronto are expensive, so we've got a CAD $765,000 mortgage on a house worth about $1.3 million (that's what we paid for it two years ago).

I've been making accelerated payments (including an extra $800 per accelerated bi-weekly payment). That gives us a bit of a cushion if we suddenly both ended up unemployed because the extra $800 payments (about $25k in total) are viewed as advance payments on regular mortgage payments due. So we could stop paying the mortgage altogether for about six months without being viewed as going into default.

I am thinking of liquidating some of our unregistered financial investments and paying down the principal of our mortgage by about $100-150K over the next two years. Combined with our regular, accelerated payments, this would get our mortgage down to about $500-550K in two years.

We're currently paying 3.29% on our mortgage and it's up for renewal in January 2021 - we probably can renew in the 2.5-2.75% range.

As I mentioned at the start of this post, this isn't a purely rational/financial decision. Having such a massive mortgage is stressful, especially if we spend the next few years of pre-retirement in a state of job uncertainty. I'd like to get our mortgage down to a level that leaves us with a manageable monthly payment if we both ended up involuntarily retired in the next couple of years. Something in the range of $3K a month. (Right now, with the extra payments, our monthly mortgage payments are closer to $6K per month.) At the same time, I don't want to pull too much $ out of the market and miss out on long-term growth potential.

We're also looking around Ontario about where we might be able to retire to a less expensive house. But we do like our house and its proximity to city amenities. We know that, if we had to, we could downsize and retire to a less expensive house in a remote area (hello, Elliott Lake). But our initial research suggests that the savings aren't that great if we still want to live within a couple of hours' drive of Toronto. (And because I can't see well enough to drive, any new home we choose needs to have basic amenities like shops be reasonably accessible for someone without a car.)

Has anyone else done something similar to this in circumstances like ours? Or are you thinking about it?
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Old 07-23-2020, 09:34 AM   #2
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I paid down my mortgage once I could live off my investments. Seemed pointless to have an AA with Bonds while having mortgage. Peace of mind towards no debt is a non-financial benefit.

For sure somebody could take those accelerated payments and show me how the S&P 500 is likely double the return. I think that is only valid when you are in saving phase and managing cash flow
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Old 07-23-2020, 09:37 AM   #3
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No, I wouldn't do it if you can't pay off the whole mortgage to eliminate the mortgage payment entirely.

If your husband is unemployed and you might be, then you need financial flexibility above all else.

Whether your mortgage balance is $650k or $500k your $4-5k/month of mortgage payment is still due each month and that could be the problem if it ends up that you are both unemployed. If you have $100-150k in cash for the proceeds from the unregistered investments then you have flexibility... if things go south then you have money to live on and make those mortgage payments... if things go well then you can still always paydown the mortgage.

IOW, with one person unemployed and the other are risk of losing their job it is time to be defensive. Having more house equity isn't going to do you any good if you don't have an easy and convenient way to utilize it.
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Old 07-23-2020, 10:25 AM   #4
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I paid down my mortgage once I could live off my investments. ...
Unfortunately though, not the OP's situation.
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Old 07-23-2020, 10:34 AM   #5
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Unfortunately though, not the OP's situation.
We could retire tomorrow (with our $3.7M nest egg and expected future pension income streams) - just not in this house in Toronto with our expected lifestyle expenses (which aren't extravagant but also not minimal). I do take comfort in the fact that we could quit tomorrow, if we were willing to make some compromises on which community we live in and how big a house we have. (Husband is not willing to forego the big house in the city yet - but would do so if necessary. He's fundamentally frugal and adaptable.)
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Old 07-23-2020, 10:58 AM   #6
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We are all for Mortgage free retirement, and would not have done so unless it was paid off. We were fortunate and paid off our home some 10 years before retirement by diligently applying excess cash and bonus' directly to the mortgage. It was not an insignificant figure at the time as Orange County, Southern California Property is not cheap either. When we retired we also relocated from SoCal. to Florida, but still 1 hour from one of the largest cities in Fla.

If we were you, we would pay the whole thing off from our nest egg and evaluate things as they occurred from there. OK, you are not getting the return from your investment of that cash, but you are getting a 6k per month breather, that is like income and comes with a lot better peace of mind.
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Old 07-23-2020, 11:36 AM   #7
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Originally Posted by Andromeda View Post
We could retire tomorrow (with our $3.7M nest egg and expected future pension income streams) - just not in this house in Toronto with our expected lifestyle expenses (which aren't extravagant but also not minimal). I do take comfort in the fact that we could quit tomorrow, if we were willing to make some compromises on which community we live in and how big a house we have. (Husband is not willing to forego the big house in the city yet - but would do so if necessary. He's fundamentally frugal and adaptable.)
I suspect that you are right. What does FIRECalc say? More interestingly, what does it say about your max spending at 95% success?

If you use FIRECalc input your mortgage as fixed off-chart spending and a corresponding fixed "pension" to offset it when your mortgage payments end... or exclude your mortgage payments from your spending and reduce your nestegg by your mortgage balance 9as if you paid it off).
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Old 07-23-2020, 12:28 PM   #8
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I'm with pb4, this does not seem like a good time to tie up money in home equity.

I don't really know how to help you with the stressed feeling. I'd be totally comfortable knowing I had the ability to pay down a mortgage while keeping the funds available for a worst case where both of you are unemployed. Maybe do some math on a spreadsheet and see how long you could weather a loss of income with limited funds and no mortgage, vs. lots of funds with the mortgage.
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Old 07-23-2020, 12:45 PM   #9
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I suspect that you are right. What does FIRECalc say? More interestingly, what does it say about your max spending at 95% success?

If you use FIRECalc input your mortgage as fixed off-chart spending and a corresponding fixed "pension" to offset it when your mortgage payments end... or exclude your mortgage payments from your spending and reduce your nestegg by your mortgage balance 9as if you paid it off).
FIRECALC says we'd have a 95% chance of success with pre-tax income of about $168K and pulling as much as 400K out of our financial investments to go toward a downsized home, if we stopped working/getting paid tomorrow. If we can hang on (i.e. keep earning enough to pay mortgage and expenses) for two more years, the income level jumps to $182K, and if we can hang on until 2024 (when we're both 60), the income level jumps to about $212K.

Without tooting my own horn too much, although I think there's a possibility I could lose this job in the economic downturn, my prospects for finding another job within 6-12 months are good. I have good connections in this town (who make hiring decisions) and some special skills/experience. I wouldn't necessarily make as much as I make right now, but I could find a job that covers our mortgage and moderate living expenses.

I do want to take on board the point that several of you have made that I need to make sure we've got enough cash and near-equivalents to weather at least a year of expenses before we think of paying down the mortgage at all. (We do have that much and more right now.)
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Old 07-23-2020, 01:00 PM   #10
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Maybe I misunderstood mortgage advance payment option. If you can pay ahead and skip payments that would provide some flexibility.
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Old 07-23-2020, 01:18 PM   #11
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Maybe I misunderstood mortgage advance payment option. If you can pay ahead and skip payments that would provide some flexibility.
That's not the way that it usually works. By paying additional principal, it effectively shortens your term and reduces the interest that you pay had you not made the extra principal payments. But you still have to make your monthly mortgage payment.
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Old 07-23-2020, 01:34 PM   #12
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That's not the way that it usually works. By paying additional principal, it effectively shortens your term and reduces the interest that you pay had you not made the extra principal payments. But you still have to make your monthly mortgage payment.
It's different in Canada. Standard mortgages have two flexible payment options built in:

1) Prepay up to 15% of your principal per year without penalty, and/or
2) Increase your regular payments by up to 100%.

According to my bank, with respect to payments made in category (2), they are viewed as permitted advance payments on your regularly scheduled payments, so if you need to scale back or stop your mortgage payments for a while, you aren't viewed as being in default. Payments in category (1), however, don't give you this flexibility.

So, as I mentioned earlier, we have, in effect, about six months of mortgage payments fully prepaid via option (2), should we need to slow down or stop because of financial difficulty.
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Old 07-23-2020, 02:01 PM   #13
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So, as I mentioned earlier, we have, in effect, about six months of mortgage payments fully prepaid via option (2), should we need to slow down or stop because of financial difficulty.
What is the advantage of that over putting those six months of mortgage payments in an interest bearing account that you can draw from if you hit financial difficulty?
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Old 07-23-2020, 02:35 PM   #14
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What is the advantage of that over putting those six months of mortgage payments in an interest bearing account that you can draw from if you hit financial difficulty?
Partly discipline - it's automatic and once the payment is made it's out of sight/out of mind.

Partly that the payments help eat away at principal, and with our mortgage rate at 3.29% and the best interest rate these days for savings is a short-term one of about 2.5%.

And we do a fairly substantial cash emergency fund as well.
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Old 07-23-2020, 02:46 PM   #15
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Sell the house. Retire where you want to. Rent for a year.
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Old 07-23-2020, 03:03 PM   #16
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Do you receive any interest on these funds that could be used in the future for payments? If not I would not keep up the extra $800 biweekly payments. Yes it is discipline to automate that extra money to your mortgage, but I would rather you automate those same funds into a separate savings account. Cash is king. When you get to your refinance date in early 2021, you can reevaluate how much to refinance. You may know more then than now, regarding your future.Q
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Old 07-23-2020, 04:36 PM   #17
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Check to see if your bank will do a recast of the loan. They may charge a small fee, but a recast would allow for a large payment to be made, and they will reset your mortgage payment based on the new principle amount. This would lower your amount owed as well as your monthly payment.
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Old 07-23-2020, 04:56 PM   #18
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Check to see if your bank will do a recast of the loan. They may charge a small fee, but a recast would allow for a large payment to be made, and they will reset your mortgage payment based on the new principle amount. This would lower your amount owed as well as your monthly payment.
Actually, our mortgage comes up for renewal early next year. (It's a 3-year mortgage coming due in on May 1, 2021, but we'll be able to renew it 120 days before that without any prepayment fees - and no fee charged on renewal either.) So, we'll be able to adjust the principal, term and amortization period then if we want and likely will pay down a chunk of the mortgage at that point if our financial situation looks more solid than it does now.
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Old 07-23-2020, 05:29 PM   #19
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OP,

1- The most important thing is not to get cornered into a situation where you can't make your mortgage payment in the near future. It looks like you won't have that problem
2- When #1 is not an issue, then do the things that make you sleep well at night. Paying down or paying off the mortgage as you like
3- If it will make you feel better, paying off or paying down your mortgage (using your invested $) will be equivalent to making a guarantee investment gain of 3.29%->4.xx% (depending on your tax bracket etc.). Stock/bond investment may give you more or you can go negative. The biggest risk in paying off the mortgage is that $ becomes illiquid. The best thing about paying off the mortgage is you have an improved cash flow of $6K/month.
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Old 07-23-2020, 05:36 PM   #20
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OP,

1- The most important thing is not to get cornered into a situation where you can't make your mortgage payment in the near future. It looks like you won't have that problem
I don't agree. I think #1 is to make sure you are able to cover all of your necessary expenses, not just the mortgage payment.
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